Should You Consider A HELOC On Your Investment Property? A Guide

A home equity line of credit (HELOC) allows borrowers to tap into the equity they’ve built in a property. It’s an option for anyone who needs an ongoing line of credit but doesn’t want to rely on a credit card or face the high interest rate that comes with one.

Since real estate investors can use a HELOC on an investment property, it’s important to understand how this process works. Knowing the pros and cons of this strategy is also key.

Keep in mind that Rocket Mortgage^® doesn’t offer HELOCs at this time.

Once you’re approved for a HELOC, which is a revolving line of credit, you’ll enter into an initial draw period. You can withdraw money as needed during this time, and you’ll make minimum payments to cover the cost of interest. The draw period typically lasts 5 – 10 years, but your time frame will depend on your lender.

Once the draw period ends, you’ll enter into the repayment period during which you’ll pay back both the interest and the money owed. The repayment period can last up to 20 years, although the exact terms will vary depending on your lender and the amount of money borrowed.

Leveraging funds from a HELOC on an investment property can be beneficial if you want to make improvements or upgrades that can attract prospective tenants. Additionally, you can use HELOC funds to invest in another property, or at some point purchase a vehicle or something priced similarly high.

How HELOCs On Rental Properties Differ From HELOCs On Primary Homes

If you’re wondering how an investment property HELOC deviates from a HELOC on a primary residence, the explanation is multi-pronged. Although the two are similar in theory, HELOCs on investment properties differ from traditional HELOCs in a few ways.

They’re Considered Riskier, So They Cost More

Because the investment property you’re taking out a HELOC on isn’t your primary residence, lenders see it as riskier than a regular HELOC. Your cash flow is tied up in multiple rental properties, so lenders may consider you to be at a higher risk for defaulting. For that reason, you’ll likely have to pay more in fees and interest.

Finding Lenders Can Pose A Challenge

Most lenders prefer to offer lending products where the likelihood is high that the borrower will repay the loan. For that reason, many lenders – including Rocket Mortgage – don’t offer HELOCs on rental properties.

It’s Tough To Qualify

If you find a reputable lender that offers HELOCs on investment properties, these HELOCs likely come with stringent approval requirements. So, it’s unlikely you’ll qualify for a HELOC on your rental property if you’re hoping to secure a HELOC to get out of financial trouble.

To qualify, you’ll need:

• An excellent credit score (720 or higher)
• A maximum 80% loan-to-value (LTV) ratio
• Healthy cash reserves (enough to cover 6 months or longer)
• A debt-to-income ratio (DTI) of no more than 40% – 50%
• At least 20% equity in your property after the full value of the HELOC has been drawn
• Sufficient income from tenants
• Additional features, such as long-term tenants and multiple appraisal quotes, that make the property attractive

What Are The Pros Of Taking Out A HELOC On Investment Property?

Some advantages are worth considering before writing off a HELOC as too expensive or hard to obtain. As an investor, you’ll want to ensure that your assets are productive. Money tied up in a rental property’s equity may seem unproductive.

A HELOC on an investment property has these benefits:

• Cash flow for investment opportunities or emergencies: HELOCs only cost money if you spend the funds. You can always keep the HELOC on hand as a source of cash flow if an investment opportunity arises or you need to make unexpected repairs.
• A long draw period: As noted, the draw period for HELOCs can last up to 10 years, so you need not feel rushed to spend the cash. You also don’t have to begin repaying the line of credit until the draw period ends.
• A potential tax incentive: If you get a HELOC on the mortgage of your rental home, the interest portion of the HELOC may be tax-deductible if you use the funds to make capital improvements such as remodeling the property’s kitchen or replacing the roof.

What Are The Cons Of Taking Out A HELOC On Investment Property?

Taking out a home equity line of credit on an investment property won’t be the right choice for everyone. Here are the downsides that come with this option:

• The risks associated with using investment property as collateral: In this instance, you’re not risking your primary residence, but you do risk foreclosing on your rental property. If this happens, you’ll lose your investment and all the future income you would’ve earned.
• A potentially higher interest rate: A HELOC on an investment property typically comes with a variable interest rate, which can get expensive quickly. It’s wise to carefully monitor how much you’re paying back in interest.
• The potential for additional fees: Since lenders consider a HELOC on an investment property as risky, you might end up paying more in various fees.

Alternatives To HELOCs On Rental Properties

If you’re not sure if a HELOC on a rental property is the right choice for you, other options may be worth you considering. 

• Cash-out refinance: A cash-out refinance allows you to refinance a rental property at a higher loan amount and receive the difference in cash. This option allows you to only have one mortgage, more freedom with your funds and – usually – a lower interest rate.
• HELOC on your primary residence: If you meet the requirements, you can secure a HELOC on your primary residence, which is easier to qualify for and usually comes with a slightly lower interest rate.
• Home equity loan: For investment property owners with enough equity, a home equity loan can be a solid alternative to a HELOC. With this loan, you’ll receive a lump-sum payment you can use to fund repairs or make an emergency payment.
• Unsecured personal loan: If approved for an unsecured personal loan, you’ll receive a one-time lump sum. The funding is quick, and strong candidates may qualify for a lower interest rate. You’ll have to start making repayments right away, though.

How To Find Banks That Offer HELOCs On Investment Properties

If you want to pursue a HELOC on your investment property, the first step is to find a reputable lender that offers this type of loan. The best way to go about this is by speaking with your professional contacts and network in social media forums geared toward real estate investors.

These individuals may be able to point you toward a trustworthy lender. It’s also a good idea to consult a trusted financial advisor before applying.

Although HELOCs for investment properties can be tricky to come by, you should be able to work with a lender, mortgage broker, small bank, credit union or real estate investment firm to find a HELOC that fits your needs.

Using A HELOC For A Down Payment On An Investment Property

You can also use a HELOC for the down payment on an investment property, and it’s often worth it since home equity is a valuable financial asset that exists for your benefit. Using this asset to finance an investment property can help you boost your passive income, potentially increasing your wealth and equity over time. However, keep in mind that a HELOC will also increase your DTI.

The Bottom Line: HELOCs For Investment Properties Come With Pros And Cons

By taking out a HELOC on an investment property, you’ll put your equity to work for you and take advantage of tax benefits that may come with it.

However, the approval requirements for a HELOC on a rental property are relatively strict, and you’ll pay more overall than you would with some alternative financing options. Also, many lenders, including Rocket Mortgage, don’t offer HELOCs.

If you’re interested in financing your primary residence or investment property using another type of loan, take the first big step and apply for initial approval with Rocket Mortgage today.