Can you get a HELOC on an investment property?

Home equity lines of credit (HELOCs) allow homeowners to access funds needed for home renovations, college tuition, medical bills, or other unexpected expenses. Since most people have just one home, HELOCs are usually taken out on a borrower’s primary residence. However, it’s possible to take out a HELOC on an investment property. The catch is that HELOCs on investment properties come with stricter requirements, aren’t widely available, and are hard to qualify for. 

‍

In this blog, we’ll review what a HELOC is, how it works, the pros and cons of taking one out, and how to determine if obtaining a HELOC on an investment property is a good idea.

What is a HELOC? 

A home equity line of credit is a financial product that allows homeowners to borrow money using their home’s equity as collateral. HELOCs are attractive funding options because they usually come with less interest than a credit card or personal loan.

‍

HELOCs act as revolving lines of credit, allowing homeowners to access funds during an initial draw period of about 10 years. During that time, borrowers make small, interest-only payments. After the draw period has passed, borrowers begin to repay the balance owed plus interest through larger monthly payments. 

Can I get a HELOC on an investment property? 

Yes, securing financing against a property that is not your primary residence is possible. Investment property HELOCs work similarly to HELOCs on a primary residence. However, when you apply for a home equity line of credit on an investment property, there are considerations to take into account.

They’re riskier, so they’re more expensive

Lenders consider HELOCs to be riskier on investment property than HELOCs on primary residences. This is because the borrower is responsible for two mortgage payments instead of one, increasing the risk of defaulting on payments. As a result, lenders tend to charge HELOC borrowers with investment properties more in interest and fees than traditional HELOC borrowers.

Lending criteria are stricter 

HELOCs on investment properties come with more stringent application requirements than HELOCs on primary residences. You can expect a more thorough review of your finances and higher requirement thresholds to meet.  

Lenders are scarce 

In addition to being hard to qualify for, HELOCs on investment properties are also hard to come by. Not all lenders offer investment property HELOCs. As a result, shopping around for competitive terms and rates can be difficult. 

Requirements for investment property financing 

Here's a list of the criteria borrowers need to meet:

Equity 

Lenders usually require HELOC borrowers to have a minimum of 15-20% home equity. With a HELOC on an investment property, equity requirements are slightly different. Lenders will want a loan-to-value ratio (LTV) of no more than 75% to 80%. This means that outstanding loans on the property, including the mortgage, cannot surpass 75% to 80% of the property's overall value. You'll need to own 20% or more equity to meet this threshold.

Credit score

A good credit score is necessary for all types of financing, but especially investment property HELOCs. With HELOCs on primary residences, lenders might be more willing to weigh credit scores against other financial factors such as income. With HELOCs on investment properties, lenders prefer to see a credit score of 720, or higher. It's important to keep a good credit score in order to get approved.

Debt-to-income (DTI) ratio 

Lenders typically look for a debt-to-income (DTI) ratio of 43% or lower for loans on investment properties. Your DTI ratio shows what portion of your monthly income goes toward debt payments. This helps lenders assess whether you have enough financial flexibility to manage the payments on an additional loan.

Cash reserves 

Another factor that influences whether or not a borrower gets approved for an investment property HELOC is the amount they have in personal cash reserves. Lenders prefer to see six months' worth of expenses to make sure a borrower is capable of keeping up with their payments in case of a financial emergency. With a HELOC on a primary residence, the required minimum cash reserves are usually less.

Rental history

If your property is a rental, lenders may request a history of your income and expenses to confirm the property’s ability to generate positive cash flow. Frequent vacancies can be cause for concern. 

When getting a HELOC on an investment property makes sense 

There are a few instances where taking out a HELOC on an investment property is especially beneficial. Take a closer look at these scenarios below. 

