Using a Home Equity Loan or HELOC on an Investment or Rental Property

A perk of homeownership is the ability to build equity as the gap between what you owe on the mortgage and your home value increases. You can then tap into your equity using a home equity loan or line of credit (HELOC). 

Some people use home equity to tackle renovation projects or consolidate debts. But others leverage their equity to buy an investment property. It might sound crazy to use one home to buy another, but there are advantages to putting your equity to work this way. 

If you’re considering using a HELOC or home equity loan on an investment property or rental, here’s a closer look at how it works. 

Can you use a home equity loan or HELOC for an investment property?

It’s possible to use a home equity loan or a HELOC to buy an investment property, but which one you choose may depend on your needs and how you plan to use the funds. Your ability to use home equity for investment property can depend on:

• How much equity you’ve accumulated
• Your creditworthiness and financial situation

Lenders consider these factors when deciding whether to approve a borrower for a home equity loan or HELOC for an investment property and what terms to set. Having more equity, a higher credit score and a steady income can all work in your favor. 

These are the differences between home equity loans and HELOCs.

• Home equity loans provide a lump sum, and a HELOC is a revolving credit line.
• Home equity loan rates are usually fixed, and HELOCs often have variable rates. 
• You may have more time to repay a home equity loan than a HELOC. 

In both cases, your home is collateral, so if you fail to make your payments, the lender could foreclose on the property.

Loan type	Rates	Best for	Repayment terms
Home equity loan	Fixed	Purchasing investment property	5–30 years
HELOC	Variable	Covering expenses related to the purchase (e.g., renovations or repairs)	5- to 10-year draw period, 20-year repayment period

Our expert weighs in: Understand the risks

Erin Kinkade

CFP®

I recommend doing your due diligence on the housing market surrounding the property to understand what the purchase price will be and the estimated amount that will go into refurbishing the property to prepare it for rent or sale. Then, create a network of contractors and other real estate agents. This should go into a well-prepared business plan; the lack of an insufficient business plan is a risk you might be willing to take, but I would never recommend it. (I may be stating the obvious here.) Within the business plan should be backup plans if plan A doesn’t come to fruition. In addition, assuming the investment property income will first be used to pay contractors, managers, and the HELOC or home equity loan, a timeline should be understood to weigh the pros and cons of a variable or fixed rate. I recommend reducing as many fluctuating costs as possible and, therefore, electing a fixed-rate HELOC or home equity loan. Finally, consult a professional who is a veteran in the business to engage as a mentor and engage with a financial professional with expertise in this area.

Purchasing a rental property using a HELOC or home equity loan

How it works

Getting a HELOC or home equity loan on an investment property isn’t much different from getting any other type of home loan. 

The process looks like this:

1. You apply for a home equity loan or HELOC with a reputable lender.
2. Your lender requests an appraisal to determine the home’s value and the amount of equity you have. 
3. If approved, you receive the funds or access to the line of credit after closing.
4. You use the funds to cover purchase costs. 

You may pay closing costs out-of-pocket or roll them into the loan. 

Is a HELOC or home equity loan better?

If you’re buying an investment property, a home equity loan is usually the better option. Here’s why. 

• You can use loan proceeds to cover some or all of the purchase price. 
• Fixed interest rates mean your monthly payments are predictable, so it’s easier to budget. 
• You can choose a longer repayment term if needed. 

Pros and cons

Using a HELOC or home equity loan to fund an investment property has advantages and 

disadvantages. Looking at both sides can help you decide whether it might be right for you. 

Pros

• It can allow you to cover some or all of your new property’s costs without draining your cash flow.

• You may get better interest rates than from other financing options, especially if you have good credit. 

• Lending limits are usually higher than personal loans or credit cards. 

Cons

• It puts your property at risk of foreclosure. 

• The closing process may take longer than getting an unsecured loan would. 

Funding investment property expenses using a HELOC or home equity loan

How it works

You can also use your home equity to cover the costs of a rental or investment property you own. This might include:

• Repairs
• Renovations
• Ongoing maintenance expenses
• Furniture
• Marketing costs
• Real estate agent fees or property management fees

You’d follow the same process outlined above: Apply for a loan, complete the appraisal, and get access to funds after closing. 

Is a HELOC or home equity loan better?

If you just need money to cover expenses related to an investment property, a HELOC may be best. Here’s why.

• HELOCs allow you to draw against your credit line as needed.
• You’ll only pay interest on the part of your credit line you use. 
• You may only have to make interest-only payments during the draw period.

Pros and cons

Pros

• The most significant benefit of using equity to fund investment property expenses is getting access to cash. 

• If you’re making renovations, they could add to your property’s value and increase its equity. 

• It may be a less expensive way to borrow compared to a credit card. 

