I started in short-term rentals with a 398 credit score and no savings, so no bank was going to lend to me. So I learned the routes that do not start at a bank, and today I teach three that run on someone else's asset or credit instead of yours: rental arbitrage with written landlord permission, partnerships, and seller financing. All three can work without a 700 score, and all three carry legal and financial risks that a bank loan does not, which is what most of this article is about.
I wrote the first version of this story in 2025 as a newsletter issue. This version drops the hype, keeps the parts that held up, and adds what I wish someone had explained to me back then: how credit scores work, what each non-bank route costs, and where each one can hurt you.
What a 398 Credit Score Actually Means
A credit score is a number a lender uses to predict whether you will repay. According to the Consumer Financial Protection Bureau, most credit scores range from 300 to 850, and a higher score usually makes it easier to qualify for a loan and get better terms. A 398 sits near the bottom of that range. In practice it meant every mortgage application I could have filled out was a waste of an afternoon.
The score is not a judgment of your character. It is a calculation built from your credit report: whether you pay on time, how much of your available credit you use, how long your accounts have been open, new applications, and whether you have had collections, a foreclosure, or a bankruptcy and how long ago. The CFPB also points out that you do not have just one score. Each scoring model uses different data, so your numbers can differ from one lender to the next.
Two facts changed how I thought about my own number. First, negative payment history generally stays on your report for up to seven years, according to the CFPB, which means a bad stretch has an end date. Second, the FTC says the three nationwide credit bureaus (Equifax, Experian, and TransUnion) let you check your report from each of them once a week for free at AnnualCreditReport.com. You cannot fix what you have not read.
Here are the credit facts in one place, with the source for each figure listed at the bottom of this article.
Credit fact | Figure | What it means for a new STR operator |
|---|
Typical score range | 300 to 850 | A 398 is near the floor; conventional mortgages are off the table for now |
Negative payment history on a report | Up to 7 years | Old late payments age off; a rebuild has a timeline |
Free report checks per bureau | Once a week | Pull all 3 reports before any landlord, partner, or seller asks |
Nationwide credit bureaus | 3 | Errors on one report may not appear on the others, so check each |
My Start: Squatting, Bad Credit, and No Cushion
Everyone told me I was too broke to invest in real estate. They were right about the broke part.
Before I owned or leased anything, I lived in a bank-owned property I had no right to be in. I am not proud of it, and I am not recommending it. Squatting is illegal in most situations and can end with eviction, criminal charges, or both. I mention it because it is where I learned the physical side of this business: how a house fails, how neighbors react to strangers, and which repairs cannot wait.
That experience gave me a habit I still use. When I walk a property now, I look at it the way a tired guest will at 11 p.m.: Does the lock work on the first try? Is the Wi-Fi password where I would look for it? Does the bed sag? Is there hair in the drain? Operators who have always been able to pay someone to find those problems often never learn to see them.
My point is narrow. Bad credit and no money did not make me smarter. They removed the easy option, which was borrowing, and forced me to learn the routes that do not start at a bank. I have now spent more than 18 years in real estate and have focused on short-term rentals since 2016. Those routes are still how I explain the business to people who arrive with the same problem I had.
Why Tight Money Made Me a Better Operator
A common claim is that rich people make terrible STR operators. That is not true, and I have met plenty of well-funded operators who run excellent properties. What is true is that a tight budget punishes mistakes fast, and that feedback teaches quickly.
When I could not afford to guess wrong, I skipped the mistakes I now see well-funded beginners make:
Over-renovating to personal taste instead of what guests in that market book
Paying for a premium location without checking whether the demand is there year-round
Buying software that impresses other hosts but does nothing for the guest
Amenity creep, where each add-on raises costs without raising the nightly rate
A guest does not care what you spent. They care about fast Wi-Fi, a comfortable bed, a clean unit, and a check-in that works without a phone call. A constrained operator spends money there first because there is nothing left for anything else.
Tight money has a cost too. With no reserve, one slow month or one broken water heater can put you behind on rent. The discipline is real, but so is the fragility. The next two sections cover the routes in and the risks each one carries.
Three Non-Bank Routes Into Short-Term Rentals
None of these routes is free money. Each replaces the bank's credit check with a different kind of trust, and each gives someone else a claim on your time, your profit, or your deposit.
Rental arbitrage with written landlord permission
In rental arbitrage you lease a property from a landlord and host it as a short-term rental. Your credit still gets checked, but a landlord looking at one lease is usually more flexible than a mortgage underwriter, especially if you bring a clear plan, proof of income, and a larger deposit.
Permission is the part people skip. Airbnb's own guidance for US hosts tells you to read your lease, check with your landlord, and check HOA or co-op rules for bans on subletting. Hosting without permission can breach your lease and cost you the unit, the furniture you put in it, and your deposit. Local permits, registrations, and occupancy taxes apply on top. For how to have that conversation, read how to get your landlord to say yes to the Airbnb business you're considering.
Arbitrage is also not zero capital. You still need first month's rent, a deposit, furniture, and supplies. The illustrative numbers below show why.
Partnerships
When you lack credit or cash, a partner can bring one or both while you bring the operating work: finding the deal, setting up the unit, and running it day to day. This is how many operators with bad credit get their first property.
The risks are about paper and people. Put the split, decision rights, capital calls, and exit terms in a written agreement reviewed by an attorney before money moves. Know whose name is on the lease or loan, because that person carries the liability if the deal fails. If you are raising money from people who will be passive investors, securities rules may apply, so get legal advice before you pitch anyone. The SBA's funding guide notes that investors who fund a business usually expect an ownership share and often a say in decisions, and a real estate partner is no different.
Seller financing
In seller financing, the owner acts as the lender. You pay the seller over time under a promissory note instead of getting a bank mortgage. Some sellers care more about steady monthly income or a quick sale than about your score.
