Real estate investors are always looking for smart ways to leverage their property equity. One of the most flexible financing options available is the Home Equity Line of Credit (HELOC). While HELOCs are typically associated with primary residences, many investors wonder if they can tap into the equity of their rental properties. The good news? Yes, you can—but it’s a bit more complicated than a standard HELOC on a primary residence. Here’s what you need to know.
Understanding HELOCs for Rental Properties
A HELOC is a revolving line of credit secured by the equity in a property. Unlike a traditional mortgage, which gives you a lump sum, a HELOC allows you to borrow, repay, and borrow again, similar to a credit card. This makes it an excellent option for real estate investors who need quick access to capital for repairs, upgrades, or even new property purchases.
However, getting a HELOC on a rental property is more challenging than on a primary home. Here’s why:
- Higher Risk for Lenders: Rental properties are considered riskier because tenants can default, vacancy rates can fluctuate, and maintenance costs can be unpredictable.
- Stricter Requirements: Lenders typically require a higher credit score, more equity, and a lower loan-to-value (LTV) ratio compared to primary residences.
- Higher Interest Rates: Expect higher interest rates than those available for primary residence HELOCs, reflecting the added risk.
Key Requirements for a Rental Property HELOC
To qualify for a HELOC on a rental property, you’ll typically need to meet the following criteria:
- Strong Equity Position: Most lenders require at least 25-30% equity in the rental property.
- High Credit Score: A minimum FICO score of 700 is often required, though some lenders may accept scores as low as 680.
- Stable Rental Income: Lenders will assess your property’s cash flow to ensure it can cover the HELOC payments.
- Solid Debt-to-Income (DTI) Ratio: While some DSCR lenders may be more flexible, traditional HELOC lenders often require a DTI below 45%.
- Property Condition: The property must be in good condition and fully tenant-occupied to qualify.
Pros and Cons of Using a HELOC on a Rental Property
Pros:
- Flexible Access to Capital: Use funds as needed for renovations, repairs, or new acquisitions.
- Interest-Only Payments: Many HELOCs offer interest-only payment periods, boosting cash flow.
- Revolving Credit Line: Borrow, repay, and re-borrow without reapplying.
- Tax Benefits: Interest may be tax-deductible if used for investment purposes (consult your tax advisor).
Cons:
- Higher Interest Rates: Typically higher than primary residence HELOCs.
- Variable Rates: Payments can increase if interest rates rise.
- Risk of Over-Leverage: Borrowing against equity can strain your finances if rental income decreases.
- Property Must Cash Flow: Lenders will assess your ability to cover the HELOC payments.
How to Choose the Right Lender for a Rental Property HELOC
Not all lenders offer HELOCs on rental properties, and those that do often have strict requirements. When comparing options, consider:
- LTV Limits: Some lenders cap LTV for rental properties at 70-75%, while others may go higher.
- Fees and Costs: Watch out for origination fees, annual maintenance fees, and early closure penalties.
- Interest Rates: Compare rates carefully, as they can vary significantly.
- Flexibility and Terms: Look for lenders that offer interest-only payment options or flexible draw periods.
For a streamlined digital HELOC experience, consider modern lenders like Figure, known for fast approvals and competitive rates on investor-focused HELOCs. You can learn more about Figure’s HELOC options here.
Final Thoughts: Is a HELOC on a Rental Property Right for You?
A HELOC can be a powerful tool for scaling your real estate portfolio, but it’s not without its risks. Make sure your rental property cash flows reliably and you have a clear plan for how you’ll use the funds before committing.
Ready to take the next step? Get matched with a lender to explore your HELOC options today.
FAQs About Rental Property HELOCs
Yes, a HELOC can provide the down payment or full purchase price for another investment property if you have enough equity.
Possibly, if the funds are used for investment purposes, but always check with a tax advisor
It’s possible, but more challenging. Some lenders may require personal guarantees or additional paperwork.
If your property value declines, your lender may freeze your HELOC or reduce the available credit limit.
Read Next:
- How to Use a HELOC to Scale Your Rental Portfolio Fast
- Leveraging HELOCs for Real Estate Investment Success
- Complete Guide to Investor HELOCs
Looking for more financing options? Check out our guide to Real Estate Investor Financing.
Our advise is based on experience in the mortgage industry and we are dedicated to helping you achieve your goal of owning a home. We may receive compensation from partner banks when you view mortgage rates listed on our website.
