How Your Credit Affects Real Estate Investing? Credit is an important part of everyone’s financial life, but it’s especially important for real estate investors and house hackers. These are just some of the ways that your credit score can impact your investment journey.
Ability to Qualify for Loans
While we all wish we had enough money to invest in real estate without applying for a mortgage or other loan, the reality is that most real estate investors use leverage to buy their investments. That leverage one of the things that can make investing in real estate so lucrative.
Your credit impacts your ability to qualify for loans, which has a direct effect on your ability to invest in real estate. If you have poor credit, you’ll have trouble qualifying for a mortgage for your own home, let alone a second mortgage for an investment property.
You want to build a good credit score so that you can qualify for multiple loans, giving you the chance to invest in multiple properties, rather than just one.
Mortgage Rates
Beyond affecting your ability to qualify for loans, your credit score helps to determine the interest rates that you pay for those loans. Interest rates impact real estate investors in many ways.
Monthly Payments and Cash Flow
If your investment strategy is to buy properties and rent them out, the interest rate for your mortgages will determine whether you’re able to generate cash flow from a property and how large that cash flow will be.
Consider this example. You borrow $100,000 to buy a property that you expect to rent for $800 each month.
If you have good, but not great credit, you might be able to qualify for a 30-year mortgage with a 4.5% interest rate. You’ll pay $507 each month for the loan, leaving just under $300 to cover maintenance costs and any times when you don’t have renters in the home.
If you have excellent credit, you might be able to qualify for a loan with a rate as low as 4%. That drops your monthly payment by $30 to $477. That gives you an extra $360 each year that you can use to cover costs.
Put another way, just by improving your credit score, you could effectively increase the income that a property produces by nearly 6%.
Total Costs
If you’re just looking to invest by buying a home instead of renting, or if you plan to sell properties rather than renting them out for the long-term, your credit score can help you save a huge amount over the life of your loan. With 30-year mortgages, even small differences in the interest rate can have massive impacts.
Let’s use the same $100,000 mortgage as an example. If you qualify for an interest rate of 4.5%, you’ll pay a total of $182,407 over the life of the loan. If your interest rate is 4%, you’ll pay just $171,870. You’ll save almost $11,000 by improving your credit, not to mention that it will be easier to produce cash flow from the property if you do decide to rent it out someday.
You can pocket that extra cash or use it to purchase other properties, accelerating your real estate investing plan.
Home Equity Loans and HELOCs
Even if you already own real estate and don’t plan to buy more, you shouldn’t ignore your credit.
You might decide to make some improvements to a property so you can increase its value or ask for a higher rent. If you don’t have the cash to pay for these projects out of your own pocket, you might want to apply for a home equity loan or line of credit, using some of your real estate holdings as the collateral.
Your credit score impacts your interest rates for almost every loan you get, including home equity loans and HELOCs. If you do want to make improvements to a property you own and plan to borrow money to do so, keeping your credit in top condition can help you save money. That lets you get even more value out of the effort you put into improving the properties.
Wrap Up
Real estate investing and leverage are closely linked. The use of leverage is one of the reasons that you can make so much money as a real estate investor. That link makes your credit an immensely important part of your success as a real estate investor. Good credit can help you qualify for loans to purchase more properties and make those properties produce greater profits. Poor credit can prevent you from being able to invest in the first place, stopping you before you can get started. Now you know how your credit affects real estate investing. If you enjoyed this article, be sure to check out the basics on how to build credit: https://fibyrei.com/learn-the-basics-how-to-build-credit/
