10 Ways to Invest In Real Estate
With Bad Credit and No Money
Investing in real estate with no money and bad credit is possible. For us (Aja & Family,) the journey started as a way to get out of debt. So you don’t have to have all of your ducks in a row to get going.
Since then, real estate investing has been a fun, profitable result of our family becoming increasingly more financially independent. After paying off over $120,000 of debt, we turned our focus to investing and eventually landed in real estate ventures.
It’s been super fun fixing up, renting, selling and even building new real estate with the help from Archute architects. It’s also been a tad bitter-sweet with some of the hard lessons we had to learn. Some days, I wish we would have started investing a little sooner because it’s just been a huge blessing for our family.
Why invest in real estate?
Real estate is one way to have a more hands-on approach to investing — which can be a good foray into more passive forms of investing. In some ways, you are more in touch with your investment in real estate.
This approach undoubtedly means more work for you in the beginning. But the good news is that there are so many ways to invest in real estate, ranging from active to passive investing, that you can surely find a way to invest that works for you.
Some people say real estate isn’t a good investment but I don’t agree. Real estate can actually be a very good investment if you look at it as such. I’m not a fan of overextending yourself for a dream home, but I do like the idea of building up passive income, equity, or both to support the purchase of that dream home.
If you want to invest in real estate as a way to fuel your other financial goals, here are some ways to get started sooner than later.
This is one of my favorite ways to invest in real estate. It’s great for beginner real estate investors, yet not many people do it. You can house hack with either a single-family home or a multi-unit property.
I know some house hackers, usually young and single, who purchase a home, then get roommates who end up covering their mortgage. If you’ve got a multi-unit, the concept is the same — living in one unit and renting out the other(s.)
If you choose this route, living a mortgage-free, rent-free existence can help you pad your savings for more real estate while building equity you could use down the line.
Airbnb hosting can be a great, lucrative side hustle. In some cases even more lucrative than traditional rentals. With traditional, long-term, rentals, you’ll have a single tenant. In many cases, you’ll have to be sure that they’ll be a good fit for a long time.
With short-term rentals, like Airbnb, you have access to a large, diverse tenant pool. In some locations, you can generate two to three times the amount of rent you would with a traditional rental.
There are some important factors to consider when deciding to rent your property on Airbnb. You’ll have to run your short-term rental company like a real business. Having the correct property insurance, accounting records, and superb hospitality will be key. Starting with a target market and strategy to increase profits will be a huge help.
Starting your Airbnb listing is as easy as going to Airbnb.com, completing your profile, and finalizing your listing details. Once you get bookings, money is automatically deposited into your bank account. To get started as an Airbnb host, create your listing here.
Get creative and launch some money-making ideas to finance your REI goals. There are many ways to earn extra money on the side:
- Airbnb hosting
- Freelance writing
- Social media management
- Gig economy: Uber, Lyft, Instacart, etc.
If you are strapped for time, consider borrowing against some assets
- Refinance your primary home and use the cash to put a downpayment on an investment property.
- Borrow from your 401k
- Pension advance loan
- Borrow against a whole life insurance policy
- Take out a personal, unsecured loan
- Get a cash advance from your credit card
- Car title loan
Note: Borrowing to invest in real estate can be extremely risky. Proceed with extreme caution to make sure you have a viable exit plan that includes QUICKLY servicing or eliminating debt. This could include a sale, refinance, or leasing.
Low down payment loans
You can get a mortgage for an investment property with a small down payment using certain home loans. In some cases, you may even get first-time homebuyer grants. There are many federally-backed loan options that allow you to purchase property with little to nothing down:
- FHA loans are great for borrowers with less than stellar credit and the required down payment is only 3.5%
- FHA 203k loans have many of the same qualifications as a standard FHA loan, but you get to budget for home renovations with this loan. You can earn instant equity once your renovation is complete.
- VA loans allow veterans to secure a mortgage with NO down payment or mortgage insurance.
- USDA loans provide loans for homes in qualified rural areas. A long as you meet the requirements, this loan requires no down payment.
- Fannie Mae homestyle loans are similar to 203k loans, the guidelines for buyers are a bit more strict with homestyle loans. You do, however, have more freedom over what kinds of renovations you make to your property.
Capital gains taxes, labor costs, and a high level of risk are all factors to consider when flipping homes. To mitigate some of these risks consider the slow-flip method. Slow-flippers live in the home while it’s undergoing renovations and can take advantage of owner-occupied mortgage rates and capital gains exemptions upon the sale of the home. (Tip: owner-occupied mortgages are typically cheaper than mortgage rates for commercial loans for investment property). There are a few key elements to a successful live-in flip:
- Get the ugliest house in a great neighborhood. You can make great profits by upgrading the worst house on the best block.
- Know your comps. Be sure you can make a profit by surveying other homes in the area.
- Know your holding costs. There’s great money to be made flipping, even now. Don’t forget to calculate your mortgage, utilities, and taxes for a true idea of your profit.
Many live-in flippers do most (or all) of the home renovations themselves, to save money and increase profits! With a live-in flip, there’s less pressure to sell the house quickly because you’re living in the home. With a slow flip, you can take your time and find the right buyer who’s willing to pay the right price.
