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4 min readPublished December 01, 2022
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A home equity line of credit (HELOC) allows you to borrow money as needed from your home’s equity, up to the line limit and on a revolving basis, similar to a credit card. You can only borrow from the line during the draw period, typically 10 years. You’ll then repay what you borrowed over a repayment term, usually up to 20 years. HELOCs have variable rates, but sometimes the option to convert some or all of your balance to a fixed rate, as well.
You can only take out a HELOC, however, if you have sufficient equity in your home. If you have an investment property, you might be thinking about leveraging it as collateral for a line of credit. Here are the pros and cons of this strategy.
HELOC requirements for investment properties vs. primary residences
| Investment properties | Primary residences | |
|---|---|---|
| Credit score minimum | Generally 700 and up | 620 |
| Debt-to-income (DTI) ratio maximum | 43% (can depend on expected rental revenue) | 43%-50% |
| Loan-to-value (LTV) ratio maximum | 80% | 85% |
HELOC on a rental property: Pros and cons
Pros
- The interest rates on HELOCs are often lower compared to other forms of financing, like credit cards and unsecured home improvement loans. (You’ll likely pay a bit more because it’s tied to an investment property, however — more on that below.)
- Taking out a HELOC on an investment property might be less risky than a HELOC on your primary residence. If you default on the line of credit, at least the home you live in won’t be subject to foreclosure.
- You can continually draw from the HELOC during the initial period, so it’s often a good fit for fluctuating or longer-term expenses like home upgrades.
- With most HELOCs, you only need to pay interest during the draw period, which might mean more manageable monthly payments.
Cons
- Not many lenders offer HELOCs on investment properties.
- An investment property is inherently riskier than a primary residence, so lenders charge higher rates for any type of financing attached to one, including a HELOC.
- Most HELOCs come with an annual fee and an early cancellation or termination fee if you close the line within three years.
- You could end up underwater. “If your combined home equity and loan-to-value is lower than the value of the property, you’re in a difficult spot if you want to sell it,” says Dick Lepre of CrossCountry Mortgage.
How to get a HELOC on an investment property
Obtaining a HELOC is similar to getting a mortgage. Shop around and compare offers from at least three home equity lenders that offer HELOCs on investment properties, keeping in mind their individual requirements. For an investment property, you’ll likely need to meet slightly more stringent criteria, including having reserves in the bank, in order to qualify.
Alternatives to a HELOC on an investment property
- Cash-out refinance: With a cash-out refinance, you’ll refinance the loan on your rental property to a higher amount — provided you have enough equity — and take the difference in cash. Some savvy real estate investors use this method to continuously add new properties to the mix. One caveat: This strategy might not work as well today, with rates having gone up.
- HELOC on your home: If you can’t find a lender willing to extend a line of credit on your investment property, you might want to consider taking out a HELOC on your primary residence. This means your home’s on the line, however, if you can’t repay what you borrow.
- Credit card: Credit cards have higher interest rates, so they’re riskier compared to home financing. Still, charging your card might be worth it if you can get a zero percent APR offer and repay the balance in full before the introductory period ends.
- Personal loan: Depending on your debt load, you might be able to take out an unsecured personal loan as a lump sum. The interest rates on these can be high if your credit isn’t the best, however, and you’ll need to start repaying what you borrowed right away.
HELOC on investment property FAQ
You might be able to deduct the interest paid on a HELOC, including a HELOC on an investment property, so long as the funds were used to improve or repair the home. You can’t deduct all of the interest, however. Depending on your filing status, you can deduct up to $750,000 (joint) or $375,000 (separate) of interest on combined debt, including any mortgages on your primary residence.
You can get a HELOC on a vacation or second home. As with a HELOC on an investment property, it might be more challenging to find compared to a HELOC for a primary residence.
You can use the funds from a HELOC for a down payment on an investment or rental property. However, since your primary residence serves as collateral for the credit line in this instance, it’s important to evaluate your potential return on investment before tying up these funds in another property.
