Leveraging the equity in your primary residence to invest in rental properties can be a strategic way to expand your real estate portfolio. Home equity loans and lines of credit (HELOCs) are two financing options that allow you to access this equity. However, using these products for investment properties involves specific considerations and requirements.
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How to use home equity for investment properties
Home equity loans and HELOCs enable homeowners to borrow against the equity in their properties. While these financial tools are common to use for personal expenses, you can also use them to purchase or renovate investment properties.
- Home equity loan: Provides a lump-sum payment with a fixed interest rate and set repayment term. This option is suitable for covering substantial, one-time expenses, such as purchasing an investment property.
- HELOC: Offers a revolving line of credit, often with a variable interest rate, allowing for flexible, ongoing access to funds. This is ideal for covering intermittent expenses such as renovations or repairs on rental properties.
Eligibility criteria for investment property financing
Qualifying for a home equity loan or HELOC on an investment property typically involves more stringent requirements compared to a primary residence. Key factors include:
- Credit score: Lenders often require a minimum credit score of 720 for investment property loans, higher than the 620 typically needed for primary residences.
- Loan-to-value ratio (LTV): Lenders may allow a maximum LTV of 70% to 80% for investment properties, meaning you must retain 20% to 30% equity in the property
- Debt-to-income ratio (DTI): A lower DTI is often required for investment property loans, reflecting the borrower’s ability to manage additional debt.
Home equity financing for investment properties
These lenders offer home equity loans or HELOCs on investment properties.
Figure
Best Overall HELOC
About Figure’s HELOC
Figure offers a HELOC you can use for an investment property and other mortgages. It’s well-suited for investors seeking quick access to substantial funds for property acquisitions or renovations. However, the obligation to draw the entire credit line upfront may not be ideal for those preferring to access funds incrementally.
- Fixed rate
- 100% online application and appraisal
- Receive funds in as little as five days
- Redraw up to 100% of your funds
- No closing costs
- Charges an origination fee
- Must draw the full HELOC amount at origination
| Rates (APR) | 7.45% – 16.15% |
| HELOC amounts | $20,000 – $400,000 |
| Repayment terms | Draw: 5 years / Repayment: 5, 10, 15, or 20 years |
Spring EQ
Home Equity Loan
About Spring EQ’s home equity loan
Spring EQ offers fixed-rate home equity loans that can be applied to investment properties. Fixed rates provide predictability in monthly payments, which can be advantageous for long-term financial planning.
Spring EQ also allows you to borrow up to 95% of your primary home’s current value—more generous than most other lenders.
- See whether you qualify for a home equity loan and HELOC with one application
- Limited information available outside of its online application
- Funds take 21 business days, on average
| Rates (APR) | Starting at 9.50% |
| Loan amounts | $25,000 – $500,000 |
| Repayment terms | 5 – 30 years |
Pros and cons of using home equity for investment properties
Consider the benefits and drawbacks before you make a decision to use any financial product.
Pros
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Access to capital
Using home equity provides funds for purchasing or improving investment properties without depleting personal savings.
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Potential tax benefits
Interest on loans used for investment properties may be tax-deductible, depending on current tax laws and how the funds are used.
Cons
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Risk of foreclosure
The property used as collateral is at risk if loan repayments are not met.
-
Variable interest rates
HELOCs often come with variable rates, which can lead to fluctuating monthly payments.
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, and 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.
Alternative financing options
If a home equity loan or HELOC isn’t suitable, consider these alternatives:
- Cash-out refinance: Refinance your mortgage for a higher amount and use the excess funds for investment purposes. (Best cash-out refinance companies)
- Personal loan: Unsecured loans that don’t require collateral but may come with higher interest rates and shorter repayment terms. (Best personal loans)
- Investment property loan: Loans specifically designed for purchasing rental properties, which may offer terms better suited for investment purposes.
Using a home equity loan or HELOC to finance an investment property can be an effective strategy for expanding your real estate holdings. However, it’s crucial to understand the associated risks and eligibility requirements and to explore all available financing options to make an informed decision.
Recap of HELOCs or home equity loans for investment property
| Company | Product | Rating (0-5) |
|---|---|---|
| HELOC | ||
| Home Equity Loan |