Invest in REITs
REITs or, Real Estate Investment Trusts, are an easy, low-cost way to get into real estate investing. REITs are traded on most major stock exchanges, and purchasing one is as simple as purchasing any stock or mutual fund.
A REIT offers a diverse portfolio of real estate assets without the hassle of financing or managing actual property. In many cases, you’ll receive dividend payments from a REIT just like you would with an ETF or index fund. You can use your 401K or other tax-advantaged retirement accounts to invest in REITs as well.
Partner with friends or family
In a partnership, each partner can bring different assets to the table. One party may have the funds while the other party may have the experience. With this method, be sure to capture your agreement in writing.
Here are some ideas on how to work with family and friends in real estate:
This involves borrowing money at a specified interest rate from one or more individuals. With this arrangement, your “lender” only provides money for a project. They will not usually have input on the process, much like a bank would not give you direction on renovating your home with their funds.
You can put in safeguards to ensure work is done according to code so that the loan can be repaid. A seasoned, REI lawyer can help you with more direction and clauses that make sense for this arrangement
Limited liability company
In this arrangement, everyone will contribute money with the intent of doing business together. In real estate, funds can be used to acquire property. The profits from the venture are then split among the group. This is a great way to get into real estate if you don’t have a lot of money. Sometimes, you can accomplish more with a group of like-minded individuals.
In this arrangement, you bring your deal hunting, project management, and administrative skills to the table. In some cases, you may contribute funds to a deal, but it’s not necessary. As a general partner, you are going to do the bidding on behalf of your limited partners, who will contribute funds. These arrangements are common for groups who purchase apartment complexes or similar high-value real estate deals.
Finding underutilized assets
You’d be surprised at how many families have real estate under their purview without much interest in optimizing it. For some, they just don’t want the hassle of caring for grandma’s or Uncle Joe’s abandoned home. Sometimes, relatives even have land that no one is really caring for or keeping up with. Ask around and see if anyone wants to turn over any land or real estate for you for deeply discounted rates. This is exactly how I started investing in real estate!
If you’ve struggled to secure traditional financing for your real estate investments, you can side-step the bank and save with owner financing. Owner financing is when the owner of the home “holds the note” on your property.
Instead of getting a mortgage loan from the bank, the owner will allow you to make monthly payments to them directly until you have paid off the balance of the loan. Most times, you can negotiate better terms and quicker closings on an owner-financed property. Plus, you can quickly generate income if you decide to use it as a rental right away.
With this approach, you may have to put money down. Sometimes, the owner may not require a down payment.
Generally, owners do not like to hold these notes for a long time. If a buyer defaults on a loan with an individual owner (i.e. not a bank,) the foreclosure process can be very cumbersome for them.
As a result, these deals may require you to finance the property with the owner for just 12, 36, or 48 months. Then, you’ll have to figure out a way to pay off the property with a balloon payment (the remaining loan balance.) You could make extra payments to pay off a loan early or build up enough equity in the property to refinance the loan for a longer-term with a bank.
Look into pre-foreclosure lists and probate court cases for great deals on property.
Assuming a Mortgage
An assumed mortgage is an agreement between a buyer and a seller that transfers an existing mortgage, along with all its terms and conditions to the new owner. When a buyer assumes a mortgage they step into the current homeowner’s mortgage and take over exactly where they left off. With an assumed mortgage buyers benefit from lower interest rates and closing costs, typically saving thousands of dollars.
Trying to find a seller willing to let you assume their mortgage can be time-consuming, but it’s definitely worth it for better loan terms, and usually an overall cheaper mortgage for an investment property. If a seller is facing financially difficult times offering to assume a mortgage can be a great negotiating strategy.
“Subject to” financing
With “subject to” financing a buyer and seller enter into a contract giving the seller the responsibility to pay the seller’s mortgage and the grants buyer the right to sell/lease a property at their discretion. For a seller facing foreclosure “subject to” financing can be a means of saving their credit and a great negotiating piece for you.
This type of financing offers buyers the capabilities of long term financing without having to qualify for a traditional mortgage. There are, however, many risks associated with this financing method that you should be aware of. Lien holders can prevent the sale of the property without proper title insurance and seller’s mortgage holders may not allow for the transfer of the mortgage. It’s important that you do your due diligence and protect yourself by having a lawyer go over your contracts and purchasing title insurance.
Wholesale real estate
A wholesaler acquires a contract from a property’s seller and then assigns that contract to an end buyer. A wholesaler makes profits by identifying properties that are being sold for under market value, and contracting it to a buyer for a higher, but often still under market value, price. Wholesaling is a great way to jump into real estate because it doesn’t require money from the wholesaler, only time, networking, and effort. Wholesaling will teach you negotiating skills and has the potential to help you generate a great income for other investments.
Getting started as a real estate investor is not easy, but it’s doable. Hopefully, implementing one of these strategies will jumpstart your REI investing journey ASAP.
In the meantime, make sure you are doing the work of improving your credit score and saving up money with a decent budgeting plan so that you are ready when the real estate market presents opportunities.