Can You Get A HELOC On An Investment Property? (2024)

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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

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.

Cash-out refinance

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.

Personal loan

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.

Bottom Line

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.

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Can You Get A HELOC On An Investment Property? (2024)

FAQs

Why can't I get a HELOC on an investment property? ›

It's Harder To Find Lenders

Most lenders prefer to offer lending products where there's a high likelihood the borrower will repay the loan. For that reason, many lenders – including Rocket Mortgage – don't offer HELOCs on rental properties.

Is a HELOC a good idea for an investment property? ›

HELOC funds can be used for pretty much anything. This includes down payments on other properties. Using a HELOC from a current investment property to purchase a second property could be a smart way to leverage your assets, increasing your income while not impeding your cash flow.

Can you write off a HELOC on a rental property? ›

Most expenses relating to a home used as a rental property are tax deductible and the interest portion of your HELOC might be included, depending on how you use the funds.

Can you get a second mortgage on an investment property? ›

You can use the funds to purchase investment properties, consolidate personal debts, and pay for other significant expenses that you would not be able to afford otherwise. You may take a second mortgage on an investment property, and it does not have to originate from your primary place of residence.

Who doesn't qualify for a HELOC? ›

Another factor that lenders pay close attention to in the absence of regular income is an applicant's credit score. If you have a history of falling behind or defaulting on other debts, lenders may be hesitant to approve you for a HELOC. A credit score of 670 or above with no late payments is a good credit goal to set.

Can I use a HELOC to put a down payment on an investment property? ›

You can even use it to make a down payment on a second home, such as a lake cottage or an investment property. Looking to tap your primary home's equity for a down payment on another home? It's important to understand how HELOCs work when deciding whether they're the right choice for you compared to other loan options.

When should you not do a HELOC? ›

Experts advise against using loan money to buy stocks—you can possibly lose the money and be stuck with a loan you can't afford to repay. You should also avoid using a HELOC to invest in luxuries like vacations, since the money will be gone quickly without an asset to sell if you end up needing the money down the road.

Is HELOC riskier than mortgage? ›

A mortgage will usually have a lower interest rate than a home equity loan or a HELOC. That's because a first mortgage takes first priority for repayment in the event of a default and therefore represents a lower risk to the lender than a home equity loan or a HELOC.

Can you get a HELOC on a paid off property? ›

It is possible to take out a HELOC or home equity loan on a paid-off house, but deciding whether you should do so likely depends on your financial situation and goals. Borrowing from your home can come in handy if you need the funds, but it comes with a cost—the risk of losing your home.

Can I do a cash out refinance on an investment property? ›

To qualify for a cash-out refinance on an investment property, you'll need to have sufficient equity in your home. Equity is the difference between the current value of your home and your outstanding mortgage balance. Lenders typically require a minimum of 20–30% equity in the property to approve a cash-out refinance.

Is interest on a line of credit tax deductible for rental property? ›

As a general rule, you may deduct interest on money you borrow for a business or investment activity, including being a landlord.

What is the 2 rule for investment properties? ›

What Is the 2% Rule in Real Estate? The 2% rule is a rule of thumb that determines how much rental income a property should theoretically be able to generate. Following the 2% rule, an investor can expect to realize a positive cash flow from a rental property if the monthly rent is at least 2% of the purchase price.

How to pull money out of rental property? ›

A cash-out refinance (often referred to simply as a cash-out refi) for rental property works the same way refinancing does for your primary residence. You take out a new loan for your current property value, pay off the existing loan balance, and keep the difference in cash.

Is a second home considered investment property by IRS? ›

And, you can also generate income by renting a second home to third parties for part of the year. The property will meet the definition of a second home, rather than an investment property, as long as the owner lives there for a number of days equal to at least 10% of the days the home is rented or 15 days a year.

Why are lenders not offering HELOC? ›

During the early stages of the 2020 financial crisis, several big banks stopped offering HELOCs, citing unpredictable market conditions as the reason.

Why can't i get a HELOC loan? ›

Credit scores aren't everything. Lenders will also want to confirm you have adequate income to make interest and principal payments on your HELOC and your existing debts. You may struggle to get approved if your income is too low, sporadic or if your job is relatively new.

Does a HELOC have to be your primary residence? ›

HELOCs are available for both primary residences and rental properties and generally work the same way. However, there are some key differences with a rental property HELOC that investors should understand.

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