Using a HELOC for property investment

If you own a home, as you pay down your mortgage, your home equity increases. A home equity line of credit (HELOC) is a way for you to access that equity to invest in yourself, your home or other real estate. Before planning your investments around a HELOC, consider the best way to the strongest return on your investment while staying on budget.

How can I use a line of credit to invest in property?

You can use a line of credit as a down payment for an investment property. If you have a significant amount of equity in your home, a HELOC could potentially account for most or all of your down payment.

A line of credit usually only requires you to pay the interest portion of the loan until you reach your credit limit. This can be a savvy move for property investors, as interest payments on investment properties are tax deductible.

If you don’t use your entire credit limit for a down payment, you can set aside a cushion of funds for any urgent repairs or maintenance on your investment property. This can help you manage your cash flow.

Should I use a HELOC for a real estate investment?

When looking at investment properties, crunch the numbers to make sure that any rental income covers the majority, if not all, of your bills. If you don’t plan to rent, you’ll want to budget for enough financial security until your investment pays off.When the housing market is strong, a real estate investment could be a solid way to leverage your equity. With a HELOC, you have access to a line of credit that you can tap into for a down payment or other fees related to a real estate investment.

Using a HELOC toward real estate may ultimately save you during tax season. Any interest paid on any investment with a HELOC — called an investment interest expense — is tax-deductible.

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Using a HELOC for the greatest return on renovations

Upgrades not only increase the value of your home for a future resale, but also improve your everyday life with more functional and beautiful living spaces. Popular renovations that increase the overall value of your property include:

• Kitchen updates. There’s a reason real estate magazines and TV shows focus on remodeled kitchens. Buyers tend to favor updated materials, high-quality appliances and the latest gadgets when shopping for a home.
• Bathrooms. The same goes for bathrooms, where modernizing older styles can increase the overall value of your home.
• Outdoor improvements. Renovating your home’s exterior or property is a smart investment that just might influence your neighbors to do the same, driving up value in the neighborhood.
• Roofs and windows. Because they’re expensive to replace, buyers expect these to be in good condition — even if replacing them doesn’t increase your property’s value as much as kitchens and bathrooms.

If your renovation involves a builder, a HELOC gives you more control over your money than a construction loan, giving you a line of credit that you access as you need it. With a construction loan, the lender often dictates how much and at what stage of the renovation they’ll pay your suppliers. More flexible control might even help you negotiate a better deal.

How much do home improvements cost?

Home improvements can add up. Here’s around what you can expect to pay for these common home improvement expenses.

Improvement	What it involves	Average cost
Adding square footage	Removing walls to expand the interior of a home or apartment	$7,000 to $100,000
Basement remodeling	Putting down a floor, building walls, installing electric and plumbing lines	$10,500 to $27,000
Plumbing	Hiring a plumber to replace old pipes or install new plumbing systems	$45 to $150/hour
Electric work	Hiring an electrician to redo part of your building’s wiring	$50 to $100/hour
Permits	Getting permission from your state and local authorities to start construction	$900
Solar energy	Buying and installing solar panels	$25,000 to $35,000

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What are some tips for using a HELOC for property 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 carefully to make sure 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 equity in the future and minimizes your non-tax-deductible debt.

What are the drawbacks?

While a home equity line of credit can help you invest in property sooner and carries significant tax advantages, there are some drawbacks.

• Difficult to manage. Between your home loan, the line of credit and an investment loan, using a line of credit for property investment can become complicated.
• You’re using your own home 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 your home.

Can I use a HELOC for something other than an investment?

Yes. Maybe you’ve worked hard to pay off your home and raise your children to be successful adults and are now ready to buy that vehicle you’ve always wanted or travel to that destination you’ve always dreamed of — all reasonable reasons to tap into the equity you’ve built in your home.

Think carefully about using your equity to repay other debts, like bills or credit statements. If a HELOC is the only way to stay afloat with everyday expenses, it could be a sign of deeper financial distress. Consider looking into debt management or financial counseling to get your budget in order first.

Must read: Keep your future financial health in mind

A home equity line of credit can give you access to money to achieve your financial goals. But because many HELOCs only require that you pay interest during the draw period, the time it takes to pay off your HELOC could be much longer than with a home equity loan. Before you decide on this type of financing, work out a budget and time frame to fully repay the debt first.

If you can’t commit to a payment strategy for a HELOC, you may want to instead consider a loan with set payments and terms.

Bottom line

Using a HELOC to invest in your home can be an excellent way to turn your hard-earned equity into profit or pleasure. If you’ve been diligent in repaying your home loan and you’re lucky enough to see your home grow in value, a line of credit could offer a great way to put your equity to work for you.

But, as with all financial products, it’s important to compare your options and consider your own financial situation before you make a decision.

Frequently asked questions

• What's the difference between a home improvement loan and line of credit?

  With a home improvement loan, you receive all of the funds as a lump sum payment. You then have to pay principal and interest toward the entire amount borrowed.

  A line of credit gives you access to a credit limit. You’re then able to draw on the funds up to that limit when you pay for your renovations. You only pay interest on the funds you use, and as you make payments on your credit limit, you can then use those funds again.

• Is a home equity line of credit safe?

  Yes, if you use it wisely. Because your credit line is secured by your home, the interest rate you’ll pay should be lower than you’d find for other types of financing. But that security comes with a potential downside: If you find yourself unable to pay it back, you could ultimately lose your home.

• What fees will I pay with a HELOC?

  HELOCs can come with upfront and maintenance fees over the life of your line of credit. Similar to a mortgage, HELOCs can require an appraisal fee, an application fee and even annual maintenance fees over your repayment term. Confirm all fees you face with your specific HELOC before signing a contract.