As you can tap into your home’s equity with a home equity loan or line of credit (HELOC), you can also tap into the equity you’ve earned by paying down your investment property’s mortgage.
But each lender treats borrowing against investment properties differently, so you may need to adjust your strategy when searching for the right lender for you.
Using a HELOC for a real estate investment
When the housing market is strong, a real estate investment could be a solid way to leverage your equity. A HELOC gives you access to a line of credit you can tap into for a down payment on a new property or investment in your current property to increase your return.
And using a HELOC for real estate may ultimately save you during tax season. If you use the funds from your HELOC on qualifying builds and improvements, you can deduct the interest you pay on your taxes. And this can add up, as all the payments you make in your draw period are interest-only.
Three tips to use your HELOC for investment
Using a line of credit as an effective property investment tool requires some strategy. Here are some tips to keep in mind:
- Read your loan documents thoroughly to ensure you understand any closing costs, annual fees, autopay requirements and other stipulations that may come with your HELOC.
- Leave a cushion of funds in your HELOC for unexpected repairs and maintenance.
- Put extra funds toward repaying your home loan. This allows you to unlock more future equity and minimizes debt that isn’t tax-deductible.
HELOC on an investment property vs. a home
Lenders know you value your home and trust you’ll work hard to make your HELOC payments so you don’t lose it. But investment properties may not be as important to you, which is why you can expect to face the following differences as you compare the HELOC you could have gotten on your home versus what you can find for your property:
Fees and closing costs
Many lenders offer to pay the closing costs on your HELOC or waive the HELOC’s annual fee for the first year or more. But those perks usually don’t apply to a HELOC against your investment property. So, you’ll need to factor the extra costs into your budgeting when you decide which HELOC will work best for your property.
You’ll have to do more shopping than you might think. Many lenders see HELOCs on your investment property as too high-risk and won’t offer them. You could still find one, though.
Check in with a mortgage broker you trust. Consider looking into what smaller banks and credit unions have to offer. And get your finances in order to give you the most choices to find the HELOC that’s right for you.
Qualifying for the HELOC
Lender requirements get a lot tougher because of the perceived risk. The following are typical qualifications you may need to meet to qualify for a HELOC on your investment property:
- At least 20% to 40% equity in your property
- A debt-to-income (DTI) ratio below 36%, with preference given below 15%
- A credit score of at least 720
- Cash reserves covering six to 18 months of your rental property
- Proof of established tenants in good standing
- More in-depth appraisal process
Your lender will most likely charge a higher rate on your investment property HELOC than what they’d charge for a HELOC on your home, despite the more stringent requirements.
Benefits of using a HELOC on a rental property
As you compare HELOCs to find the right one, make sure the programs you find allow you to take advantage of the following benefits:
- More flexible than a loan. A line of credit allows you to take out only what you need and pay it back to use again.
- Interest-only payments. Most HELOCs allow you to make interest-only payments through the draw period, which can help, especially if you can write off those payments on your taxes.
- May give you a tax benefit. As always, check with your tax professional, but as long as you’re using your HELOC money to make a qualifying reinvestment in your property or buy a new one, you should be able to write off the interest on your HELOC, which includes all the interest-only payments you make during the draw period.
- Lower rates than an unsecured business loan. While you’ll pay more than you would for a HELOC on your personal home, you may find you pay a much lower interest rate for a HELOC than you would taking out an unsecured loan.
Drawbacks to using a HELOC on a rental property
While a home equity line of credit can help you invest in property sooner and carries significant tax advantages, there are some drawbacks.
- Harder to find and qualify. Not every lender offers a HELOC program for investment properties, because lenders see it as a high-risk move to let you borrow against a property where you don’t live.
- You’ll pay higher interest rates. The high-risk assumption also leads lenders to charge higher interest rates on a HELOC that isn’t secured with your personal home.
- Difficult to manage. Between your first mortgage loan, the line of credit and a second investment mortgage loan, using a line of credit for property investment can become complicated.
- You’re using your property as security. If you run into trouble repaying your line of credit when it’s due, your lender could seek recourse through your property and — in the worst-case scenario — foreclose on it.
When using a home equity loan is better
If you need money to cover a single large expense, a home equity loan may be the better choice for you. Unlike a HELOC, a home equity loan has a fixed interest rate and fixed payments, making repayment easier to fit into a budget. The lump-sum funding of a loan can also help limit your spending and keep you on track to meet your investment property goals.
Compare interest rates for home equity loans, HELOCs and cash-out refinancing
Use our tool to get personalized estimated rates from top lenders based on your location and financial details. Select whether you’re looking for a Home Equity Loan, HELOC or Cash-Out Refinance.
If you selected a home equity loan or HELOC, enter your ZIP code, credit score and information about your current home to see your personalized rates.
In the Cash-Out Refinance tab, select Refinance and enter your ZIP code, credit score and other property details to see what you might qualify for.
5 steps to get a HELOC on an investment property
Once you’ve decided a HELOC is right for you, there are some steps you can take for the most suitable outcome.
- Gather all the documentation you’ll need to apply. Some financial or government documentation can take a while to get to you through the mail. Make sure you have everything you need ahead of time to streamline the application process.
- Make sure you meet the requirements. Whether you need to strengthen your credit or take another month to save up the reserve funds you need, it’s worth the time to give yourself the best possible chance at approval.
- Shop for a HELOC. You may need to expand your search beyond the typical lenders to find someone who offers HELOCs on investment properties. Consider using a mortgage broker you trust or checking out community banks and credit unions. A lender marketplace can also be a time-saving way to get multiple offers with one application.
- Apply for multiple HELOCs. You may have heard that too many applications can bring down your credit score. But as long as you’re applying for the same kind of loan product, credit score companies typically weigh multiple applications against your credit the same as one application. Still, group your applications within a 14-day window to be sure.
- Compare and negotiate. Rarely is your first offer the best offer. And even if you only get one, it’s okay to negotiate the terms of your HELOC to make sure they meet what you planned for in your budget. The good news is that smaller banks and lenders are often more flexible than larger banks. So the limited availability of investment property HELOCs may work in your favor in this instance.
Alternative sources of financing
If you can’t find a HELOC or decide a variable-rate line of credit isn’t right for you, you have other options.
- HELOC against your personal home. Use a HELOC against your personal home on your investment property. It’s a risk, because you could lose your house if you’re unable to make payments. But you can write off the interest on your taxes, if you use the HELOC for qualifying property improvements and repairs.
- Home equity loan. A home equity loan gives you money in a lump sum, but you have to start making full loan payments right away. And similar to a HELOC, the interest part of your loan could have tax benefits, depending on how you spend the funds.
- Cash-out refinance. Depending on the amount of equity you have, you could choose to refinance your investment property home and take the difference out as cash. As with any mortgage, you should be able to write off your interest on your taxes.
- Personal loans. Whether secured or unsecured, personal loans are available to help you make the improvements you need. But you only get the tax advantages if your loan is secured by your property, regardless of how you spend it.
- Credit card. You can use an unsecured credit line with a standard credit card. There’s no risk to your property with this choice, but you’ll pay a higher interest rate, and you don’t get the tax break, regardless of how you spend your money.
As long as you understand your business needs and the risks involved, taking out a HELOC on your investment property can be a great way to make improvements and repairs or even invest in a new property. And while finding a lender that offers the product can be difficult, it’s not impossible. To start your shopping, check out our guide to the best HELOC lenders.