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Should You Consider A HELOC On Your Investment Property?

Jamie Johnson6-minute read

November 29, 2022

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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 that 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). 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 rates that come with it.

But this strategy has some downsides, 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 that decision. It’s important to note that Rocket Mortgage® does not offer HELOCs.

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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 two ways. One is to take out a personal loan and receive a one-time lump-sum payout.

Or you can take out a line of credit, where you’re allowed to borrow up to a maximum loan amount, and you can 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. During this time, you can withdraw money as needed, and you’ll make minimum payments to cover the cost of interest. The draw period typically lasts 5 – 10 years, though this 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 typically lasts up to 20 years, though the exact terms will vary depending on your lender and the amount of money borrowed.

Are HELOCs On Rental Properties Different From HELOCs On Homes?

At this point, you may be wondering how an investment property HELOC differs from a HELOC on a primary residence. While they are similar in theory, a few practical differences are worth exploring.

They’re Considered Riskier, So They Cost More

Because the property you’re taking out a HELOC on isn’t your primary residence, it’s seen as riskier than a regular HELOC. Your cash flow is tied up in multiple properties, so lenders may see you as 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 these types of loans.

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 that you’ll qualify for a HELOC on your rental property.

Here are the requirements you’ll need to meet:

  • An excellent credit score (720 or higher)

  • Healthy cash reserves on hand (enough to cover 6 months or more)

  • Debt-to-income ratio of 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 that make the property attractive, such as long-term tenants and multiple appraisal quotes

Are There Advantages To Taking A HELOC On Investment Property?

Some advantages are worth considering before you write off HELOCs as too expensive or difficult to obtain. As an investor, you want to ensure that your assets are productive. Money tied up in a property’s equity in a rental property is unproductive.

And 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, the draw period for HELOCs usually lasts up to 10 years, so there’s no immediate rush to spend the cash. And you 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 HELOC 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 Security For A Loan

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 variable interest rates, which can get expensive very 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 take out a mortgage on a rental home, you can write off any expenses you incurred as a landlord. And if you take out a HELOC on that mortgage, you can write off a portion of the interest you paid on the loan over the past year.

Are There Alternatives To HELOCS On Rental Properties?

If you’re not sure if taking out a HELOC on a rental property is the right choice for you, other options are worth considering. Let’s look at three:

  • Cash-out refinance: In a cash-out refinance, you refinance your rental property at a higher loan amount and then receive the difference in cash. The advantage here is you’ll likely get a lower rate in a cash-out refinance than with a HELOC. Also, it doesn’t add another monthly payment to your list of bills. Instead, the funds are rolled into your current mortgage. And you can spend the funds as you see fit.

  • HELOC on your primary residence: Another option is to take out a HELOC on your primary residence. Assuming you meet the requirements, a traditional HELOC is easier to qualify for and usually comes with slightly lower interest rates.

  • Home equity loan: For investment property owners with enough equity, a home equity loan can be a smart 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. Similar to HELOCs, home equity loans aren’t readily available for investment properties and will come with higher interest rates.

  • Unsecured personal loan: You can always consider taking out an unsecured personal loan. When you take out a loan, you’ll receive a one-time lump-sum The funding is quick, and strong candidates may qualify for lower rates. But you will have to start making repayments right away.

A cash-out refinance may be a better option.

Apply online with Rocket Mortgage®.

How Can I 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 these types of loans. The best way to do this is by speaking with your professional contacts and networking 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 with a trusted financial advisor before applying.

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

Can I Use A HELOC For Down Payment On An Investment Property?

You can use a HELOC for the down payment on an investment property, and it’s often worth the investment. Home equity is a valuable financial asset that exists for your benefit. Using this asset to finance an investment property can help you increase your passive income which will increase your wealth and your overall equity over time.

The Bottom Line: HELOCs Are A Big Risk That Might Yield A Big Reward If Used Properly

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 tax advantages may come with it.

However, the application requirements are pretty strict, and a HELOC tends to be more expensive than other types of loans. And many lenders, including Rocket Mortgage, don’t offer this type of loan. So it’s best to take the time to learn about refinancing investment properties first.

Refinancing may be your best option.

See if you can shorten your term and lower your interest rate.

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.