An investment property can be a great way to diversify your portfolio, generate rental income and build equity over time. However, you don’t have to sell the property to cash in on your investment. A home equity line of credit (HELOC) allows you to borrow money using property as collateral. And while HELOCs on investment properties are less common, it’s still possible to find them.
If you’re wondering whether you can get a HELOC on an investment property, here’s what to know.
What is a HELOC?
You can draw money from the line of credit during the “draw period,” which usually lasts 10 to 15 years. You’ll need to make monthly minimum payments during this time. But you can also choose to pay down the balance and reuse the line of credit as often as you’d like. Once the draw period ends, you’ll make principal and interest payments to clear any remaining balance.
How to get a HELOC on an investment property
The process of getting a HELOC on an investment property is similar to that of taking one out against your primary residence. But you’ll need to find a lender that offers this type of loan and then meet the strict qualification requirements.
If you’re ready to get a HELOC on an investment property, follow these steps:
1. Review the requirements
When you take out a HELOC against your investment property, you borrow money using the value of your real estate as collateral.
It can be more difficult to qualify for a HELOC on an investment property because “they’re riskier for the lender,” says Ron Haynie, the senior vice president of housing finance policy for the Independent Community Bankers of America. “If you get into financial trouble and you own three or four properties, you’re going to protect your primary residence. The investment property you’ll let go to foreclosure.”
Because of this risk, you could need a higher credit score to qualify than you would for a standard HELOC on a primary residence. Lenders might also charge annual fees and set higher interest rates on investment property HELOCs, according to Haynie.
2. Find a lender
Investment property HELOCs aren’t as common as standard HELOCs because they pose more risk to the lender. But it’s still possible to find them at some banks, credit unions and online lenders.
If you’re not sure where to start, check with the lender that closed your first mortgage. In the case that your original lender provides this type of HELOC, it might be able to offer a streamlined application process.
“[Your lender] might have a lot of your property’s value and tax information on hand, so [the lender] can just update it,” Haynie says.
You can also check out community and regional banks, which are more likely than larger institutions to offer investment property HELOCs. Loan brokers or real estate investing forums might also give you some leads.
3. Compare offers and pick a loan option
Once you find a few places that offer investment property HELOCs, get a personalized quote from each so you can compare your options. Consider details like the interest rates, fees, closing costs, maximum loan amount and terms of the draw and repayment periods.
After you’ve done your research, choose the loan option you like best.
Tip: If you have strong credit, you might be able to use the best offer to negotiate with another lender.
4. Apply for the HELOC
After you’ve chosen a lender and negotiated your terms, you’ll need to submit a formal application for the HELOC and agree to a hard credit pull. The lender might also ask for tax forms and pay stubs to document your income as well as bank or investment account statements to demonstrate your ability to repay the loan. And if your investment property is a rental, the lender could ask for a copy of the lease as well.
5. Get your funds
The lender will review your application and supporting documents to determine whether you qualify. An appraisal of the investment property will also be ordered by the lender to determine its market value. This part of the process could take a few weeks.
If you’re fully approved, the lender will let you know when the closing day will be, which is when you’ll sign all your loan paperwork and then receive access to your HELOC funds.
Pros and cons of getting a HELOC on an investment property
Like any loan, a HELOC for an investment property comes with both pros and cons to consider before applying.
- Interest rates could be higher than those of standard HELOCs.
- Might come with annual fees.
- Could require a higher credit score to qualify.
- Harder to find lenders that offer these kinds of HELOCs.
HELOCs on rental properties vs. HELOCs on homes
Investment property HELOCs generally come with stricter requirements compared to a HELOC on a primary residence. However, every lender has different criteria. Here’s an idea of how the two compare and what you might need to qualify:
If a HELOC on your investment property doesn’t seem like the right fit for your needs, here are some options to consider:
- HELOC on your primary residence: This type of HELOC usually comes with looser qualification requirements, a variable interest rate and a draw period that lasts between 10 and 15 years. Standard HELOC rates can also be lower than those of HELOCs on investment properties.
- Cash-out refinance: With this option, you’ll refinance your primary home or investment property for more than you owe, pay off the original loan and keep the difference in cash.
- Unsecured personal loan: An unsecured personal loan doesn’t require you to pledge collateral to borrow money and usually comes with a fixed interest rate. You’ll receive the funds as one lump sum and make installment payments on the balance.
Frequently asked questions (FAQs)
It depends on how you use the funds. You might be able to deduct the interest paid on a HELOC if you use the money to buy, build or substantially improve the property that secures the underlying loan. If you use your HELOC for other expenses, like debt consolidation or a vacation, it’s not eligible for a tax deduction.
Whether you qualify for a tax deduction will also depend on your original loan amount and the date you took out the loan.
Yes, you can take out a HELOC on your primary residence and use the money to buy an investment property. Lenders often set higher down payments for investment properties, so you might need a down payment of around 20%.