Many people believe that buying an investment property is one of the best ways to achieve long-term wealth. But one of the most frequent problems that real estate investors face when financing investment properties is being ineligible for bank loans since mortgage lenders often refrain from lending money to real estate investors with bad credit score. But that doesn’t mean there aren’t other ways to finance an investment property! In this blog, we will show you how to buy investment property with a bad credit score, so tune in!
What is meant by bad credit score?
Credit score is a statistical number that evaluates an individual’s creditworthiness. Mortgage lenders use credit score to decide whether to offer an individual a loan and at which interest rate the loan is issued. Simply, a high credit score means that the person is financially trustworthy to pay back a loan. For real estate investors, having a good credit score is the optimal situation since it qualifies them for loans at lower interest rates and better terms while, on the other hand, a bad score could mean a loan is not an option.
According to Investopedia, these are the ranges for credit scores:
- Excellent: 750 and above
- Good: 700-749
- Fair: 650-699
- Poor: 550-649
- Bad: 550 and below
Your credit score is calculated based on an analysis of your credit files. Believe it or not, this number can tell the likelihood that you will pay your bills! If you are among the unlucky ones, a bad credit score doesn’t necessarily mean you can’t buy an investment property. So how to buy investment property with bad credit score? Follow these real estate investment strategies!
How to buy investment property with bad credit score: Fix and flip
Real estate investors with low credit scores might not be eligible for loans that would cover the price of a single-family property. However, they might still be able to qualify for a loan that would finance a distressed property. This kind of investment property can be renovated and flipped for a profit. Fix and flip is a short-term real estate investment strategy that offers high returns in a short period of time if done correctly. The only downside of this investment strategy is that you’ll have to invest in a lot of effort for good results, and sometimes, new expenses emerge as you go on with the flipping project.
To know more about the fix and flip strategy, check out our real estate investment guide here.
How to buy investment property with bad credit score: Find a co-signer
If you think you have found the perfect investment property but don’t have good credit that qualifies you for a loan, then consider looking for someone to co-sign who will act as a guarantor of your loan. Asking a close friend or a family member with a better credit score to co-sign your rental property mortgage is a good idea as long as you make sure to pay your mortgage payments. Failing to do so will not just worsen your credit score, but that of your co-signer as well!
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How to buy investment property with bad credit score: Form a partnership
Forming a real estate partnership is another way to use another’s personal credit to facilitate a real estate investment opportunity. The only difference in this approach is that you have to split any profits with your partner. Forming a real estate partnership offers many advantages; pooling resources can help you afford a larger investment property and extend your real estate investing network. Nevertheless, a poorly planned partnership can turn into a nightmare, especially in the absence of a partnership contract. Therefore, it is always advised to sign a contract when forming a real estate partnership.
Check out this blog for everything you need to know about real estate partnerships.
How to buy investment property with bad credit score: Use hard money lenders
If you are wondering how to buy investment property with bad credit score then hard money is your top option. Hard money lenders are individuals or businesses that lend money at high interest rates. In addition, hard money lenders charge large fees which makes them unfavorable for long-term real estate investments. However, hard money is ideal for a fix and flip investment strategy. This way a real estate investor can borrow hard money, make a profit, and move on to the next project. Getting a hard money loan with a bad credit score is not a problem because hard money lenders don’t have to adhere to regulations and lending policies of banks.
How to buy investment property with bad credit score: Real estate wholesaling
This is probably one of the most talked about methods when it comes to investing in real estate with a bad credit score. Real estate wholesaling is basically the business of finding a real estate deal, putting it under contract (without paying a single dollar), and then finding a buyer to purchase it for a higher price. The difference in price is your profit. It sounds easy, right? Well not that much. Wholesaling requires time, dedication, and great marketing skills, and in some places, you need a real estate license to practice wholesaling.
How to buy investment property with bad credit score: Improve your credit score!
Before doing anything else, try to resolve any issues related to your credit check to improve your credit score. Just pay your bills on time, pay off your debts and don’t open additional credit cards of any type.
The Bottom Line
If you ask me how to buy investment property with bad credit score, I would simply tell you to improve your credit score first. Having a good credit score will qualify you for loans at lower interest rates and better terms. However, if you think you have what it takes to succeed in real estate investing, but you are doomed with a bad credit score, check out the strategies suggested above.
Use Mashvisor’s investment property calculator to find the best real estate investment opportunities out there to help with loan approval!
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