Can I Take A Heloc On An Investment Property


Top 5 Benefits Of Using A Heloc For Investment Property

Where Can I Find a HELOC for My Investment Property?

When it comes to financial stability, both homeowners and investors should be prepared with a plan. Using the equity in a home or investment property to pay for home upgrades or to cover unexpected expenses can be a great option for those who are financially healthy. Keep reading to discover more ways to use your home as a valuable tool.

Are There Alternatives To Helocs On Rental Properties

If youre not sure if taking out a HELOC on a rental property is the right choice for you, there are other options you can consider. Lets look at three alternatives:

  • Cash-out refinance: In a cash-out refinance, you refinance your rental property at a higher loan amount and then receive the difference in cash. The advantage of this is it doesnt add another monthly payment to your list of bills. Instead, the funds are rolled into your current mortgage. And you can spend the funds however you see fit.
  • HELOC on your primary residence: Another option is to take out a HELOC on your primary residence. Assuming you meet the requirements, a traditional HELOC is easier to qualify for and usually comes with lower interest rates. However, you will be putting your primary place of residence at risk.
  • Unsecured personal loan: And finally, you can always consider taking out an unsecured personal loan. When you take out a loan, youll receive a one-time lump sum payment. The funding is quick, and strong candidates may be able to qualify for low rates. But you will have to start making repayments right away.

Home Equity Loans And Rental Properties

Home equity loans are loans taken against the equity available in the property . Typically, you need to have around 20 percent equity in the property to be eligible for a home equity loan. If youve been approved for a home equity loan, youll be provided the loan in one lump sum, which you will pay off on a monthly basis . The loan can then be used however you wish to use it.

But not all lenders are willing to underwrite home equity loans on rental properties due to the risk involved. This is because a home equity loan is a second mortgage that has to be paid off on top of your initial mortgage. Added to the fact that a rental property is not your primary residence, itis a potential financial risk , and this can scare some lenders away.

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Special Considerations When Using A Heloc On A Rental Property

You will have more hurdles to overcome when getting approved than a borrower who lives in the property. This will include more equity in the real estate, a lower loan-to-value and debt-to- income ratio, and a higher credit score. You will end up paying a higher annual percentage rate or potentially paying points to keep it manageable, and the borrower will likely limit the number of rental property mortgages that you can carry at any one time. They will also require more insurance on the properties as well. This is all to reduce the risk of loan and make sure to the best of their ability that the borrower will be able to pay back the loan.

Another critical consideration when tapping into home equity is the tax implications. A HELOC is no longer tax deductible like typical mortgage interest is. The only use that is still deductible is for home improvements. That’s why so many real estate investors will use this as a temporary solution to purchasing an additional property and then quickly follow up by refinancing. There are some accountants who utilize an interest-tracing approach and are able to get it tax deductible for certain situations, but this is an exception, not the rule. Talk with your accountant and have a solid plan for utilizing a HELOC so that you aren’t surprised at the end of the year.

How To Take Out A Heloc On An Investment Property

Can I Take A Heloc On An Investment Property

HELOCs can be a great tool for real estate investors looking for additional capital. Heres what to consider when getting a HELOC on an investment property.

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A home equity line of credit is a lending product that provides a loan based on the amount of equity held in a real estate asset. Typically, HELOC lenders will require the borrower to have 20% or more equity in the property already, which acts as security for the loan.

Traditional consumer personal loans have higher interest rates because they arent secured against anything. As a HELOC is secured against a property, the interest rate tends to be lower.

Because of this, HELOCs can be a great way for real estate investors to access funds. HELOCs on an investment property, done properly, can provide capital for future acquisitions or renovations. Here’s an overview of HELOCs, the pros and cons of getting an investment property line of credit, and whether real estate investors should try to get in on the action.

