Should you consider a HELOC on your investment property?

A home equity line of credit (HELOC) allows property owners to borrow their equity as needed to pay their expenses. However, borrowing equity from an investment property comes with higher costs and distinct risks compared with taking out a HELOC on your primary residence.

Even though Rocket Mortgage currently doesn’t offer HELOCs on investment properties, we want you to understand all your borrowing options. Learn more about how a HELOC on an investment property works, how it differs from a traditional HELOC, and how to decide if it is the right choice for you.

Key takeaways:

• A HELOC on an investment property provides a flexible, revolving line of credit based on your rental property’s equity, but it is much harder to find and qualify for than a primary residence HELOC.
• Lenders view investment properties as higher risk, which translates to stricter guidelines, including substantial cash reserves, and higher interest rates.
• If an investment property HELOC is not available or does not match your needs, alternatives such as a cash-out refinance, a primary residence home equity option, or a traditional mortgage can keep your real estate goals moving forward.

Can you get a HELOC on an investment property?

Yes, you can get a HELOC on an investment property. However, it may be more challenging to find a lender, and you can expect a more rigorous approval process than for a HELOC for your primary residence.

What qualifies as an investment property?

An investment property is residential real estate meant to generate income or financial gain rather than serve as a home for the buyer. This includes single-family homes, townhouses, or multifamily homes with up to four units.

An investment property can't be your primary residence. Even if you live in one unit of a multiunit home and rent out the rest, it's still your primary residence and won't qualify with lenders as an investment property. The same applies to an investment property vs. a second home. Since you live part of the time in the second home, it’s not an investment property.

Why are investment property HELOCs more difficult to get?

People are more likely to pay the mortgage on their primary residence than on an investment property if money gets tight. That increases the lender's risk on such loans. Stricter HELOC requirements for an investment property protect the bank from this extra risk.

How HELOCs on rental properties differ from HELOCs on primary homes

A HELOC on an investment property works much the same as a HELOC on a primary residence. Both are second mortgages on the property, and both have a draw period and a repayment period.

• The draw period: This initial period typically lasts about 10 years. During the draw period, you can borrow money up to your HELOC’s limit. You typically make interest-only payments on the exact amount you use during this phase. This phase works much like a credit card.
• The repayment period. This second phase usually lasts 15 to 20 years. You can no longer borrow from the HELOC and make fully amortized payments that repay the principal and interest by the end of the loan term.

These loans differ in pricing, availability, and requirements.

They may have higher rates and fees

Interest rates on investment property HELOCs are typically 1% – 2% higher than the rates for a primary home HELOC.

Origination fees, appraisal costs, and annual maintenance charges also are more expensive.

Most HELOCs feature variable interest rates. If market rates climb, your rate and monthly payment will increase.

Lenders may be more difficult to find

The number of lenders offering HELOCs for investment properties is relatively small. National lenders frequently restrict HELOCs to primary homes or second homes. Rocket Mortgage doesn’t currently offer HELOCs on investment properties.

To find an investment property HELOC, you may have to look for regional institutions or portfolio lenders.

Qualification requirements are stricter

Lenders that offer investment property HELOCs set strict underwriting guidelines. You should expect to meet or exceed the following criteria:

• Credit score. Lenders generally require a minimum credit score of 720 or higher to verify your history of managing debt responsibly.
• Loan-to-value (LTV) ratio. Your LTV measures your total outstanding loan balances against the appraised market value of the property. It’s a big factor in determining how much HELOC you can get. Lenders typically limit your cumulative LTV to 80%, meaning you cannot borrow against your entire equity stake.
• Existing equity. As with a cash-out refinance, you need to have enough equity in your property to borrow with a HELOC.
• Higher credit score. The minimum for many lenders is 680, although some may require 720.
• DTI. HELOC lenders look for 43% or less.
• Cash reserves. Lenders often require you to hold enough liquid cash reserves to cover 6 months or more of mortgage payments, taxes, and insurance across all properties you own.
• Tenant income. You will need to provide documented proof of sufficient tenant income, often supported by executed lease agreements and tax returns, to confirm that the property successfully supports itself.

How to use a HELOC on an investment property

The flexible structure of a HELOC means you do not have to deploy all the cash at once. Instead, you can draw what you need, when you need it.

Here are some common ways owners of investment properties use a HELOC.

Use a HELOC for renovations

Whether you need to replace an aging roof, remodel a dated kitchen, or upgrade a bathroom, renovations can increase your property’s value, justify higher rent, and attract reliable, long-term tenants.

A HELOC allows you to pay your contractors in stages as work is completed, helping you avoid paying interest on unspent funds.

