Get Funding For Investment Property Despite Bad Credit

It is possible to get funding for an investment property even with bad credit. However, it is important to note that traditional mortgage loans are difficult to obtain with a poor credit score, and improving one's credit score is generally recommended before pursuing any kind of loan. That being said, there are several alternative financing options available for those with bad credit, each with its own pros and cons. These include hard money loans, private money lenders, seller financing, real estate investment trusts (REITs), government-backed loans, and more. It is crucial to carefully consider each option and consult with a financial advisor to determine the best course of action for one's unique situation.

Hard money loans

Benefits of Hard Money Loans

There are several advantages to choosing a hard money loan over a conventional mortgage:

• Speed: You can secure funding within a matter of weeks, which is crucial for investors who need to act quickly to secure a property.
• Flexible terms: Private lenders offer more room for negotiation, allowing you to tailor the repayment schedule to your needs and possibly reduce certain fees.
• Less focus on creditworthiness: Hard money lenders are more interested in the value of the property than your credit score, making it a viable option if you have bad credit.

Drawbacks of Hard Money Loans

• Cost: These loans tend to have higher interest rates and fees compared to conventional loans, so you'll pay a premium for the convenience and speed they offer.
• Shorter repayment period: Hard money loans have much shorter repayment terms than traditional mortgages, as they are designed to help investors get a property ready for sale as quickly as possible.

Finding Hard Money Lenders

When choosing a hard money lender, it's important to compare fees, interest rates, and loan terms. You can find hard money lenders through online searches, and some platforms offer comparisons of different lenders' offerings. Additionally, local real estate investment clubs can be a great resource for finding lenders in your area.

Example Lenders

• AMZA Capital: Requires a minimum credit score of 650 and offers loans starting at $75,000.
• Easy Street Capital: Offers loans from $75,000 to $2 million with no appraisal required and the possibility of closing within 48 hours.
• Express Capital Financing: Provides real estate loans ranging from $100,000 to $50 million, with no income verification required.
• Jet Lending: Offers asset-based loans with quick approval and funding, often within 3 days.

Improving Your Credit Score

While hard money loans can be a solution when you have bad credit, improving your credit score is still important. A higher credit score will give you more financing options and potentially better terms. Here are some tips to improve your credit:

• Make timely payments: Ensure you make all your loan and bill payments on time, as payment history is a significant factor in your credit score.
• Keep credit utilization low: Aim to keep your credit utilization ratio below 30%. This ratio represents how much credit you're using relative to your available credit limit.
• Review your credit report: Check your credit report for any errors, as fixing inaccuracies can quickly boost your score.
• Use credit repair services: Consider engaging a credit repair service to help remove negative marks from your credit reports.

In conclusion, hard money loans can be a valuable tool for real estate investors, especially those with bad credit. By understanding how these loans work and their advantages and disadvantages, you can make an informed decision about whether this financing option is right for your investment needs.

Private money lenders

There are two main ways to use private lender loans:

• Refinancing a property: Private money lenders can help negotiate a better interest rate or repayment timeline on an existing loan. They are particularly attractive because investors can incentivize lenders with profit shares instead of loan repayments.
• Buying a new property: Private money loans can help investors purchase new properties, including residential, commercial, and multi-family real estate.

To find private lenders, it is important to first understand the differences between private lenders, hard money lenders, and financial institutions. Then, build a network of potential private lenders from both within and outside the real estate industry. Prepare a strong portfolio and pitch to present to potential lenders, and be ready to answer their questions about the facts and figures of the deal.

Some pros of using private money lenders include:

• Speed of financing: Private lenders can often make quick decisions, allowing investors to close deals faster.
• Flexibility in terms: Loan terms, interest rates, payment schedules, and loan duration can often be negotiated to fit the borrower's needs.
• Less stringent requirements: The approval process focuses more on the value of the property and the investment opportunity than on the borrower's credit history or financial standing.

However, there are also some cons to consider:

• Higher costs: Private loans typically have higher interest rates and additional fees, which can affect the overall profitability of the investment.
• Shorter repayment terms: Private loans often have shorter repayment timelines, which can put pressure on investors to refinance or sell the property quickly.
• Risks of predatory lending practices: While many private lenders operate with integrity, there are also less scrupulous players in the industry who may engage in predatory lending practices.