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What To Look For In Investment Property Financing

Right now money is still cheap compared to other investment property financing options. Borrowing costs are still low. However, you still have to be very careful to get into the right properties, in the right locations. These are the type of investment properties that give you:

  • The highest possible monthly cash-flow
  • Excellent potential for Equity appreciation
  • And solid tenants that pay your mortgage every month

Remember, the lower the amount of cash invested, the higher your leverage and your return . On the other hand, the larger your cash investment, the lower your return. Also, remember, a higher property appreciation will greatly increase earnings on your leveraged real estate investment.

A Few Points To Keep In Mind When Applying For A Heloc On Investment Property

As it is the case with any form of real estate investment financing, getting a good HELOC deal is predicated on having a firm grasp of how the market works. It is essential to shop around before committing to anything as rates and fees can vary widely from one lender to the other. Furthermore, some of the fees that come with a HELOC on rental property can be flexible. Make sure to negotiate for lower loan-origination fees when you are closing the deal.

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Using The ”rule Of Four

When it comes to actually buying an investment property, it can be hard to know where to start.

But a simple rule of thumb is to multiply your useable equity by four to arrive at the answer.

For example, four multiplied by $100,000 means your maximum purchase price for an investment property is $400,000.

Advantages Of Using Home Equity On An Investment Property

HELOC To Buy Investment Property: Step By Step Masterplan

Using funds from a home equity loan or HELOC is often a smart money move for many consumers. Here are some of the key advantages of doing so:

  • Low interest rates. As compared to unsecured forms of debt, such as personal loans, home equity loans and HELOCs have low interest rates, making this an inexpensive form of borrowing.
  • Utilize the equity youve built. Though you may not realize it, your home equity is a part of your net worth. It is, however, much harder to get your home equity to work for you like you can with savings and investments. With a home equity loan or HELOC, you can utilize your equity to grow your money.

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Should I Use A Heloc For A Down Payment

Using a HELOC on your primary residence as a down payment on a second property is risky. You should understand the risks of real estate investing and make sure that you have the monthly cash flow to pay the mortgages on both properties in addition to your HELOC. If you are able to do that, then a HELOC may be the best way for you to get the cash for a down payment.

Which Is Better: A Home Equity Loan Or A Home Equity Line Of Credit

That depends on why you need the money. A home equity loan may be better if you need a lump sum of money at a particular timesuch as to purchase another home. A home equity line of credit could be better if you dont need the money all at once but expect to spend it in stages. Some lines of credit remain open for as long as 10 years.

From an interest-rate perspective, a home equity loan may be safer because its interest rate is fixed, while the rate on a HELOC is variable. Borrowers with HELOCs have some protection in the form of caps on how quickly their interest rates can rise, although that can vary from lender to lender.

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Reasons To Use A Heloc

Home equity lines of credit are home loans that allow you to take cash out of your home as needed. A HELOC works a lot like a credit card, in that you put it in place with a maximum allowable balance, and you can draw on that balance and pay it down over a set draw period, typically 10 or 20 years.

Lets examine reasons to use and not use a HELOC so you can determine if its the right loan to meet your financial objectives.

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Can I Take Out A Heloc On An Investment Property

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What You Need To Know About Heloc

Because youre given a line of credit, youll only pay interest on the money that you withdraw. The money you pay back on what youve withdrawn will be put back towards the line of credit. For example, if you have a $10,000 line of credit and you take out $8,000 and then repay $4,000, your line of credit available will be $6,000. A HELOC line of credit will usually provide a draw period between five and 10 years. Once the period is over, youll enter the repayment term during which you have to pay off the balance. A HELOC typically has a minimum withdrawal amount as well.

Help Purchase A Property In Cash

Because a HELOC is readily accessible, its possible it could help you purchase an investment property quickly and in cash. Then after purchasing the property, you could take out a loan on the property and pay off the HELOC immediately.

In this situation, you were essentially able to purchase the property for no money down.

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Transfer Your Home Equity Line Of Credit

When your mortgage comes up for renewal, you may consider transferring your mortgage and home equity line of credit. Youll likely have to pay legal, administrative, discharge and registration costs as part of the switch.