Use a HELOC for a down payment

You also can use a HELOC for a down payment on another property. Just be aware that using debt to finance your down payment adds a new obligation to your balance sheet. This will increase your overall DTI and could make it more challenging to qualify for a mortgage on a new property.

Use a HELOC for a full purchase

If your investment property has accumulated a substantial amount of equity, your approved HELOC limit might be large enough to cover the entire purchase price of a new, lower-cost property. Buying a property with cash allows you to bypass the traditional mortgage process. It makes your offer more attractive to sellers.

What are the pros of taking out a HELOC on an investment property?

Some benefits to consider before getting a HELOC on an investment property, which include:

• Flexible access to capital. You draw only what your projects require, and you pay interest only on your active balance.
• Interest-only draw options. During the draw period, your monthly payments are often interest-only. This keeps your short-term overhead low while you complete renovations or wait for a new property to start producing income.
• Built-in emergency safety net. You can handle unexpected costs, such as an expensive HVAC repair, without draining your personal savings.
• Potential tax incentives: The interest on an investment HELOC may be tax-deductible if the funds are used strictly to buy, build, or substantially improve the property securing the loan.

What are the cons of taking out a HELOC on an investment property?

Drawbacks to a HELOC on an investment property include:

• Collateral risk to your portfolio. A HELOC is a type of second mortgage with the property as collateral. If you’re unable to afford your HELOC payments, the lender may foreclose on the property.
• Variable-rate exposure. Because investment property HELOC rates fluctuate with market benchmarks, your monthly payment is less predictable. A spike in national rates could inflate your monthly payment and cut into your profits.
• Elevated borrowing costs. From higher initial interest rates to specialized closing fees, an investment property HELOC is a premium financial product. You must verify that the return on investment (ROI) generated by the borrowed funds comfortably outpaces the higher cost of capital.
• Cash flow pressure. Once the repayment period begins, your monthly payment will jump significantly to cover both principal and interest. You need to be ready to afford the higher payment.

Alternatives to HELOCs on rental properties

If you struggle to find a lender or the requirements are out of reach, there are HELOC alternatives.

Cash-out refinance

You can refinance an investment property. A cash-out refinance replaces your existing mortgage with a new one based on your home’s current value. After you pay off your current mortgage, you keep the difference and repay the loan as part of your new loan. A cash-out refinance vs. HELOC offers fixed interest rates. Primary mortgage rates are typically lower than those for a HELOC.

HELOC on your primary residence

Getting a HELOC on your primary residence is a significantly easier path with lower interest rates. However, your home serves as collateral. If you can’t afford the HELOC, your lender could foreclose.

Home equity loan

A home equity loan on investment property is a second mortgage that allows you to borrow your equity as a lump sum.¹ If you have enough equity, you can use a home equity loan to buy another house. When comparing a HELOC vs. home equity loan, the latter offers a fixed interest rate and a structured repayment schedule from day one.

Unsecured personal loan

If you need funding quickly and do not want to risk any real estate assets, an unsecured personal loan is worth exploring. The trade-off is that lenders charge significantly higher interest rates on unsecured loans, as well as shorter repayment timelines and smaller loan amounts.

Traditional mortgage

You also can compare HELOC vs. mortgage to buy an investment home. You will need a down payment and closing costs, but you will keep your existing properties clear of additional liens. You can choose the type of mortgage, and interest type, which allows you to get an ARM for an investment property.

Cash purchase

A cash purchase removes all borrowing friction. Buying a home with cash means you completely bypass a lender and can maximize your immediate monthly rental cash flow.

How to find banks that offer HELOCs on investment properties

Start by contacting local community banks and regional credit unions near your investment property. Additionally, working with an independent mortgage broker can save you time. Brokers have access to wholesale networks and can cross-reference multiple specialized lenders simultaneously to find a program that matches your financial profile.

The bottom line: HELOCs for investment properties come with pros and cons

Leveraging the equity in your investment property via a HELOC can fund renovations, cover unexpected expenses, or help you make a down payment on a new property. However, the premium pricing, strict credit score requirements, and variable-rate risks mean this path requires a high level of financial discipline and a rock-solid repayment strategy.

If you’re ready to buy a property or refinance your current mortgage, explore your borrowing options today with Rocket Mortgage.

¹ Home Equity Loan Product is a second standalone lien and may not be used for piggyback transactions. Valid for loan amounts between $45,000.00 and $500,000.00 (minimum loan amount for properties located in Michigan is $10,000.00). Not available on Ameriprise products. Additional restrictions, terms, and conditions apply. Must meet qualification requirements. This is not a commitment to lend.