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You can get a HELOC on an investment property — a home that you don’t live in at all — but it may be harder to find, more expensive, and smaller than a HELOC on your main home.
Despite these drawbacks, you might want to take out a HELOC against your investment property instead of putting your own house up as collateral. This will reduce your risk of losing your home if you have financial trouble.
Plus, owning an investment property is similar to running a business. From a tax and accounting perspective, it’s generally a good idea to keep your personal income and expenses completely separate from your investment property income and expenses.
Here’s what you need to know about using a HELOC on an investment property:
What is a HELOC?
A home equity line of credit (HELOC) lets you borrow against your home’s market value, up to a limit. You can borrow as much or as little of that limit as you need and pay interest only on what you borrow.
The interest rate is variable and based on an index, such as the Wall Street Journal prime rate, plus a margin determined by the lender. Some HELOCs have a fixed-rate option that’s similar to a home equity loan.
As you repay what you borrow, you replenish your credit line, similar to a credit card. You can use the money for any purpose.
Learn More: Using a Home Equity Loan or HELOC to Pay Off Your Mortgage
Can I use a HELOC on an investment property?
Yes, you can take out a HELOC on an investment property. If you use the money wisely, it can help you build your wealth.
Owning an investment property is like owning a business. You owe taxes on the rental income your property generates, and you deduct the expenses (like depreciation, interest, and repairs) associated with earning that income. You also capitalize expenses to improve your property, which means you add them to your property’s cost basis (or original value).
If you take out a HELOC on your investment property, you can deduct the interest you pay on your HELOC from the income you earn on your investment property — as long as you’re using the HELOC for expenses related to your investment property.
Compared to other forms of borrowing, a HELOC can be a low-cost way to improve your return on your investment — to create leverage, in other words.
Credible doesn’t offer HELOCs, but we can help you find a great rate on a cash-out refinance.
Related: Home Equity Loan or HELOC vs. Reverse Mortgage: How to Choose
Where to get a HELOC on an investment property
You might have to look harder to find a lender that offers HELOCs on investment properties than if you were looking for a HELOC on your primary residence. Here’s where to look:
- Traditional banks: These are the big-name banks that provide home loans in multiple states or nationwide, like Bank of America and U.S. Bank. Some traditional banks (including Chase and Citibank) don’t offer HELOCs as of October 2022.
- Local banks and credit unions: Local banks or community banks serve residents in a certain geographic area. Credit unions are open to anyone who meets the membership requirements. Some (like Pentagon Federal Credit Union) are open to almost anyone, while others have tighter restrictions.
- Loan brokers: These are individuals or companies that can connect borrowers with loans from a variety of lenders, free of charge.
- Online lenders: These are lenders that don’t have brick-and-mortar locations and strictly operate online.
Get a Home Loan: Compare Today’s Best Lenders
Requirements to get a HELOC
These are the factors lenders will look at when evaluating your HELOC application. The factors are the same whether you’re getting a HELOC on a primary residence or an investment property, but the requirements will be stricter on an investment property.
Combined loan-to-value ratio
Combined loan-to-value (CLTV) ratio is a way to measure your equity in your investment property. You’re more likely to qualify for a HELOC with a lower CLTV.
You can calculate your CLTV by adding the credit limit you’re applying for to your existing mortgage balance and dividing that sum by your home’s appraised value.
Calculate your debt-to-income (DTI) ratio by dividing your total monthly debt obligations by your monthly gross income. The lower your DTI, the better.
If you have too much debt relative to your income, lenders may not be willing to offer you a HELOC.
Your credit score is based on the information in your credit report, such as how many loans and credit cards you have and how often you make your monthly debt payments on time. This score helps a lender evaluate how likely you are to repay your debts. The higher your credit score, the better.
Some lenders may require you to have a certain amount of cash in your savings or checking account before they’ll grant you a HELOC. These reserves act as a safety net that could help you stay current on HELOC payments if your income decreases or your expenses go up.
See: Have Bad Credit and Want a Home Equity Loan? Here’s What to Do
Benefits of using a HELOC for an investment property
Here’s how taking out a HELOC for your investment property might help you:
- Finance operating expenses and improvements: A HELOC can be a low-cost way to borrow only what you need to run and fix up your investment property. Ideally, your rental income will cover all your operating expenses and still leave you with a profit. But if you’re operating on a tight margin, a HELOC can help in months when you don’t have tenants.
- Reduce income tax: As we mentioned earlier, you can deduct the interest you pay on your HELOC from the income your investment property generates. To deduct the interest, you must use your HELOC to pay for expenses related to your investment property (not to go on vacation or pay off your personal debt).
- Consolidate debt: If you’ve financed improvements to your investment property with a high-interest hard-money loan, personal loan, or credit card, you might save money in the short run by opening a HELOC and using it to pay off those balances.
Related: Refinancing to a 15-Year Mortgage: Does It Make Sense?
Drawbacks of using a HELOC for an investment property
Here are some of the less-attractive aspects of taking out a HELOC against your investment property:
- Higher interest rate: Lenders typically charge higher interest rates on loans secured by investment properties. They know that if money is tight, a borrower will prioritize making payments on their primary residence and other essentials over making payments on their investment property. Losing an investment property to foreclosure won’t disrupt a borrower’s life as much as losing their main home will.
- Lower CLTV: You may be able to borrow up to 100% of your primary home’s value, but only 70% of your investment property’s value. CLTV requirements vary by lender, but in general, because lending against an investment property is riskier, you won’t be able to borrow as much.
- Lower borrowing limit: You might be able to borrow up to $500,000 against a primary residence but only $100,000 against an investment property. Again, limits vary by lender and some may be more comfortable than others offering larger HELOCs on investment properties.
Alternatives to HELOCs for investment properties
If you can’t find a lender who’ll give you a HELOC on your investment property at all or with the terms you want, here are some other ways you could borrow:
Primary residence HELOC
Take out a HELOC against your main property instead. It might be less expensive and you might be able to borrow more. That said, you’ll increase your risk of losing the place you sleep at night if you can’t repay the loan.
A cash-out mortgage refinance on your investment property (or primary home) could give you a lump sum of cash with a fixed interest rate. However, closing costs are generally much higher than with a HELOC, and it’s only a good choice when you can lower your interest rate.
The interest rate on a personal loan may be lower than certain credit card rates, and the loan will have a fixed interest rate, monthly payment, and term.
A bonus: You won’t have to put up your main home or investment property as collateral. Still, if you default, the lender could sue you and you might have to sell your property to pay the judgment.
A credit card also relies on your personal credit history and doesn’t require collateral. Instead of a lump sum, it gives you an on-demand credit line to borrow against, and you’ll only pay interest on what you borrow. What’s more, you can often get approved instantly.
Credit cards, however, typically have higher interest rates. Falling behind on payments can send you further into debt. And, as with a personal loan, even though the debt is unsecured, the creditor could sue you if you don’t repay what you owe. You might have to sell your assets to pay them back.
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