You'll often hear that having a high credit score is your ticket to not only getting approved for a mortgage but snagging a competitive interest rate on a home loan. And there's definitely truth in that.
Mortgage lenders have tightened their standards in the wake of the 2008 housing crisis. And so now, if you go in as a borrower with poor credit, you may be denied a mortgage if you're considered too risky a prospect.
But that doesn't mean you can't invest in real estate with a low credit score. If you have the capital, there are other options you can consider. Here are three options.
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1. Flipping houses
Investors who flip houses generally don't finance them with a mortgage. Rather, they put up the capital themselves or seek out private loans with higher interest rates, whose lenders don't necessarily impose the same borrowing standards as mortgage lenders.
If you're sitting on a pile of cash to invest with, you can use it to purchase a home and fund the renovations needed to market it to buyers. Since housing inventory is extremely low these days, you may find that buyers are eager to jump at the chance to own a recently rehabbed property.
2. Buying an income property with cash
Most homebuyers can't afford to just plunk down a pile of cash for a home. Rather, they need to finance the bulk of a home purchase with a mortgage. But if you're sitting on a lot of money, you may be in a position to purchase an income property outright.
Doing so isn't without risk. Homes are usually a very illiquid investment, so you'll need to be careful when parting with a large chunk of cash for a home purchase. But if you buy in a market with strong rental demand, you might easily start recouping your investment in the form of large monthly payments from tenants. And in time, the value of your income property could grow, putting you in a position to sell at a profit.
3. Loading up on REITs
When it comes to buying stocks, your credit score is irrelevant. Your broker doesn't care what your credit history looks like, as long as you have the money in your account to purchase shares of the company you're looking to own.
REITs, or real estate investment trusts, work similarly. These are companies that make money by owning and operating portfolios of different properties. Retail REITs, for example, own malls and shopping centers, and they make money by leasing out that space.
You can buy shares of publicly traded REITs as quickly and seamlessly as you can of shares of regular stock. And that allows you to invest in real estate without owning physical property.
Plus, REITs are known for higher-than-average dividends. And if you hold yours for many years, you might benefit nicely as your shares gain value.
Don't let poor credit be a barrier
When it comes to qualifying for a mortgage, a low credit score could get in your way. But that doesn't mean investing in real estate is off the table. A number of options don't require you to fill out a mortgage application and hope for the best.
Of course, it's always a good idea to work on improving your credit score if you feel it needs a boost. A higher score will make it easier to borrow affordably when you need to. But from a real estate investing standpoint, poor credit doesn't have to be a barrier to building a solid portfolio.
