If you want to buy real estate to diversify your portfolio, you will probably need to take out a mortgage. Unless you have the money to buy outright — and are willing to tie up your money that way — you’ll need to qualify for a loan to make your purchase.
This can be a big problem if you have a low credit score. This is because lenders will review your borrowing history to make sure they can trust you will repay a loan.
The good news is that you don’t need stellar credit to add real estate to your investment portfolio. There are other options.
You can invest in real estate without buying properties
If you have a low credit score, the big challenge in buying properties will be that you may have difficulty qualifying for a mortgage. Lenders use your credit score to determine if they will give you a loan and what interest rate they will charge you. A low score sends red flags and makes borrowing more expensive and more difficult.
Although there are mortgages available for borrowers with bad credit, you could end up paying a high interest rate, which makes it more difficult to invest in real estate profitably. Avoiding this could mean you have to pay cash for the properties rather than borrow. This would seriously limit your ability to invest, and it would also mean losing one of the greatest benefits of real estate investing – the leverage you get by being able to borrow against an expensive property after making only a small down payment.
The good news, however, is that you don’t need good credit to invest in real estate because you don’t need to personally own properties to gain exposure to this asset class.
Explore your options for investing in real estate without borrowing
If you don’t have good credit and want to invest in real estate, it’s worth considering whether you should buy a real estate investment trust (REIT) instead.
REITs can be traded like stocks. This means that anyone can invest in a REIT, regardless of their credit rating. And you usually won’t need a lot of money to invest in one, as there’s often no minimum investment amount required. This means you don’t have to borrow to invest, so your credit history doesn’t matter.
REITs are companies that pool funds from investors and then use them to buy properties or finance real estate transactions. There are many REITs out there, so you can buy a REIT that has the type of properties you might personally want to buy if you had better credit.
You also have the option of buying any publicly traded REIT of your choice or buying REIT mutual funds or exchange traded funds. This makes it easier to find an investment that fits well into your portfolio.
Once you own a REIT, you can earn regular income from it when it pays dividends. You also have the option of selling the REIT for more than you paid if the price goes up. So if the real estate market is doing well, you’ll get all the benefits of being invested in it without a credit score holding you back.