Can You Get a HELOC on an Investment Property?

Can You Get a HELOC on an Investment Property?

Yes, you can get a HELOC on an investment property, but it's generally harder to qualify and not every lender offers them. But if you have enough equity, an investment property HELOC could give you access to funds you can use for almost anything, from replacing an HVAC unit to adding square footage.

The structure works much like a HELOC on a primary residence. It starts with a draw period, typically 10 years, where you can borrow as needed up to your credit limit like a credit card, and make interest-only payments. After that period ends, the line closes and you enter the repayment phase, where you'll pay back both principal and interest over the next 10 to 20 years. Most HELOCs come with a variable interest rate, so your monthly payment can change based on market conditions.

Learn more: How to Start Investing in Real Estate

Requirements for Getting a HELOC on an Investment Property

It's generally harder to qualify for a HELOC on a rental property because lenders see it as riskier. If you suffer a financial setback, they assume you'd prioritize making payments on your primary home over a property you don't live in.

Consequently, requirements for investment property HELOCs tend to be stricter than those for primary residences.

• Credit score: You'll need a good credit score—typically at least 720—to qualify. Some lenders may accept a lower score, but typically, the higher your score, the better.
• Debt-to-income ratio (DTI): Lenders usually want your DTI below 40% or 50%, depending on the lender. That means your monthly debt payments (including any mortgage you have on the property) shouldn't take up more than half of your gross income, or 40% to be safe.
• Loan-to-value (LTV) ratio: LTV measures how much you owe on the property compared to what it's worth. For an investment property HELOC, lenders typically cap the allowable LTV at 80%.
• Home equity: Generally, you'll need enough equity in the property to ensure at least 20% remains after drawing the full HELOC amount.
• Cash reserves: The purpose of cash reserves is to demonstrate to lenders you can keep making payments even if the property sits vacant and isn't bringing in rent. Most lenders want to see enough savings to cover at least six months of mortgage payments.

Learn more: What You Need to Know About HELOCs

Pros and Cons of HELOCs on Investment Properties

A HELOC on an investment property can offer funding for upgrades or future investments, but there are risks and limitations to consider first.

Should You Get a HELOC on an Investment Property?

A HELOC on a rental or investment property isn't the right option for everyone. But in certain situations, it can be an effective way to draw from your equity to achieve your goals.

• You're renovating or improving the investment property. You might utilize a HELOC if you want to make upgrades that boost the property's value or tackle repairs between tenants.
• You're financing another investment property. A HELOC could give you the down payment to purchase and improve another rental property without draining your savings or refinancing your current home loan.
• You're capitalizing on a time-sensitive opportunity. A HELOC can give you quick access to cash when you need to act quickly, such as if your ideal investment property hits the market or a contractor offers a discount for upfront payment.

How to Get a HELOC on an Investment Property

The process of getting an investment property HELOC is similar to a standard HELOC, but lenders take a harder look at your finances, the property's equity and other factors. Follow these steps to help you prepare and improve your chances of approval.

1. Know the equity requirements. Before you get started, check to make sure you have enough equity—typically at least 20%—to meet the lender's minimum. That way, you won't waste time applying if your equity falls short of the threshold.
2. Find lenders that offer investment property HELOCs. Not as many lenders offer HELOCs on rentals and investment properties, but plenty still do. Start with your mortgage lender or bank, then shop around and compare offers from other institutions to find the best terms.
3. Improve your credit score before applying. Check your credit score and take steps to raise it if it's below your potential lenders' threshold. While you're at it, make sure your DTI ratio falls below your lender's limit, usually under 40% to 50%. One of the quickest ways to do both is to pay off credit card balances a few months before applying.
4. Ask about interest rates. Your HELOC will likely have a variable rate, so ask your lender how often rates adjust and what the rate caps are. This will help you get some predictability in your budgeting.
5. Apply and close. Once you've chosen the best lender, fill out the application to start the process. If approved, you'll review the final documents at closing, sign if everything looks right and then get access to your credit line.

Alternatives to HELOCs on Investment Properties

Taking out a HELOC on your investment property may help you reach your financial goals, but if not, these alternatives may be worth exploring.

• Personal loan: If you'd rather not risk your property as collateral, a personal loan might allow you to borrow as much as $100,000. Keep in mind, however, an unsecured personal loan will typically come with a higher interest rate than a secured HELOC, and you'll need good credit to qualify for larger amounts.
• Small business loan: If you own and manage your rental through your own company, a small business loan may be an option. You'll likely need a business plan to qualify, and you may need to provide both a personal and business credit score.
• Home equity loan: A home equity loan on an investment property is another way to tap into equity, but like their HELOC counterparts, these loans aren't as widely available as they are for primary homes. These installment loans have fixed interest rates, and the funds are disbursed as a single lump sum.
• Cash-out refinance: A cash-out refinance lets you replace your current mortgage with a larger one and take the difference in cash. For investment properties, lenders typically limit the new loan to 70% to 75% of the home's value.

Solidifying Your Credit May Improve HELOC Approval Odds

Getting a HELOC on an investment property is possible, but the requirements are more stringent than for primary homes. If you qualify, it can help you access equity to improve your rental's value, increase income potential or purchase another investment property without risking your primary residence.

You'll need good credit to qualify and secure better terms. Consider checking your free credit report through Experian to see what lenders see when they review your credit. If necessary, you can take steps to resolve any issues found on your report that could be hurting your score.