How to Get a HELOC on an Investment Property
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Taking out a home equity line of credit (HELOC) on your main home can be challenging. It’s likely not any easier to get a HELOC on an investment property that generates rental income, but it is possible.
If you’re in a good financial position as a real estate investor, and can find a lender willing to work with you, a HELOC can allow you to make improvements to your property or fund other financial goals.
Can you get a HELOC on an investment property?
Yes, you can get a HELOC on an investment property — it’s just more difficult to do than tapping equity from your primary home.
How do HELOCs work?
A HELOC on a rental property is a type of second mortgage that works like a credit card. Your lender gives you access to a credit line with a set dollar amount, and you draw on that credit line up to the limit as needed.
Your credit line access is known as the draw period. It lasts for a certain amount of time — for example, 10 years — and you’ll typically make interest-only payments during this time. Once the draw period ends, you can’t draw on the credit line anymore and must begin making principal and interest payments based on what you’ve borrowed until your balance is repaid in full.
There are typically no restrictions on how HELOC funds can be spent. Common uses include:
- Making home improvements
- Consolidating high-interest debt
- Buying another investment property
Finding a lender for an investment property line of credit
Lenders who offer HELOCs on investment properties are hard to come by, so you may have to do a little digging to find one.
A potentially effective way to find home equity lenders is through word of mouth. Join local and regional real estate investing groups and ask for lender recommendations. You could also try searching for resources offered by online real estate communities.
One reason these types of lenders might be few and far between is due to the increased risk that an investment property line of credit brings. As an investor, if you face a financial hardship that reduces your income, it’s expected that you’ll almost always cover the mortgage payments for your main home first. Repaying a line of credit on a rental property likely isn’t at the top of your list of priorities.
Additionally, if you happen to lose your rental property to foreclosure, the sale proceeds would pay off your first mortgage, then whatever’s left would go toward repaying your HELOC.
How to get a HELOC on an investment property
Investment property line of credit requirements are stricter than those for a HELOC on a primary residence, said Marina Vaamonde, real estate investor and founder of commercial real estate sales site PropertyCashin.com. This includes having a higher credit score and plenty of cash reserves.
Here are some typical qualifications lenders may require:
- A 720 to 740 minimum credit score
- A maximum 80% loan-to-value ratio
- A tenant occupying the property for a longer term
- A significant amount of liquid cash reserves (often, at least 18 months’ worth)
Expect to pay more than you would for a HELOC on a primary residence. Investment property interest rates tend to be higher than rates for owner-occupied homes because there’s more risk involved in the transaction.
It’s also highly likely you’ll have closing costs to pay, including a home appraisal fee, title search fee and documentation preparation fee. Lenders may waive these costs for HELOCs on primary residences, but that may not be the case for a HELOC on an investment property.
Your lender might also request information about your other investment properties, Vaamonde said. They may need confirmation that you’re earning rental income on those properties, and not borrowing a new form of debt to pay down a mortgage you owe elsewhere.
“They don’t want you to get a line of credit on one property, which has a renter in it, and then they find out you have five other properties that have no renters,” Vaamonde said, adding, “and so you’re going to use this money to cover the other debt.”
Pros and cons of an investment property line of credit
Alternatives to a HELOC on a rental property
If you find that a HELOC on your investment property isn’t the best option for your financial goals, consider one of the following alternatives.
- Cash-out refinance. If you’ve 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 that’s higher than many mortgage products. Personal loans are unsecured, meaning your assets aren’t used as collateral.
- Credit cards. If you don’t need a lot of money, a credit card 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.