Can I Get a HELOC on an Investment Property?

People want to know if its is still possible to take out a HELOC on their investment property, or second home. The home equity line of credit has been a powerful tool for homeowners to leverage their real estate to buy an investment property, of vacation home. But it is also possible to take out a second mortgage or HELOC line on an investment property if you meet the home equity lending requirements with loan to value, credit score and debt to income ratio.

Do you want a large amount of cash for major expenses, such as property renovations or paying off debt? Real estate investors may be able to obtain a home equity line of credit or HELOC on their rental properties. Many real estate investments are spurred when a homeowner decides to borrow money with a HELOC to cover the down-payment requirement for a rental property or investment home.

A common desire is to use equity from one property fund the purchase of another. If you are interested in getting a HELOC for an investment home, below is important information to review.

How to Use a HELOC to Buy an Investment Property or 2nd Home

heloc for rental propertyA home equity line of credit is a revolving credit line that uses the property as collateral.

A HELOC on one of your investment properties uses the rental property as collateral and not your personal home.

Accessing your investment home equity through a HELOC is often done with a credit card; once the credit line is set up, you just swipe the card when you want to buy something with the equity.

Home-equity credit lines usually have much lower interest rates than personal loans and credit cards, so they are a smart choice for real estate investors. Using a HELOC to buy a second home or rental property could jump-start your income if you do it the right way.

Your HELOC from an investment property will typically have a 10-year draw period when you can access the money and make interest-only payments. After the initial draw period ends, you pay interest and principle each month at a variable rate. Once the repayment period kicks in, you may want to refinance the HELOC into a fixed rate home equity loan. The Home Equity Mart can help you connect with trusted HELOC lenders that offer a wide variety of home equity financing options.

A HELOC on an investment property can be a smart decision for the investor who wants to use their equity to fund large expenses. For example, you may want to fund the rehab of a new property with equity from another property. You also can use the home equity line of credit to make a 10% or 20% down payment on a new property. Many savvy borrowers have accumulated a strong real estate portfolio that started with a HELOC.

Can You Use a HELOC Line of Credit for Down Payment on Rental or Investment Property?

Taking out a HELOC on an investment property can help you leverage your equity to pay for renovations, consolidate debt, or even purchase a new investment property. However, qualifying for this type of financing is challenging and can put your property at risk of foreclosure. Therefore, it’s crucial to carefully assess your finances to ensure this option makes sense for your situation.

HELOC funds offer versatility, allowing you to use them for various purposes, such as financing a down payment for a second home. Your bank assesses your HELOC’s credit limit by considering your current home’s equity and mortgage balance. Usually, this limit is set at a maximum of 85% of the combined equity and mortgage balance.

Why HELOC Loans Are Great for an Investment Property

investment home equity lineGetting a HELOC on a rental property is usually more difficult than with your personal residence.

The reason is that you don’t live in the property, so there is a higher chance there could be a loan default.

You may have to look more extensively to find a lender that will issue a cash out equity loan or HELOC on an investment property.

These are the typical requirements for investment property HELOCs, but understand the qualifications vary widely by lender:

• Debt-to-income ratio: Usually 43% maximum for investment properties; 43% to 50% for personal residences.
• LTV maximum: 80% for investment properties; 85% for personal residences.
• Credit score: 720 minimum for investment homes 620 minimum for personal residences. Ask about a HELOC for bad credit if you don’t meet the eligibility for a prime-rate HELOC.
• Cash reserves: Most lenders will want to see a year or 18 months of cash reserves for investment homes. Cash reserves for personal residences vary.
• Property occupancy: You need to have a renter in place with a solid rental history. For a personal residence HELOC, you should be living in the home.

How to Get an Investment Property HELOC

Like with a personal residence, you will need to shop around for the best HELOC for your investment home. You should look at lending offers from at least three lenders. Look for low rates, but also examine how long the teaser rate will last and what the fees are for getting the HELOC. You also should understand what the variable rate is based on and how high it can go. Look at HELOC closing costs, how much they are, and whether they can be wrapped into the loan or paid in cash. Our investment advisors can offer you various HELOCs on rental properties, so you can compare which meets your needs best.

