Can You Get a HELOC on an Investment Property?
A home equity line of credit (HELOC) on an investment property can provide cash for almost any purpose, from home renovations to unexpected medical bills. Savvy real estate investors also commonly use HELOC funds to fix, flip or purchase another property.
A HELOC for an investment property comes with different rules and requirements than HELOCs for primary residences. Understanding how to navigate the HELOC process for investment properties can be the key to boosting your real estate portfolio — and your income.
What is a HELOC on an investment property?
A HELOC is a revolving line of credit that uses your home as collateral. A HELOC on an investment property uses that property, rather than your primary residence, as the collateral.
How a HELOC works
Accessing HELOC funds is usually as simple as swiping a card, and you’ll typically pay less interest with a HELOC than you would a credit card, personal loan or home equity loan. You’ll also have an initial “draw period” (usually 10 years), during which you can use the credit line but make low, interest-only payments. After that, you’ll repay the balance owed using monthly payments at a variable interest rate.
How a HELOC can benefit you
A HELOC can be a good choice for anyone who wants to use the equity they have in an investment property to fund big expenses. These could be education costs, medical bills or debt consolidation.
Real estate investors often use HELOCs for renovations, repairs or the down payment on another rental property. Using home equity to buy an investment property is a common way to build wealth because the funds can help you meet the large down payment requirements needed to qualify for a new home loan.
Understanding loan types: What defines an investment property loan?
Whether or not you live in a home is known as “occupancy,” and it plays a large role in determining how you finance your property purchase. Any mortgage used to buy a property that you don’t live in, and that will produce rental income, is usually an investment property loan.
How to get a HELOC on an investment property
1. Make sure you qualify
Here are some common minimum requirements for a HELOC on an investment property, versus one for a primary home. Keep in mind that some lenders may have stricter requirements.
HELOC requirements
| Investment property HELOC | Primary home HELOC | |
|---|---|---|
| Credit score minimum | 670-720 | 620 |
| Debt-to-income (DTI) ratio maximum | 43% | 43% to 50% |
| Loan-to-value (LTV) ratio maximum | 75%-80% | 85% |
| Cash reserves | At least six months’ worth | Not usually required |
| Property occupancy | You don't live on the property, and intend to use it to generate rental income | You live in the property as your primary residence |
2. Shop around for the best deal
Apply with at least three to five lenders and compare their offers. Every lender has its own way of judging risk, so you’ll get slightly different rates and terms from each one. Here’s what to focus on:
- Interest rates. It’s important to shop around for the lowest HELOC interest rates — your rate plays a huge role in how costly your loan will be in the long term.
- Loan terms. Look at how long the draw periods are and whether you’d have the option to make interest-only payments during the draw period.
- Costs and fees. Make sure you compare origination fees and check whether there are any prepayment penalties to worry about.
Applying with multiple lenders won’t hurt your credit score
Even though you’re applying with multiple lenders, don’t worry about multiple inquiries impacting your credit score — your credit won’t be dinged as long as you apply with all of them within a 14-day window.
Ready to compare top HELOC lenders and rates? Get Personalized HELOC Offers Now3. Negotiate with lenders
If there isn’t an obvious winner, contact some of the lenders and ask them if they can make a more competitive offer. Tell them about the offers that they’re competing against — by negotiating, you could get an even better deal.
Learn more about our picks for the best HELOC lenders.
Who offers HELOCs on investment properties?
HELOCs on investment properties aren’t as easy to find as HELOCs secured by primary residences. That said, some large national lenders — including TD Bank, BMO Harris Bank, and AmeriSave — do offer them.
If you’re having trouble finding a lender, reach out to local credit unions or work with a mortgage broker in your area. You can also use LendingTree to get custom rate quotes from multiple lenders.
Recommended investment property HELOC lenders
Pros and cons of investment property HELOCs
| Pros | Cons |
|---|---|
Flexible: You only repay what you withdraw, plus interest. Reusable: You can repay and reuse the credit line as needed during the draw period. Low interest rates: Your interest rate may be lower than that of a credit card or personal loan. Wealth-building: You could use the funds to expand your investment portfolio. Personal security: You won't lose your primary residence if you aren’t able to make your payments. | Drained equity: You’ll lose a portion of the equity you’ve built in your property. Another debt: You’re adding another monthly expense to your plate. Costs and fees: You’ll likely pay closing costs, which may be deducted from your credit line. Variable interest rates: You may find it hard to budget for payments that can change as the market fluctuates. Collateral: You could lose your property to foreclosure if you default on your HELOC. |
Is an investment property HELOC right for me?
Here’s what to consider:
- Cash flow. Can you comfortably handle another monthly loan payment, on top of your existing mortgage and property expenses? Don’t forget to consider future periods of vacancy or months in which your renters don’t make their payments.
- Rising payments. Are you prepared for a time when your HELOC rate begins to adjust and your monthly payments shoot up significantly? HELOCs typically have adjustable rates, which means the monthly payment fluctuates with the broader market.
- Future financing. Keep an eye on your DTI, because if you plan to continue investing in real estate, that can become a roadblock to qualifying for future loans.
Alternatives to investment property HELOCs
Don’t think a HELOC on an investment property is the right fit for you? Here are some alternatives.
- HELOC on a primary home: You’ll face less stringent requirements and still enjoy the benefits of a HELOC if you use your primary residence as collateral.
- Home equity loan: Instead of a credit line, you can tap your investment property’s home equity and receive your payout in a lump sum. You’ll also enjoy a fixed interest rate, which means payments won’t change over time.
- Cash-out refinance: You’ll replace your investment property’s current mortgage with a larger loan and, ideally, lower your interest rate. At the same time, you’ll get a lump sum of cash that you can use as you wish. The amount you take out in cash is added to what you already owe on your mortgage.
- Personal loan: You don’t need any home equity to qualify for this type of loan. Instead, unsecured personal loans rely only on your credit report and credit history. If approved, you’ll get a lump sum of cash to use for any purpose. Because it’s unsecured, however, average interest rates can be higher.
- Credit card: You don’t have to put up any collateral and can qualify based only on your credit history. However, credit cards typically come with high variable interest rates, so your balance can snowball quickly if you don’t pay the card off in full every month.
- Cross-collateralization loan: If you already have multiple investment properties, you can group them together and pool your equity to access a larger credit line. This means you won’t have to deplete the equity from one property.
Frequently asked questions
If you have significant equity in at least one investment property and want a flexible form of credit, a HELOC can be a good choice. Using equity to fund improvements or raise funds for a down payment on another rental are two of the best ways to leverage your home equity.
Yes, you can use a HELOC to buy a second home or an investment property. If you purchase a second home with your HELOC, you can always turn it into an investment property later. Your second home will become an investment property if you take on renters and live in it for less than 10% of the number of days it was rented.
Funds from a HELOC can make up some or all of your down payment on a new property. Since investment property loans have higher down payment requirements, a HELOC can provide a much-needed solution when you’re low on cash.
If you’re willing to live at the property while renting out other units, you can also use what’s called “owner-occupied financing.” These loans, commonly used in house hacking, come with very low down payment requirements — your down payment can be as low as 3.5% if you use an FHA loan and 0% if you’re eligible for a VA loan.
The interest you pay on a HELOC may be tax-deductible if the HELOC was used to “buy, build or substantially improve” the home that secures it. This rule applies to any HELOC, whether it was taken out on a primary home or an investment property.