You may also be required to pay off all other forms of credit, such as credit cards, that may be included within a home equity line of credit combined with a mortgage.

You may be able to negotiate with a lender to cover some costs to transfer any credit products you may have. This can be difficult if you have different sub-accounts within your home equity line of credit combined with a mortgage that have different maturity dates.

Ask your lender what transfer fees apply.

Alternatives To A Heloc On A Rental Property


If you find that a HELOC on your investment property isnt the best option for your financial goals, consider one of the following alternatives.

  • Cash-out refinance. If youve built a significant amount of equity, you may benefit from a cash-out refinance. This type of refinance allows you to take out a new mortgage for more than what you currently owe. The new loan serves two purposes: paying off your existing investment property loan and pulling equity out of your rental property. The equity you tap is equal to the difference between the old and new loan amounts.
  • Personal loan. You may qualify for a personal loan for as much as $100,000, and there are typically no restrictions on how the money is spent. The tradeoff is an interest rate thats higher than many mortgage products. Personal loans are unsecured, meaning your assets arent used as collateral.
  • If you dont need a lot of money, a can be a solution. To minimize your interest costs, focus your search efforts on cards that have a 0% interest offer for a set amount of time after the account is opened.

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What Is Home Equity

Home equity is the difference between the value of your home and how much you owe on your mortgage.

For example, if your home is worth $250,000 and you owe $150,000 on your mortgage, you have $100,000 in home equity.

Your home equity goes up in two ways:

  • as you pay down your mortgage
  • if the value of your home increases

Be aware that you could lose your home if youre unable to repay a home equity loan.

Can You Get A Heloc On An Investment Property

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If you’ve built enough equity in your investment property, you may have considered getting a home equity line of credit, or HELOC, to make improvements, consolidate debt or even buy a new property.

You can get a HELOC on an investment property and tap into its equity, but there are strict qualification requirements, they aren’t offered by all lenders and, depending on your situation, you may have other funding options to choose from.

Heres how to find out if you can get a HELOC on an investment property.

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Benefits Of Getting A Heloc On Your Rental Property

Having the ability to draw on the existing equity in your rental property by using a HELOC can be a great way to have access to funds when and if you need them. Some of the top benefits of getting a home equity line of credit on your investment property include:

1. Finance improvements or upgrades

Using a HELOC to update your rental property and increase your monthly rental income is one great way to put a home equity loan to work for you. Your monthly cash flow will increase, along with the market value of your property.

Thats because the greater the NOI is, the more your property will be worth. For example, lets say your current NOI is $10,000 per year and cap rates for single-family rental houses like yours are 6%.

Using a HELOC to make improvements that let you raise your monthly rent and boost your NOI by 10% would add $16,667 to your property value:

  • NOI / Cap rate = Market value
  • $10,000 NOI / 6% cap rate = $166,666 market value
  • $11,000 NOI / 6% cap rate = $183,333

2. Add rentable square footage

Many real estate investors are surprised to learn how much equity theyve accrued in their rental property over just a few years.

As an example, if you purchased a single-family rental property five years ago for $150,000 in a market where houses have appreciated 5% annually, your property would now be worth $191,442.

  • $191,442 current market value less $111,500 mortgage balance = $79,942

3. Grow and diversify investment portfolio

Is Using A Heloc On A Rental Property A Good Idea

Can You Use Heloc To Buy Investment Property

Drawing on equity from a rental may seem like a no-brainer, but it’s not as straightforward as it may seem.

Get our 43-Page Guide to Real Estate Investing Today!

Real estate has long been the go-to investment for those looking to build long-term wealth for generations. Let us help you navigate this asset class by signing up for our comprehensive real estate investing guide.

A home equity line of credit is one of many creative financing tools to use when investing in real estate. A HELOC can allow you to draw on a homes equity to finance the down payment on another piece of real estate while still maintaining one monthly payment. But this comes with some caveats, especially when you’re trying to do this for a rental property. Find out exactly how you can use a HELOC on rental property and what you need to consider before doing so.

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