Getting a home equity line of credit (HELOC) to help pay for renovations on your personal property is fairly straightforward, but what if you’re a real estate investor and want to access extra funds for a property you rent out? Keep reading to learn how HELOCs on rental properties work, how to get one and what it can be used for.
- It is possible to open a HELOC on a rental property, just like you can on your primary residence.
- However, not all lenders offer HELOCs on investment properties because, in the event of financial hardship, the owner is more likely to prioritize their primary home over a rental property.
- As a result, qualifying for a HELOC on an investment property may be more challenging and requires a higher credit score than for a HELOC on your primary residence.
How Do HELOCs Work?
A HELOC allows you to tap into the equity you’ve acquired in your home to help pay for home improvements and renovations. Mathematically, the amount is the current market value of the property minus the outstanding balance on the primary mortgage. A HELOC carries less risk for lenders than other types of loans because the home is used as collateral in the case of a default and, therefore, comes with competitive interest rates for the borrower.
A HELOC is made up of two phases: A draw period that typically lasts five to 10 years and a repayment period that lasts between 10 and 20 years. During the draw period, you can use the line of credit to borrow cash, repay it, and borrow more, much like an ordinary credit card. You only have to pay back what you spend, plus interest. During the repayment phase, you can no longer withdraw funds and start paying down debt in the form of monthly principal and interest payments. To learn more about how HELOCs work, take a look at this article.
If you're a real estate investor, you may be wondering if it's possible to take out a HELOC on a rental property. The short answer is yes. However, there's a lot to consider before applying.
HELOCs on an Investment Property
A HELOC on an investment property functions in the exact same way as a HELOC on a personal property, but the process of acquiring one can prove much more challenging due to the increased risk for the lender.
Not all lenders offer HELOCs on rental properties because the risk of default is much higher than with personal properties. In the event of a financial hardship, the borrower is much more likely to prioritize paying the loan on their primary property before paying down debt on a secondary property, whether that’s in the form of a HELOC or mortgage. In the case of a foreclosure, the sale proceeds would first go toward paying off the mortgage before any other liens on the property, such as a HELOC.
The best way to find a lender that offers investment property HELOCs is to leverage your existing network of real estate investors who have already qualified for a HELOC. Online forums and real estate investing groups may also be helpful.
Due to the increased risks discussed above, rental property HELOCs are more expensive and come with stricter requirements than for HELOCs on primary residences. The interest rate is typically higher and the borrower must shell out cash for an additional appraisal and title search fees, among other costs.
To qualify, you’ll need a FICO credit score of 720 or above, versus just 620 for a HELOC on a personal property. The lender will also consider your combined loan-to-value ratio (CLTV) and debt-to-income ratio (DTI), both of which will need to be low.
Unlike a HELOC on a personal property, lenders oftentimes require the borrower to wait a full year after purchasing the rental property before being eligible for a HELOC so they can prove that they have trustworthy tenants that will make payments on time and provide sufficient cash flow. The lender may also require you to have a large cash reserve on hand that’s equivalent to 18 to 24 months of payments.
What Can an Investment Property HELOC be Used For?
A HELOC on an investment property can be used in the exact same way as a HELOC on a personal property. They are most commonly used to pay for renovations and improvements to the property, but can also be used to consolidate high-interest debt, purchase a new property, or anything else you'd like. However, experts advise that HELOCs be used for investments that will grow your wealth over time, rather than for purchases that will not, such as cars or vacation trips.
Currently Aven’s product is not available for rental or investment properties. Are you considering applying for a HELOC for your primary residence? With Aven's HELOC Card, you can get approved in as fast as 15 minutes and have the card in your hands in a few days. Read more to learn whether it's what you're looking for!