Poor credit can create a serious obstacle when it comes to securing financing for a real estate investment. This is particularly true in 2021, when lenders are tightening their standards due to the COVID-19 recession. But with interest rates at an all-time low, investing in real estate is an attractive opportunity in many markets.
To help you take advantage of these low rates, here are three ways to finance a real estate investment when you have poor credit.
1. Seller Carry-Back Financing
Seller carry-back financing is a type of financing where the seller acts as the bank. Rather than getting a mortgage loan through a traditional lender, such as a bank, you get the loan directly from the seller.
This arrangement can work well for both parties. As the buyer, you get access to financing that wouldn’t be available through traditional lenders, even if it means paying a slightly higher interest rate. And the seller gets the benefit of ongoing cash flow, as well as earning higher-than-market interest rates. If you were to default on your loan, the seller would simply take back possession of the home.
Finding seller carry-back opportunities can be difficult as many sellers (particularly those who need the lump sum from the sale to purchase a new home) aren’t in a position to provide financing. Smart real estate platforms like PropStream allow you to filter your property search to find seller carry-back opportunities.
2. Hard Money Loans
Hard money loans are often used for short-term financing of a real estate investment. If you’re fixing and flipping properties, for example, you may need a loan to purchase and rehab the property, but the plan is to complete the project, sell for a profit and move on in short order. This is a good use of hard money loans, which typically come with higher interest rates and shorter terms.
Hard money loans can be an option for people with poor credit because lenders who offer hard money loans are typically less risk-averse than traditional lenders. You’ll pay a substantially higher interest rate, but since you probably won’t take more than six to 12 months to repay the loan, the high interest is typically manageable.
When considering hard money loans, make sure your local market is in growth mode; you don’t want the property losing value during the short time you own it. And make sure you use PropStream’s Rehab Estimator Tool, which uses price information for local labor and materials to give you a more accurate projection.
3. Take on an Investment Partner
Taking on an investment partner means finding someone to share the investment with you. There are a few benefits to sharing your investment:
- Flexibility: You can structure the joint venture in any number of ways, depending on how much of the total you will each invest, what share of ownership you each get in return and how much of the work each partner will handle.
- No added debt: Taking on an investment partner who gets an ownership stake is equity financing, not additional debt financing.
- Possible learning opportunity: If you can find an experienced investment partner, you could learn a lot about real estate investing while sharing the risk with your partner. He or she will have a vested interest in your success.
Poor credit doesn’t have to stop you from investing. With seller carry-back, hard money loans and investment partners, you have options to get your real estate investing business off the ground.