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Can you get a HELOC on an investment property?

HELOCs on investment properties are possible, but it might be hard to find a lender.

Some lenders offer home equity line of credits (HELOCs) on rentals and investment properties, allowing you to utilize that hard-earned equity. However, they’re a little harder to qualify for than a HELOC on a primary residence.

HELOCs on investment properties

When the housing market is strong, your investment property’s value may increase and possibly put you in a better equity position. A HELOC lets you tap into your equity and use it for large expenses such as property improvements, a down payment on another asset, or to pay off other debts.

A HELOC is a revolving line of credit with a set draw period and variable rate. The amount you can borrow depends on how much equity you have in the property. The draw period typically lasts anywhere from five to 10 years, and there are minimum interest payments during the draw period. Once the draw period is over, you make payments to the lender to repay what you’ve borrowed.

The main benefit of a HELOC over a home equity loan is that with a HELOC, you only pay back what you borrow. A home equity loan is a lump sum, so a HELOC is better-suited for borrowers that aren’t quite sure how much equity they want to use.

However, while HELOCs are possible on investment properties, there are more requirements than with a primary residence HELOC.

Qualifying for the HELOC

An excellent credit score, cash reserves, regular income from tenants, a low debt-to-income (DTI) ratio and enough equity are typical requirements for a HELOC on a rental property. Here are some stipulations to expect:

  • At least 20% to 40% equity in your property
  • A DTI ratio below 36%, with preference given below 15%
  • Credit score of at least 720
  • Cash reserves covering six to 18 months of your rental property
  • Proof of established tenants in good standing
  • In-depth appraisal process or possibly multiple appraisals

HELOC closing costs and interest rates

HELOCs typically come with closing costs around 2% to 5% of the loan amount. Many lenders offer to pay the closing costs on your HELOC or waive the HELOC’s annual fee for the first year or more. However, those perks usually don’t apply to a HELOC against your investment property.

When it comes to rates, a HELOC’s rate is variable, meaning the rate may fluctuate over the course of the loan. Rates range by lender, but a typical HELOC rate is around 3% to 7%.

HELOCs on investment properties are considered high-risk, so you may have to plan for a higher interest rate than what you’d get with a primary residence HELOC.

Compare interest rates for home equity loans, HELOCs and cash-out refinancing

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Are investment property HELOCs hard to find?

Many lenders see HELOCs on your investment property as too high-risk and won’t offer them — so you may have to do a little more shopping around than if you were getting a primary residence HELOC.

And if you do find a lender willing to do a HELOC on a rental property, know that the requirements for revolve around making sure your property and financial situation are in good standing.

5 steps to get a HELOC on an investment property

Here are some steps to consider when getting a HELOC on a second property:

  1. Gather docs. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.

Using a home equity loan to cover investment property expenses

A HELOC or home equity loan can be helpful if you manage multiple investment properties. Maintenance, repairs, capital improvements, new appliances — the expenses associated with rentals can stack up quickly.

But if you use the funds from your HELOC on qualifying builds and improvements made to your investment properties, 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.

You may also be able to use a home equity loan or HELOC to put a down payment on your next investment property.

Benefits of using a HELOC on a rental property

A line of credit can be useful and convenient for some borrowers.

  • 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 may 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 HELOC can carry some 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 you don’t live in.
  • 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.

Alternatives to HELOCs

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. You could use a HELOC on your personal home. 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 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 there are no tax breaks.

Bottom line

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 top HELOC lenders.

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