When working with private money lenders, focus on building strong, long-term relationships. Always remain professional, and remember that finding funding for your current investment is not a one-time deal but an ongoing process.

Partnering with someone with good credit

Finding a Partner

• Look for someone who has good credit and is interested in real estate investment. This could be a friend, family member, colleague, or someone you met through networking.
• When choosing a partner, look for someone who has the skills and resources that you lack. For example, if you lack credit, partner with someone who has excellent credit and can help secure funding.
• It's important to bring something to the table as well. This could be capital to invest, expertise in real estate, or the ability to help with property maintenance and management.

Formalizing the Partnership

• Consult a business lawyer to help establish the partnership and choose a business structure. This will protect your personal assets in case of any problems down the line.
• Create a detailed agreement that outlines the responsibilities and ownership percentages of each partner. This will help mitigate the risks of joint ownership.

Funding Options

• Your partner's good credit may help you secure more traditional funding options, such as a mortgage from a bank or other lender.
• You can also explore alternative funding options together, such as hard money loans, private money lenders, or seller financing. These options may be more flexible when it comes to credit requirements.

Profit Sharing

• Be prepared to split profits with your partner. This is a trade-off for gaining access to their good credit and funding opportunities.
• Discuss and agree on a profit-sharing structure that is fair and beneficial for both parties.

Communication and Management

• Effective communication is key to a successful partnership. Make sure you and your partner are on the same page regarding investment goals, strategies, and responsibilities.
• Clearly define management responsibilities, such as attracting tenants and performing maintenance. Partnering can help divide these tasks and make them more manageable.

Seller financing

Here's how it works: the buyer enters into a mortgage transaction directly with the seller, and both parties agree on an instalment payment plan. The terms of the agreement vary from case to case, with some sellers requesting monthly payments and others opting for quarterly payments. These terms are outlined in a promissory note, a legally binding document that outlines the buyer's promise to repay their debt.

However, it can be challenging to find someone willing to sell through owner financing. Look for homes listed as FSBO (for sale by owner) that mention they are open to seller financing. Even if it's not listed, it's worth reaching out to the seller to suggest financing terms proactively.

Buyers:

• Confirm that the seller is free to finance the sale by paying for a title search to ensure the property is free from mortgages or tax liens.
• Be prepared to make a down payment. While the amount may vary, it is typically around 20% or more of the property's value.
• Understand that seller financing usually runs for a shorter period than a traditional mortgage, often with a balloon payment due after a few years.
• Be transparent about your reasons for not qualifying for a traditional mortgage, and be prepared to share your employment, assets, financial claims, and references.

Sellers:

• You don't need to finance the entire sale. You can sell the promissory note to an investor or lender at any time and receive the cash immediately. However, you will likely get less than the full value of the note.
• Promote the fact that you're offering seller financing in your property listing and provide detailed information about the financing arrangements to potential buyers.
• Engage a financial planner or tax expert to navigate the potential tax complications of seller-financed deals.
• Unless you're experienced in lending, consider hiring a loan-servicing company to manage the monthly payments, issue statements, and handle other administrative tasks.
• Work with a real estate attorney or agent experienced in seller-financed transactions to ensure the process runs smoothly and complies with local regulations.

In summary, seller financing can be a flexible option for buyers with bad credit looking to invest in real estate. By working directly with the seller, buyers can access alternative financing, while sellers can benefit from a faster sale and a better return on their investment. However, both parties should be aware of the risks and seek professional guidance to structure the deal appropriately.

Real estate investment trusts (REITs)

REITs are an alternative way to invest in real estate without having to take out a loan. They are also a good option for those with bad credit, as they do not require a credit check.

There are two main types of REITs: equity and mortgage. Equity REITs own or operate income-producing real estate, while mortgage REITs provide financing for income-producing real estate and earn income from the interest on these investments.

REITs are typically structured as corporations and are not taxed at the entity level, which allows investors to avoid double taxation on dividends. Due to this structure, REITs typically pay out higher dividends than equities or many fixed-income investments.

REITs can be purchased on major stock exchanges, just like any other public stock. They can also be purchased through a mutual fund or exchange-traded fund (ETF).

There are some risks associated with REITs, particularly non-traded REITs, which are not sold on a stock exchange. These risks include lack of liquidity, lack of share value transparency, and potential conflicts of interest with shareholders.

Frequently asked questions