This route has the most legal traps. If the seller still has a mortgage on the property, that loan may include a clause that lets their lender demand full payment when the property changes hands. Many seller-financed deals include a balloon payment, meaning the remaining balance comes due after a few years and you must refinance or sell. Some structures, such as a contract for deed, can leave the buyer without the title until the last payment, so a default can wipe out everything you paid. Use a real estate attorney and a title company, and never sign a deal you could not refinance when the balloon comes due.
The Risks Each Route Carries
This table compares the three routes side by side so you can match one to your situation.
Route | What replaces the bank | Upfront cash needed | Main legal risk | Main financial risk |
|---|
Rental arbitrage | Landlord approval | Rent, deposit, furniture | Hosting without lease permission or permits | Rent is owed every month whether you book or not |
Partnership | Partner's cash or credit | Low to none for the operator | Weak or missing written agreement; securities rules | Profit split cuts your share; disputes can force a sale |
Seller financing | Seller acts as lender | Negotiated down payment | Seller's existing loan, contract-for-deed terms | Balloon payment you cannot refinance |
Arbitrage is where most people with bad credit start, so here is illustrative monthly math for a single one-bedroom unit. These are example numbers, not market data. Plug in your own.
Line item (illustrative) | Amount |
|---|
Booked nights | 20 |
Average nightly rate | $150 |
Gross revenue (20 x $150) | $3,000 |
Rent | -$1,800 |
Utilities and internet | -$250 |
Cleaning (8 turnovers x $80) | -$640 |
Platform fee (assumed 3% of $3,000) | -$90 |
Supplies | -$100 |
Monthly profit | $120 |
Costs add up to $2,880, which leaves $120 on $3,000 of revenue. Drop to 18 booked nights and revenue falls to $2,700 (18 x $150), while costs still come to $2,791 with one fewer turnover and a smaller fee, so the unit loses money. Opening the same unit could take first month's rent ($1,800), a deposit of one month ($1,800), furniture ($6,000 in this example), and permits and insurance ($500), for $10,100 before the first guest arrives. For a fuller breakdown, see our guide to rental arbitrage startup costs.
The lesson is not that arbitrage fails. It is that thin margins leave no room for a bad location or a lease you overpaid for, which is why a partner's cash reserve can matter as much as their credit.
The Bad-Credit Acquisition Process: 7 Steps
This is the order I would follow today if I were starting over with a low score and no savings.
Pull all three credit reports. Use AnnualCreditReport.com, read every line, and dispute errors with the bureau that shows them.
Stop new damage. Set every remaining bill to autopay at the minimum so no new late payments land while you work on the rest.
Write down your real budget. Count the cash you could put into a first unit without touching rent or food money. If the answer is close to zero, plan on a partner.
Pick one route and one market. Choose arbitrage, partnership, or seller financing based on the table above, then learn one city's permit, tax, and HOA rules before you look at listings.
Build the deal math before the pitch. Run a monthly table like the one above with conservative booked nights. If the unit only works at full occupancy, walk away.
Get it in writing. Landlord permission in the lease, a partnership agreement, or a seller note reviewed by an attorney. No handshake deals.
Set aside a reserve. Hold at least one month of rent and fixed costs before the first booking, from your own savings or the partner's capital, so one slow month does not end the business.
If you want a second set of eyes on which route fits your credit and cash, book a complimentary one-on-one diagnostic call. It is free. If you decide you want a written plan afterward, we offer a $997 action plan, but the call does not require it.
Where This Fits With Your Other Starting Inputs
Credit is one of four inputs I use to explain how people start in this business. The other three are knowledge, time, and money. In the four-component STR empire formula I break down how to pick your strongest input and borrow the rest. If credit is your weakest, the routes above are how you borrow it.
This article is about the bad-credit start. If your problem is a paycheck that eats all your time, why your job is secretly training you to stay poor covers how to start owning one asset while you are still employed. If you earn well but have little to show for it, the $512K deception walks through the gap between high income and wealth. For the difference between getting rich fast and building wealth over time, including the three-phase build framework, read the transformation trap.
A bad credit score is a starting condition, not a verdict. It closes the bank door for a while and leaves the other doors open, as long as you read the fine print on each one.
Frequently Asked Questions
Can I start a short-term rental with bad credit?
Yes, but usually not with a bank mortgage. Most people with low scores start through rental arbitrage with landlord permission, a partnership with someone who has cash or credit, or seller financing. Each route has its own legal and financial risks, so read the lease, agreement, or note with an attorney before signing.
What does a 398 credit score mean?
According to the CFPB, most credit scores range from 300 to 850, so 398 is near the bottom. Lenders will see a high risk of missed payments. The score comes from your credit report, so improving the report is how you improve the number.
How long does bad credit stay on my report?
The CFPB says credit bureaus can generally report negative payment history for up to seven years. Positive history can stay longer. A rebuild has an end date, and every new on-time payment adds positive history to your report.
Is rental arbitrage legal?
It is legal when your lease allows short-term subletting and you follow local permit, registration, and tax rules. Airbnb's guidance for US hosts tells you to read your lease and check with your landlord and HOA. Hosting without permission can cost you the unit and your deposit.
What are the risks of seller financing?
The main ones are a balloon payment you cannot refinance, a seller's existing mortgage that may be called due when the property changes hands, and contract terms that keep title with the seller until you finish paying. Use a real estate attorney and a title company on every seller-financed deal.
Do I need money to start with rental arbitrage?
Yes. In the illustrative example in this article, first month's rent, a deposit, furniture, and permits add up to $10,100 before the first guest. If you have no cash, a partner who funds setup in exchange for a share of profit is the usual answer.
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