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Real estate investors looking to scale their portfolios quickly often face a common challenge—finding flexible, scalable financing. Two of the most powerful tools for this are the Home Equity Line of Credit (HELOC) and the Debt Service Coverage Ratio (DSCR) loan. When used together, these financing options can provide unmatched leverage, cash flow flexibility, and portfolio growth potential. In this guide, we’ll explore how to effectively combine HELOCs and DSCR loans for maximum leverage.
Why Combine HELOCs and DSCR Loans?
HELOCs and DSCR loans each offer unique benefits, but when combined, they create a highly effective strategy for rapid portfolio growth. Here’s why they work so well together:
- Access to Immediate Capital: HELOCs provide quick, reusable access to your property’s equity, allowing you to fund down payments or renovations without lengthy underwriting processes.
- Cash Flow Flexibility: DSCR loans are based on the property’s income, not personal income, making them ideal for investors who want to keep personal finances separate. This also means no debt-to-income (DTI) ratio restrictions, which can be a roadblock for investors with multiple properties.
- Scalability: With a HELOC, you can recycle your equity, while DSCR loans allow you to continue scaling without being limited by your personal income capacity.
- Faster Approvals: Both options typically offer faster closings than traditional loans, making it easier to capitalize on opportunities quickly.
How to Use HELOCs and DSCR Loans Together
1. Use a HELOC to Fund Your Next Investment
A HELOC is a revolving line of credit secured by the equity in your existing properties. It’s perfect for:
- Covering down payments on new properties.
- Funding property renovations to increase rental income.
- Managing unexpected expenses without dipping into reserves.
Example: An investor with $200,000 in equity can open a $150,000 HELOC and use a portion of that as a down payment on a new rental property, setting the stage for a DSCR loan.
2. Leverage DSCR Loans for Long-Term Stability
Once you’ve acquired a property using HELOC funds, you can refinance it with a DSCR loan. This locks in long-term, fixed-rate financing without tying up personal income, allowing you to pay off the HELOC and reset it for your next deal.
Example: After purchasing a property using a $100,000 HELOC for the down payment, the investor refinances with a DSCR loan, securing a long-term, stable payment based on the property’s rental income. This allows them to reuse their HELOC for the next property.
3. Repeat the Process for Portfolio Growth
This “equity recycling” strategy can be repeated to rapidly grow a real estate portfolio without running into conventional lending limits.
Example: An investor uses a $150,000 HELOC to acquire three properties over a two-year period, refinancing each with a DSCR loan once stabilized. This approach enables rapid scaling without excessive out-of-pocket costs.
See What You Qualify ForBenefits of This Combined Strategy
- Speed and Flexibility: Quickly seize opportunities without waiting for traditional loan approvals.
- Higher Leverage: Use the same equity multiple times to scale faster.
- Lower Personal Financial Risk: Keep personal income separate from investment debt.
- Tax Benefits: Interest on HELOCs can often be tax-deductible if used for investment purposes (consult a tax advisor).
Potential Risks and How to Mitigate Them
While this strategy is powerful, it’s not without risk. Consider these potential downsides:
- Rising Interest Rates: HELOCs often have variable rates. Consider refinancing into a fixed-rate DSCR loan when possible.
- Overleveraging: Be cautious about taking on too much debt. Ensure each property’s cash flow can comfortably cover its DSCR loan payments.
- Market Fluctuations: Property values can decline, reducing available equity and increasing risk.
Mitigation strategies include keeping a solid cash reserve, maintaining a healthy DSCR, and choosing properties with stable, high-demand rental markets.
FAQs
Can I use a HELOC from my primary residence to fund rental investments?
Yes, but be aware that you’re putting your primary home at risk if the investment doesn’t perform as expected. Many investors prefer using equity from existing rental properties instead.
Are DSCR loans available in all states?
Most states allow DSCR loans, but guidelines can vary. Be sure to confirm with your lender.
What credit score do I need for a DSCR loan?
Typically, a minimum of 640-680, but better rates are available with higher score
Read Next
For more on these strategies, check out:
- How to Use a HELOC to Scale Your Rental Portfolio Fast
- Complete Guide to Investor HELOCs
- Understanding DSCR Ratios: What Real Estate Investors Need to Know
Take the Next Step
Ready to maximize your leverage? Get started today with a personalized DSCR loan consultation or apply for a HELOC to unlock your equity. Get matched with a lender here.
Unlock Your Home Equity with Figure
- 100% online application—no in-person appraisal needed
- Pre-qualify in minutes; funding in as few as 5 days
- Borrow up to $400,000 with flexible terms
- Soft credit check—no impact on your score
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.
