Can you get a HELOC on an investment property?

How a HELOC on an investment property works

A HELOC is a type of revolving credit line that allows you to borrow against the equity in your home. You can borrow against your personal residence or an investment property you own.

With an investment property, lenders typically require more equity and a higher credit score to qualify, as most banks are less comfortable with equity loans against a home you don’t live in. Also, due to the risk of equity loans on investment properties, some banks, credit unions and other lenders don’t offer investment property equity loans or lines of credit.

When you open a HELOC, you can borrow up to a certain amount of the approved credit line, but you don’t have to use all of it. You’ll only pay interest on the amount withdrawn from your line of credit account, and the repayment schedule typically closely resembles repaying a mortgage loan.

Opening a HELOC on your investment property does place a second lien on the home. That means a failure to repay the HELOC could result in foreclosure on the home and repossession by the lender.

» MORE: Fixed-rate HELOCs: a cross between HELOCs and home equity loans

How to get a HELOC on an investment property

To obtain a HELOC on your investment property, you’ll first need to find a lender that offers one. While most banks and credit unions offer HELOCs on your personal residence, only some will extend credit on your investment property.

To find a lender, you’ll need to research local and online locations, such as:

• National banks
• Local and regional banks
• Credit unions
• Online lenders

You may also have luck working with a loan broker that can offer several types of loans from different companies.

To qualify for a HELOC on an investment property, you typically need a lower loan-to-value (LTV) ratio than a personal residence and proof of cash-on-hand for the investment property itself. You may also need to provide proof of income from tenants if this is a rental property.

Most lenders want to maintain at least an 80% LTV on your property, so you may need an appraisal first to determine the fair market value.

How to apply for a HELOC on an investment property

The process is similar to applying for a mortgage. It includes understanding lender requirements, preparing necessary documentation, and evaluating the potential benefits and risks, which will help you leverage your assets to align with your financial goals.

• Review your finances. You’ll need a good to excellent credit score and a solid income to open a line of credit on your investment property. Review your finances to ensure you qualify for the loan.
• Research lenders. Review several lenders to find the best one to fit your financial goals. Compare interest rates and terms to ensure you’re getting the best deal.
• Submit an application. Once you choose a lender, you’ll need to complete an application for a HELOC on your investment property. This includes submitting your personal (and business) information and the details of your current mortgage(s) on the property.
• Access funds. Once your HELOC has been approved, the funds should be available within about a week. You can draw from the funds at any time, up to the maximum amount approved on your line of credit.
• Don’t forget to make payments. Once you draw funds from your HELOC, don’t forget to start making regular payments. Your borrower's contract determines repayment terms, which increase or decrease based on the amount of funds you use from the HELOC.

» COMPARE: Best HELOC Lenders

Pros and cons of using a HELOC on an investment property

Using a HELOC on your investment property can help you pay for improvements or repairs on the property itself or give you cash to invest in another property. However, there are more limitations and restrictions on investment property HELOCs than on one in your personal residence.

Here are a few of the advantages and disadvantages of getting a HELOC on your investment property:

Alternatives to using a HELOC on your investment property

If you don’t want to jump through the hoops to borrow against your investment property but still need access to funds, there are a few alternatives to HELOCs to consider.

Personal residence HELOC

If you don’t want to leverage your investment property or don’t have enough equity to borrow against the home, you may consider a personal HELOC. This allows you to borrow against the equity in your personal home, which may be easier to obtain and have more favorable terms than an investment property HELOC.

Most banks and credit unions offer HELOCs, and you may be able to apply for one completely online.

Cash-out refinance

Another option to access the equity in your investment property is a cash-out refinance. This is the process of getting your investment property appraised and refinancing based on that higher home value.

It allows you to borrow more than you owe on the home and “cash out” the difference. This is a simpler way to access cash instead of juggling multiple mortgages or loans on your property.

Personal loan

If you don’t want to borrow against your home or investment property, you may be able to get funding through a personal loan. It’s typically unsecured, meaning there’s no collateral, and no liens are placed on your property.

You do need a good credit score and income to qualify for a personal loan. Additionally, rates and payments are usually higher on these types of loans.

» MORE: Reverse mortgage vs. home equity loan vs. HELOC

Bottom line

Getting a HELOC on your investment property can be a great way to tap into the equity you’ve built, but it’s not always the best path forward. If you have a plan for the funds to improve the home or invest in other properties, it can be worth the cost to open a HELOC and use the funds. But if you simply want more spending money, it might not be the best idea.

If you want to open a HELOC on your investment property, it’s a good idea to compare rates and terms with multiple lenders to find the best deal. Just make sure you’re prepared to make all payments on time, or your lender could foreclose on your property.