Using a HELOC on an Investment Property: What Investors Must Know

For savvy real estate investors, equity is a powerful tool waiting to be leveraged. Tapping into the equity of a rental property with a HELOC can provide flexible capital for repairs, renovations, or even a down payment on your next acquisition. However, getting a HELOC on an investment property is a different ballgame than on a primary residence.

Key Differences for Investment Property HELOCs

Lenders view loans on non-owner-occupied properties as higher risk, which is reflected in their stricter requirements:

• Lower Loan-to-Value (LTV) Ratios: While you might get up to 85% LTV on your primary home, lenders typically cap HELOCs on investment properties at a much lower ratio, often between 70% and 75%.
• Higher Interest Rates: Expect the interest rate (both the index margin and any fixed-rate options) to be higher than for a primary residence HELOC to compensate the lender for the increased risk.
• Stricter Underwriting: The approval process is more rigorous. Lenders will scrutinize not just your personal finances but also the financial performance of the property.
• Higher Credit Score Requirements: You will likely need a higher credit score, often 720 or above, to be seriously considered.

Strategic Uses for an Investment Property HELOC

• Renovate and Increase Rents: Fund capital improvements on the rental property itself, allowing you to justify higher rents and increase its value.
• Down Payment on a New Property: A HELOC is an excellent way to source a down payment for your next investment property without having to sell existing assets.
• A Flexible Capital Reserve: Use it as a ready source of cash for large, unexpected repairs (like a new roof or HVAC system) on any of your properties, preventing you from draining your personal savings.

Finding a Lender

Not all lenders offer HELOCs on investment properties. You may need to look beyond the big national banks and explore options with:

• Local and Regional Banks: They often have more flexibility in their lending guidelines and a better understanding of the local real estate market.
• Credit Unions: Known for competitive rates, some credit unions are active in this space.
• Portfolio Lenders: These are banks that hold the loans they originate on their own books rather than selling them. They often have more discretion and can create more customized loan products.

When you inquire, be sure to state upfront that the HELOC is for an investment property to save time.