After the credit crunch of 2007, the banks made it incredibly difficult for first-time buyers to jump onto the housing ladder. Moreover, homeowners who have never missed a mortgage payment discovered that if they were to apply for the mortgage that they already had, their application would be rejected!
This article, however, is not for the buyer who is looking for a home. Here, we are going to focus on those people who are looking to make their money work for them by investing in real estate. As the financial crisis has left many people in a similar situation, we are going to look at those people looking to invest in real estate with no money or bad credit.
Now, to say ‘no money’ would be a little extreme – investing in real estate does require some capital. But many investors with little to no experience of investing in real estate may well be coming to the market expecting to require deposits in the region of at least £20,000. For many, that’s the end of the line.
The good news for them is that the market has shifted. There are numerous ways in which an investor with bad credit or limited resources can invest in real estate and build up a sizeable portfolio. Granted, the return on investment will be lower than if they were able to purchase a property outright. But the point is that the barrier to entry for the ‘would be’ real estate investor has lowered. So let’s take a look at some of the ways that investors with little money or bad credit can enter the real estate investment market.
Crowdfunding and P2P lending
P2P stands for peer to peer lending. It’s a means for investors to borrow money to purchase property without needing to go to a bank. What’s more, it’s a means for other investors to make money as lenders. And it’s a sound investment for them too, with many seeing returns of up to 12% annually.
P2P is operated via a platform – the borrower doesn’t need to go searching for someone who will lend money. What is under consideration here is the property itself, not the borrower. The hopeful investor will present the property to the platform, and potential lenders will consider investing or not.
The beauty here is that P2P lending is often lumped in with crowdfunding. One investor doesn’t need to put up 100% of the loan. He or she may want to limit their risk by only investing, say, 25%. Therefore, the platform needs to find three other like-minded investors for the borrower to get their money.
One would expect these loans to come with a much higher interest rate than the banks, but this is not necessarily true. Yes, the rates will be higher, but P2P platforms and their investors don’t have the overheads that banks do. They have no premises, no equipment, no marketing budget and no staff. As a consequence, they can afford to be a little more competitive. Granted, not as competitive as the banks, but remember that P2P is a perfect solution for real estate investors for whom the banks have said no.
Real Estate Investment Trusts
A real estate investor with no money or bad credit will find it challenging to invest outright in a single property. It does not mean that they cannot start building their portfolio. One of the least expensive ways to do this is via a Real Estate Investment Trust or REIT.
Buying into a REIT works in very much the same way as buying shares to be traded on the stock market. Like many investors, a thorough understanding of the science of the stock market is not necessary.
A REIT management company will create a real estate project. In essence, this means that they will purchase a property. It could be either commercial or residential. They will then assume the responsibility of managing that property, either directly or via a dedicated management company.
This management not only involves maintenance of the building and its services but also includes the sourcing of tenants and the collection of rent.
This project is split into shares. As the property value appreciates, so too does the value of those shares. And that value can be impressive, with REITs currently showing annual returns of between 9 and 12%.
What’s more, our real estate investor need not be locked into a single property. The REIT management firm will work with their investment. They would usually advise splitting the money across multiple real estate projects, thus minimising their risk and maximising their chances of realising the highest return on their investment.
It means that with as little as £1,000, a real estate investor could have a share in as many as ten properties. Naturally, the amounts returned here will be low, but what is happening is that our real estate investor is going from having ‘no money’ to ‘some money’, which ultimately will lead to ‘more money’, which is, of course, the goal of every investor.
Turn the Bad Credit Score Around
For many people, bad credit is not a life long situation. People who always meet their mortgage payments and pay their bills sometimes fall upon hard times, and this can have an adverse effect on their credit score.
The good news is that real estate investment can be an excellent means to reverse that bad score, and quickly. One way to do this is to purchase an inexpensive property in desperate need of renovation.
Now, of course, purchasing a property is going to require some upfront capital, and crowdfunding and P2P platforms can be an excellent means to secure that money. Yes, the interest rate is going to be higher than the banks’. However, this initial investment is not so much about making a huge profit, as it is about returning a good credit score to the real estate investor with bad credit.
Let’s say there’s a house available on a street where similar properties sell for £200,000, except this property is in a deplorable state of repair. It’s structurally sound, but every room needs modernising. As a result, it’s been put on the market for £140,000. After some negotiation, a figure of £130,000 is agreed.
Our real estate investor is not looking to live in this property. The goal is to renovate it as quickly as possible and put it back onto the market. This means that decoration can be simple. Minimalist, clean lines throughout will present an attractive blank canvass to those buyers looking to live in the property.
The renovations cost a total of £30,000. To bring about a quick sale, the property is put on the market for £190,000, and a deal is agreed. Before fees, that’s a profit of £30,000 for our real estate investor, which he or she can use to pay off all of the bills which are giving them a bad credit score.
The P2P lenders are delighted because they will have seen their loans repaid quickly. When our real estate investor is looking for their next project, they will be able to approach more traditional lenders with more confidence and a greater credit score, thus securing their financing at a lower interest rate.
Form a Partnership
Many real estate investors looking to enter the market need to bring something to the table other than money. If we were to take the example above of the property in need of renovation, our investor could seek financing from a partner and agree to tackle the renovations him or herself.
Naturally, if the investor is a builder or decorator by trade, then this could be a very attractive proposition for an investment partner. After all, all renovation work will be done at a cost, thus increasing the profits when the property is completed and sold. The investor could strike up an agreement whereby all of the money saved by not going to external renovation companies could return to them as profit. The partner still gets the majority share, but our investor is amassing some capital with which to finance their next investment.
So is it possible to invest in real estate with no money or bad credit?
The simple answer is that it is possible, but it is by no means a long term solution. The goal of the initial real estate investments is to reverse a bad credit rating and acquire enough funds to be able to embark upon a second, third and fourth investment via more traditional financing routes.
Like any real estate investment, the ultimate plan is to take a long term view of one’s finances. Regularly playing the short game may well yield some benefits, but they may only be 1 or 2% higher than simply leaving the money in the bank, which of course comes with no stress whatsoever.
The short game needs to be seen as the stepping stone to those real estate investors who will struggle to start their portfolio by any of the more traditional means.