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

March 29, 2024 7-minute read

Author: Jamie Johnson

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If you’re looking to finance a large purchase, you’ve probably been considering the best type of loan to take out. But did you know you can tap into the equity you’ve already built up in your investment property?

This type of lending product is called a home equity line of credit (HELOC), and it’s an option for anyone who needs an ongoing line of credit but doesn’t want to rely on a credit card or the high interest rate that comes with one.

This strategy has some downsides, however, so it’s important to go about it the right way. Let’s look at how to take out a HELOC on an investment property, as well as the pros and cons of such a move. It’s important to note that Rocket Mortgage® doesn’t offer HELOCs at this time.

First, What Is A HELOC?

If you need to borrow money to cover a financial emergency or finance a one-time purchase, you can go about this in multiple ways. One is to take out a personal loan and receive a one-time lump-sum payout.

Another way is a cash-out refinance. Yet another way is to take out a line of credit, where you’re allowed to borrow up to a maximum loan amount and take the money as you need it. This flexibility can help anyone who doesn’t know exactly how much money they’ll need to borrow.

A HELOC is a revolving line of credit, and once you’re approved, 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.

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Are HELOCs On Rental Properties Different From HELOCs On Primary Homes?

At this point, you may be wondering how an investment property HELOC differs from a HELOC on a primary residence. While they’re similar in theory, HELOCs on investment properties deviate from traditional HELOCs in a few practical ways that we’ll explore next.

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 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.

It’s Harder To Find Lenders

Most lenders prefer to offer lending products where there’s a high likelihood 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, that lender likely has stringent approval requirements. So, if you’re hoping to secure a HELOC because you’re facing financial difficulties, it’s unlikely you’ll qualify for a HELOC on your rental property.

To qualify, you’ll need:

  • An excellent credit score (720 or higher)
  • A maximum 80% loan-to-value ratio
  • Healthy cash reserves (enough to cover 6 months or more)
  • 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

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Are There Advantages To Taking A HELOC On Investment Property?

Some advantages are worth considering before you write off HELOCs 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 property’s equity in a rental property may seem unproductive.

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.

And, finally, as noted earlier, 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.

Are There Disadvantages Of Taking 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. Given the risk and expense involved, it’s worth taking the time to consider whether a HELOC is best for you.

Risks Of Using Investment Property As Collateral

Perhaps the biggest downside of taking out a HELOC is that you’re putting your property at risk. 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.

Higher Interest Rates

A HELOC on an investment property typically comes with a variable interest rate, which can get expensive quickly. It’s wise to pay close attention to how much you’re paying back in interest.

Are There Tax Benefits To Using A HELOC On A Rental Property?

The Tax Cuts and Jobs Act of 2017 changed many of the rules for claiming tax deductions on your mortgage. As a result, certain tax benefits may come with taking out a HELOC on an investment property.

When you get a mortgage on a rental home, you can write off most expenses you incurred as a landlord. And if you get a HELOC on that mortgage, the interest portion of the HELOC may be tax deductible depending on how you spend the funds.

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Are There 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 are worth considering. Let’s look at four:

  • Cash-out refinance: A cash-out refinance allows you to refinance your rental property at a higher loan amount and receive the difference in cash. The advantages of this option usually include a lower interest rate, typically speaking, and the ability to spend the funds as you see fit. Plus, you’ll only have one mortgage on the property instead of two since the refinance replaces the original mortgage and therefore isn’t classified as a second mortgage like the next two options in this list.
  • HELOC on your primary residence: Another option is to secure a HELOC on your primary residence. Assuming you meet the requirements, a traditional HELOC 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 that you can use to fund repairs or make an emergency payment.
  • Unsecured personal loan: You can always apply for an unsecured personal loan. If approved, 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? Speak 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 or mortgage broker, small bank or 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 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, which can increase wealth and your overall equity over time.

FAQs About Using A HELOC For Investment Property

Let’s take a look at some of the most frequently asked questions about using a HELOC on an investment property.

Can I use funds from a HELOC for a down payment on an investment property?

You’re able to use HELOC funds for almost anything, including a down payment on an investment property. However, keep in mind that a HELOC will increase your debt-to-income ratio.

Can I get a HELOC on a rental property?

You can get a HELOC for a rental property. Fewer lenders offer this option, however, and qualification requirements will be stricter. You’ll want to consider all potential financing options and decide what’s best for your situation.

Can I deduct HELOC interest on an investment property?

The interest you’ll pay on a HELOC may be tax deductible if you use the funds to make capital improvements to the property. Capital improvements are major structural modifications that increase the property’s value, and examples include remodeling the kitchen, installing a new HVAC or replacing the roof.

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

When you take out a HELOC on an investment property, you can utilize the equity in your rental home. This allows you to put that money 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 pretty strict, and a HELOC tends to be more expensive than other types of loans. 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 action and apply for initial approval with Rocket Mortgage today.

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Jamie Johnson

Jamie Johnson is a Kansas City-based freelance writer who writes about a variety of personal finance topics, including loans, building credit, and paying down debt. She currently writes for clients like the U.S. Chamber of Commerce, Business Insider, and Bankrate.