If you want to buy real estate to diversify your portfolio, you’ll probably need to get a mortgage. Unless you have the cash to buy outright — and are willing to tie up your money that way — you’ll have to qualify for a loan to make your purchase.
This can be a big problem if you have a low credit score. That’s because lenders are going to look at your borrowing history to make sure they can trust you’ll repay a loan.
The good news is, you do not need stellar credit to add real estate to your investment mix. There are other options.
You can invest in real estate without buying properties
If you have a low credit score, the big challenge of buying properties is going to come from the fact that you may have difficulty qualifying for a mortgage. Lenders use your credit score to determine if they will provide you with a loan and what interest rate they’ll charge you. A low score sends up red flags and makes borrowing more expensive and difficult.
While there are some mortgages available to 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 need to pay cash for properties rather than borrow. This would seriously limit your ability to invest, and it would also mean losing one of the biggest benefits of real estate investing — the leverage you get from being able to borrow for an expensive property after making only a small down payment.
The good news, though, is that you don’t need good credit to invest in real estate because you don’t actually need to personally own any 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 you 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 just like stocks. That means anyone can invest in a REIT, regardless of their credit score. And you usually won’t need much money to invest in one, since there’s often no minimum investment amount required. That means there’s no need to borrow to invest, so your credit history doesn’t matter.
REITs are companies that pool investor funds and then use those funds to either buy properties or to finance real estate transactions. There are many REITs out there, so you can buy a REIT that owns the type of properties you personally might want to buy if you had better credit.
You also have the option to either buy any publicly traded REIT you want, or to buy REIT mutual funds or exchange-traded funds. This makes it easy to find an investment that fits well in your portfolio.
Once you own a REIT, you can earn regular income from it when it pays out dividends. You also have the ability to sell the REIT for more than you paid for it if the price goes up. So if the real estate market does well, you’ll get all the benefits of being invested in it without having a credit score hold you back.