How HELOC Funds Are Taxed

Federal tax law changed a few years ago the rules for tax deductibility for HELOCs. Let’s discuss the tax considerations and potential benefits when taking out a HELOCs on a investment home. The interest paid on a HELOC could be tax-deductible if the funds are utilized to “buy, build, or substantially improve” the taxpayer’s secured home, whether it’s their primary residence or an investment property. Ask you tax advisor if closing costs and lending fees are deductible as well

The bottom line is if you use the equity for home repairs or home improvement, you can usually deduce the interest for tax purposes. If the money is used for purposes other than home repairs and improvements, it property is not tax deductible.

Do banks and lenders offer HELOCs on investment properties?

The vast majority of HELOCs are taken out against primary residences, as lenders feel more secure with a loan on the home you live in, knowing you’ll prioritize repaying it. However, some lenders do offer investment property HELOCs HELOCs.

How can you pull equity out of rental property?

Lenders often require more than 25% equity in rental properties to pull cash out, as they typically allow a maximum loan-to-value (LTV) ratio of 75%. Additionally, lenders may impose a waiting period of six months from the time of purchase before an investor can refinance a rental property.

How much equity can you take out of an investment property?

With a home equity loan, you may be able to borrow up to 80% (or even 100%) of your home’s value, minus any existing mortgage balance. However, if you’re seeking a home equity loan on an investment property, you may only be able to borrow up to 60% to 75% of the property’s value. That means you 25% to 40% equity in your home to take out a HELOC on an investment home or rental property.

What Are the Alternative Loans to Finance Real Estate Investments and Rental Properties?

Cash Out Refinance – For many decades, borrowers have been pulling money out of their primary residence and second homes with a cash out refinance loan. When the interest rates are trending upward it becomes risky as borrowers would rather not refinance out of their low rate mortgage into a higher interest rate.

Private Money Lending – Many real estate investors would rather not document their income, so private money mortgages offer new opportunities that are considered unconventional by most banks and lenders.

Should You Use A HELOC On an Investment Property?

Is getting a HELOC on an investment property right for you? First, you need to check with several lenders to learn if you can get approved for the loan. If you have a good credit score and your DTI and LTV are in line with the requirements, you probably can get approved.

One of the benefits of a HELOC is you don’t pay interest on the money unless you access the credit line. So, HELOC funds can be a good emergency fund for an investor who wants to have money available if a rehab costs more than they expected. HELOCs usually last for up to 10 years, so you may have the funds available for some time without using them.

A HELOC in 2024 and beyond may have a higher rate than a few years ago, especially on an rental property. But the rate will probably be lower than personal loans and credit cards.

Plus, if rates decline this year and next year as many believe, the variable rate on the HELOC may decline. If you are concerned about your rate varying, it may be better to consider a fixed-rate home equity loan on your investment property.

Obtaining a HELOC on an investment property can be a good move for the investor who wants to fund major expenses, such as buying a new property or doing renovations.

Getting qualified for a HELOC on your investment property may be more challenging because you don’t live there. It may be necessary to shop among several lenders to find one that will loan on your investment property. You can always check with our lending advisors to see if we can get you approved for an equity loan or HELOC you need.

If you find getting approved for a HELOC on an investment property too difficult, another option is to get a HELOC on your personal residence. You also could consider a cash-out refinance on your personal residence, if your current rate is above market rates. One of our loan professionals can review your financial situation and inform you about your best HELOC and other options with your investment property.

Home Equity Mart simplifies the process for homeowners to tap their home equity. Take advantage of the lenders offering a wide range of home equity  products includes fixed home equity loans and flexible home equity lines of credit for buying investment properties, second homes and business start-up capital. Let HEM connect you with competitive lenders who can meet your financing needs.