How to Get a HELOC on an Investment Property
A home equity line of credit (HELOC) on an investment property can provide cash for almost any purpose, from home renovations to unexpected medical bills. But to really put that equity to work, you could also use it to fix, flip or purchase another property. Using the equity from one investment property to fund the down payment on a new one can help boost your real estate portfolio — and your income.
What is a HELOC on an investment property
A HELOC is a revolving line of credit that uses your home as collateral. A HELOC on an investment property uses that property, rather than your primary residence, as the collateral.
Accessing HELOC funds is usually as simple as swiping a card, and you’ll typically pay less interest with a HELOC than you would a credit card, personal loan or home equity loan. You’ll also have an initial “draw period” (usually lasting 10 years), during which you can use the credit line but make low, interest-only payments. After that, you’ll repay the balance owed using monthly payments at a variable interest rate.
A HELOC can be a good choice for anyone who wants to use the equity they have in an investment property to fund big expenses. These could be education costs, medical bills or debt consolidation. For a real estate investor, however, it’s often used for renovations, repairs or the down payment on another rental property. Using home equity to buy an investment property is a common way to build wealth, because the funds can help you meet the large down payment requirements needed to qualify for a new home loan.
Understanding loan types: What defines an investment property loan?
Whether or not you live in a home is known as “occupancy,” and it plays a large role in determining how you finance your property purchase. Usually, any mortgage used to buy a property that you don’t live in, and that will produce rental income, is an investment property loan.
How to get a HELOC on an investment property
1. Make sure you qualify
Here are some common minimum requirements for a HELOC on an investment property, versus one for a primary home. Keep in mind that some lenders may have stricter requirements.
HELOC requirements
| Investment property HELOC | Primary home HELOC | |
|---|---|---|
| Debt-to-income (DTI) ratio maximum | 43% | 43% to 50% |
| Loan-to-value (LTV) ratio maximum | 80% | 85% |
| Credit score minimum | 720 | 620 |
| Cash reserves | You should have a significant amount of cash reserves (often at least 18 months’ worth). | Most lenders will verify your assets, including your cash reserves. |
| Property occupancy | You should have a tenant in place and a documented rental income history. | You should be living in the property as your primary residence. |
2. Shop around for the best deal
Every lender has their own way of judging risk, so you’ll get slightly different rates and terms from each one. While total cost —which includes interest rate and fees — is crucial when deciding which loan works best for your budget, it’s not the only factor to consider. Look at how long the draw periods are, whether you’d have the option to make interest-only payments during the draw period and if there are any prepayment penalties to worry about.
Even though you’re applying with multiple lenders, don’t worry about multiple inquiries impacting your credit score — it won’t be dinged as long as you apply with all of them within a 14-day window.
Learn more about our picks for the best HELOC lenders.
3. Negotiate with lenders
If there isn’t an obvious winner, contact some of the lenders and ask them if they can make a more competitive offer. Tell them about the offers that they’re competing against — by negotiating, you could get an even better deal.
Who offers HELOCs on investment property?
HELOCs on investment properties aren’t as easy to find as HELOCs secured by primary residences. That said, some large national lenders — including TD Bank and PenFed Credit Union — do offer them. It can also pay to contact any credit union or local lender that you already do your banking with to ask if they offer any loan products that might suit your needs.
HELOCs on investment properties: Pros and cons
| Pros | Cons |
|---|---|
Flexible: You only repay what you withdraw, plus interest. Reusable: You can repay and reuse the credit line as needed during the draw period. Low interest rates: Your interest rate may be lower than that of a credit card or personal loan. Wealth-building: You could use the funds to expand your investment portfolio. Personal security: You won't lose your primary residence if you aren’t able to make your payments. | Drained equity: You’ll lose a portion of the equity you’ve built in your property. Another debt: You’re adding another monthly expense to your plate. Costs and fees: You’ll likely pay closing costs, which may be deducted from your credit line. Variable interest rates: You may find it hard to budget for payments that can change as the market fluctuates. Collateral: You could lose your property to foreclosure if you default on your HELOC. |
Alternatives to investment property HELOCs
Don’t think a HELOC on an investment property is the right fit for you? Here are some alternatives.
- HELOC on a primary home: You’ll face less stringent requirements and still enjoy the benefits of a HELOC if you use your primary residence as collateral.
- Home equity loan: Instead of a credit line, you can tap your investment property’s home equity and receive your payout in a lump sum. You’ll also enjoy a fixed interest rate, which means payments won’t change over time.
- Cash-out refinance: You’ll replace your investment property’s current mortgage with a larger loan and, ideally, lower your interest rate. At the same time, you’ll get a lump sum of cash that you can use as you wish. The amount you take out in cash is added to what you already owe on your mortgage.
- Personal loan: You don’t need any home equity to qualify for this type of loan. Instead, unsecured personal loans rely only on your credit report and credit history. If approved, you’ll get a lump sum of cash to use for any purpose. Because it’s unsecured, however, average interest rates can be higher.
- Credit card: You don’t have to put up any collateral and can qualify based only on your credit history. However, credit cards typically come with high variable interest rates, so your balance can snowball quickly if you don’t pay the card off in full every month.
- Cross-collateralization loan: If you already have multiple investment properties, you can group them together and pool your equity to access a larger credit line. This means you won’t have to deplete the equity from one property.
Frequently asked questions
If you have significant equity in at least one investment property and want a flexible form of credit, a HELOC can be a good choice. Using equity to fund improvements or raise funds for a down payment on another rental are two of the best ways to leverage your home equity.
Yes, you can use a HELOC to buy a second home or an investment property. If you purchase a second home with your HELOC, you can always turn it into an investment property later. Your second home will become an investment property if you take on renters and live in it for less than 10% of the number of days it was rented.
Funds from a HELOC can make up some or all of your down payment on a new property. Since investment property loans have higher down payment requirements, a HELOC can provide a much-needed solution when you’re low on cash.
If you’re willing to live at the property while renting out other units, you can also use what’s called “owner-occupied financing.” These loans, commonly used in house hacking, come with very low down payment requirements — you can put just 3.5% down if you use an FHA loan and 0% if you’re eligible for a VA loan.
The interest you pay on a HELOC may be tax-deductible if the HELOC was used to “buy, build or substantially improve” the home that secures it. This rule applies to any HELOC, whether it was taken out on a primary home or an investment property.