Investment properties are a great way to put your money to work for you. And if you have enough equity in your home, you might want to think about taking out a home equity line of credit (HELOC) on an investment property.
While getting a HELOC on an investment property is possible, it’s not quite the same as getting a HELOC on your primary residence. Here’s how you can use a HELOC for an investment property and what you need to qualify.
How to Get a HELOC for an Investment Property
A HELOC is a revolving line of credit that you can use any time you need to make home-related purchases or improvements. HELOCs aren’t as common on investment properties, however, so not many lenders offer this product. But for those that do, credit requirements can be higher compared to one for your primary residence, with investment properties requiring at least a good or excellent credit score.
Other potential requirements include:
- A loan-to-value (LTV) ratio up to 80%
- A few months worth of cash reserves in your bank account
- Proven income from tenants (if used as a rental property)
Since each lender is different, you’ll want to ask your potential lender what their requirements are for a debt-to-income (DTI) ratio, appraisals and how much equity you need in your investment property.
Lenders that offer a HELOC on an investment property
While not all lenders offer HELOCs on investment properties, some do. Here’s where to look:
- Traditional banks
- Local banks and credit unions
- Loan brokers
- Online lenders
Is Using a HELOC for an Investment Property Tax Deductible?
It depends on what you use that HELOC for. If you take out a HELOC on your investment property and use those funds for home-related expenses, you can write those expenses off on your taxes. But if you used a HELOC for other expenses, like debt consolidation or tuition, it can’t be deducted from your taxes.
Alternatives to Using a HELOC for an Investment Property
If you don’t qualify for a HELOC on your investment property or you can’t find a lender for your needs, you have other options when it comes to tapping your home equity.
Home equity loan
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A home equity loan (HEL) is similar to a HELOC, but instead of a revolving line of credit, you’ll get your money in one lump sum. If you know how much you need to borrow and can get it all at once, this might be the right option for you. But like HELOCs, HELs might not be as widely available as some other options.
A cash-out refinance replaces your current mortgage with a new one, but you cash out on the equity you’ve earned. Typically, you’ll need to have about 20% equity left in the home to refinance, although that figure might vary by lender.
Since it’s a new loan, your terms and interest rate will change. For instance, you can lengthen the loan terms to have lower monthly payments or shorten them to pay off the loan sooner. Don’t forget about closing costs, which can cost you anywhere from 2% to 5% of the new loan amount.
If you can secure a lower interest rate than what you have now, a cash-out refinance for your investment property might be worth it. But if you don’t have enough equity in your home, can’t afford the closing costs or don’t have solid credit to qualify—a cash-out refinance might not be worth it.
A personal loan can be used for almost anything. Most personal loans are also unsecured, which means you don’t need to put up collateral to get a loan. This is attractive to borrowers who are worried they might lose their investment property if they fall behind on payments.
Since there isn’t any collateral to secure the loan, lenders only have your credit history to determine your creditworthiness. So personal loans tend to have higher interest rates than HELs, HELOCs and cash-out refinancing.
Loan terms might be shorter compared to other options, as well. HELOCs and HELs can go up to 30 years, similar to mortgages. Most personal loan terms, however, range from one to five years—but that length varies a lot by the lender.
If you’re thinking about getting a HELOC for your investment property, you might qualify with a few select lenders. But with stringent requirements for credit scores, DTI and a hefty amount of cash reserves, you might want to consider the alternatives.
If you’re still struggling to qualify for a loan or other borrowing options, take some time to improve your credit score, pay off some outstanding debt or increase your cash reserves. It might take some extra work, but you can get a HELOC—or another type of loan—to fund your investment property.