• You want to fund property improvements: Use a HELOC to finance renovations or repairs that can increase property value. Not only can this increase your rental income potential, but it also comes with certain tax benefits—the monthly interest payments you make on a HELOC are tax-deductible. 
• You want to venture into your next property: Investors will often take out a HELOC on an existing rental property and use the funds as a down payment on future rental properties. Although this doesn’t guarantee tax benefits, it’s a smart strategy that can double or triple rental income for a real estate investor and diversify assets. 
• You’ll still get a lower rate: Although rates may be higher on investment properties, it’s still possible that the rate will be lower than other debt products. In this case, the long-term cost may justify using a HELOC on your investment property. 
• Your primary residence is ineligible for a HELOC: If you don’t have sufficient equity in your primary residence or have too many liens against the property, you may be unable to secure financing. 

‍

Alternatively, a HELOC on an investment property may not make sense if you're facing uncertainty in your rental income or if the property has fluctuating or negative cash flow. If the rental property isn't consistently generating income or is at risk of vacancies, borrowing against it could create financial strain. Additionally, if you already have a significant amount of high-interest debt or other financial obligations, taking out a HELOC could lead to over-leveraging and possibly result in foreclosure. 

Alternatives to HELOC on investment property

Given the many requirements that come with taking out a HELOC on an investment property, it’s worth considering other financing options. Here are three equity-based funding alternatives to a HELOC:

Home equity loan 

A home equity loan works similarly to a home equity line of credit, except instead of a credit card, borrowers receive a lump sum of cash. The loan usually comes with fixed rates and monthly payments. However, as with HELOCs on investment properties, home equity loans on investment properties are scarce and often come with higher interest rates than home equity loans on primary residences.

Home Equity Investment

A Home Equity Investment (HEI) allows you to access a lump sum of cash in exchange for a share of the home’s future appreciation. There are no monthly payments over a flexible 30-year term. Instead, you repay the HEI in full anytime when you refinance, sell the property, or use another source of funds. 

‍

Requirements are less stringent than HELOCs and home equity loans—borrowers need a credit score above 500 and sufficient equity to qualify. There are no income requirements—even for those looking to finance against an investment property.

‍

It’s a smart choice for homeowners with less-than-perfect credit scores who need to access between $25k and $500k.  

Cash-out refinance 

A cash-out refinance allows you to refinance the mortgage on your property for a higher amount and take out the difference in cash. Keep in mind that when you refinance your mortgage, a new interest rate is set. It’s best to obtain a cash-out refinance when interest rates are low. 

Frequently asked questions

Can you pull equity out of a rental property?

Yes, you can pull equity out of a rental property through a home equity loan, HELOC, Home Equity Investment, or cash-out refinance. The process is similar to tapping the equity from a primary residence, but lenders may scrutinize your finances and the rental property's income potential more closely.

How much equity can you take out of an investment property?

Typically, you can borrow up to 75%–80% of the appraised value of an investment property, depending on the lender and the property's condition. 

Does a HELOC have to be your primary residence?

No, your primary residence doesn't have to secure a HELOC. You can also take out a HELOC on an investment property, provided you meet the lender's criteria. However, the terms may differ, and you might face higher interest rates and stricter approval requirements due to the increased risk associated with investment properties.

What do you need to qualify for a HELOC on an investment property?

You'll generally need, excellent credit (720+), a debt-to-income ratio of 40-50%, a maximum loan-to-value ratio of 80%, 6 months of cash reserves or more, and consistent monthly income from tenants.

Can you write off a HELOC on a rental property?

Yes, you can potentially write off the interest on a HELOC if it's used for home improvement purposes, like financing repairs or upgrades on the rental property. The IRS generally allows you to deduct interest on loans used for property-related expenses. Still, it's important to consult with a tax advisor to ensure the interest qualifies for a deduction under current tax laws.

Final thoughts on investment property HELOCs

Taking out an investment property HELOC can be a wise decision if you meet the qualifying criteria. However, if you have a low credit score, insufficient rental income, or a high debt-to-income ratio, it might be hard to get approved. 

‍

Consider a home equity investment instead. Point’s HEI allows borrowers to enter into an equity-sharing agreement where they receive the funds they need upfront in exchange for a percentage of their home equity. Visit Point to find out if you qualify for an HEI and start financing your ongoing expenses, today.