Cons

• You’re using other property as collateral, which can be dangerous—especially if you’re not sure the new property will produce enough income to cover the loan payment. 

• You may pay closing costs and wait longer for the funds than for other types of financing. 

Can you take out a home equity loan or HELOC from an investment property? 

If you already have an investment or rental property, you may also be able to take out a HELOC or home equity loan against it. You could use those funds to:

• Purchase another investment
• Make repairs or improvements to the property
• Pay related expenses, such as marketing or property management fees

The key is finding a lender willing to offer you a HELOC or home loan on an investment property. Any home equity loan or HELOC presents a bigger risk for the lender because there’s a greater chance that second mortgages might go unpaid if the borrower gets into financial trouble. 

A home equity loan or HELOC on an investment property is even riskier if you already have a mortgage on that property and a loan for your primary home. Lenders can impose stricter qualification requirements on borrowers as a result. 

	Home equity product on primary residence	Home equity product on investment property
Minimum credit score	620	720
Maximum loan-to-value	90%	80%
Maximum debt-to-income	45%	40% – 50%
Cash reserves	3 – 12 months of payments	6 – 15 months of payments

Getting quotes from multiple lenders can give you a better idea of what you might qualify for. 

Lenders that offer home equity loans or HELOCs for investment properties

Not all home equity loan and HELOC lenders allow you to use their products for investment properties, so be sure to double-check with the lender you’re considering will meet your needs.

Here are two lenders we recommend:

Figure – Best HELOC overall

View Rates

LendEDU rating: 4.9 out of 5

• Access up to $400,000 in your home’s equity
• 100% online application
• Must withdraw full credit line (minus fees) at closing

Figure offers a HELOC product you can use for an investment property, as well as other mortgages. It offers loan amounts from $20,000 to $400,000, with a five-year draw period. 

Figure requires borrowers to draw the entire credit line at origination. As you repay the balance, you can redraw the available credit. 

This requirement could be a drawback for those looking to only use the line of credit for expenses as they come up.

Spring EQ – Best home equity loan

View Rates

LendEDU rating: 4.6 out of 5 for home equity loan

• See whether you qualify for a home equity loan and HELOC with one application
• Access up to 95% of your home’s equity
• Borrow $25,000 – $500,000

If you’re eyeing a home equity loan, you might consider Spring EQ. To qualify for a Spring EQ home equity loan, you need a credit score of at least 680. Repayment terms range from five to 30 years. You can access up to 95% of your home’s equity.

Spring EQ also offers HELOCs and features a multiproduct application where you can check your eligibility for a home equity loan and HELOC at the same time.

Are there tax benefits for using a home equity loan or HELOC on an investment property?

The IRS allows you to deduct the interest paid on a home equity loan or HELOC but only in certain situations. 

Interest is deductible when loan proceeds are used to buy, build, or substantially improve the residence that secures the loan. This tax rule remains in effect through 2025. 

You may be able to deduct other expenses related to the cost of owning an investment property. They include property tax, operating expenses, depreciation, and repairs. 

---

Tip

You can only take advantage of the tax benefits if you itemize your deductions rather than use the standard deduction.

---

Should I take out a home equity loan or HELOC for an investment or rental property?

Using a home equity loan for an investment property is a personal decision. If you’re on the fence about whether to move ahead, asking yourself the following questions can help you gain clarity: 

• How much equity do you have? 
• Do you need cash to buy an investment property or improve one?
• Is there a set dollar amount of money you need? 
• What kind of repayment term would you prefer? 
• Are you comfortable using your home as security for the loan? 
• What interest rates or terms would you qualify for? 

Reviewing your budget and calculating your home equity can be helpful. You want to ensure you have enough equity to borrow the amount you require and that you can pay it back. 

Are there alternative sources of financing I should consider? 

Home equity loans and HELOCs aren’t your only options if you want to purchase a new property or cover the costs of repairs and other expenses.

You might consider any of the following as well:

• Cash-out refinance: Cash-out refinancing allows you to replace your mortgage with a new one and withdraw equity in cash at closing. You’d then have just one mortgage payment to make. 
• Reverse mortgage: You might look into a reverse mortgage if you’re 62 or older and own your home outright or have very little mortgage debt. Reverse mortgages allow you to turn your equity into a one-time payment, a line of credit, or regular monthly payments over time.
• Personal loan: These are unsecured loans that don’t require collateral. The maximum loan limit is up to $100,000, but repayment terms are shorter, often five to seven years. 
• Credit card: Credit cards can help you cover expenses, but you can’t use one for a down payment on a property. You could earn rewards on purchases, but you may pay double-digit rates. 

These options have pros and cons. Should you decide to choose a home equity loan or HELOC, especially on an investment property, make sure you shop around for a lender. This will ensure you find a loan you qualify for that aligns with your budget and goals.