How to Get a HELOC on a Rental Property

Key Takeaways

• A Home Equity Line of Credit (HELOC) is a flexible line of credit backed by the value of your rental property.
• Acquiring a HELOC for rental properties involves stricter credit and equity requirements compared to primary residence HELOCs.
• Higher interest rates are typical due to perceived lender risks, which are influenced by financial history and the real estate market.
• Besides HELOCs, options like cash-out refinancing, credit cards, and personal loans offer different means to access funds, each with unique benefits and considerations.

What is a HELOC for Rental Property?

A Home Equity Line of Credit, or a HELOC, works as a line of credit backed by the value of your property. Instead of using it to finance your units, you can use the funds for whatever your business needs. Typically, they’re used for real estate-related costs like renovations, repairs, and even paying off the first mortgage of a property.

Unlike a HELOAN (Home Equity Line of Credit), which provides borrowers with a lump sum of money, HELOCs give them a line of credit. You’ll have what’s called a draw period, which normally spans 5–10 years, wherein you’ll be able to pull out and use the approved funds as needed. The appraised value of your property will set the “credit limit” of your HELOC since it serves as collateral.

After the draw period, borrowers then repay whatever outstanding balance they owe to the lender. Repayment periods vary, but they tend to begin very soon after the draw period expires and can last up to 20 years.

Can You Get a HELOC on Rental Property?

Yes! They’re a form of borrowing that many investors utilize routinely. Obtaining a HELOC for rental property purposes can give you consistent access to the extra cash you need for various expenses. Most commonly, HELOC funds are used for paying off first and second mortgages, financing renovations, and purchasing additional rental properties.

However, getting a HELOC for a rental isn’t the exact same as getting one for a primary residence. Since you’ll be assuming a different kind of debt, lenders will have stricter requirements. For a rental HELOC, you’ll be expected to have a higher credit score, lower debt-to-income ratios, and substantial equity to back it up.

How to Get a HELOC for Rental Property

When acquiring a HELOC on rental property, you can expect the typical steps required of the loan-borrowing process up until closing. It’ll look like the following:

1. Appraisal. Lenders will need to know the value of your collateral property to price the loan properly, so you’ll need to prepare home equity questionnaires and visits from professional appraisers to do so.
2. Weigh your options. You’ll want to get quotes from a few different lenders to find the best deal. There are variable interest rates and terms, so read the fine print and find which opportunity will work best for your business’s needs.
3. Apply. Decide on your top pick and complete the requirements of their application. You’ll need to provide personal and professional details, spanning from your social security number to your portfolio and property values.
4. Closing. Once your application is accepted, which could take days or weeks, you’ll begin the closing process. Legal documents will need to be signed, and some fees will likely be due. Note that your funds likely won’t be accessible right away. Expect a rescission period first—typically 3 days—where you might have the opportunity to back out of the loan should things go awry.
5. Draw period (5–10 years). Once the draw period starts, you’ll be able to use your HELOC funds. There aren’t typically many spending restrictions, but your lender will inform you if any exist. During this time, you’ll have to cover a minimum monthly payment, which pays off your HELOC’s interest. You can elect to pay more than this, which will help you slowly chip away at the balance owed.
6. Repayment period (around 20 years). After the draw period comes the repayment period, where you’ll focus on paying off both the principal owed and the interest accrued in monthly installments.

Of course, each step of the HELOC process will vary depending on your lender of choice and their terms. Before signing any legal paperwork, make sure that you understand and agree to every aspect of your HELOC.

Pros of a HELOC on Rental Property

Having a HELOC for rental property rather than using another method of lending does have its advantages and perks. If you’re not familiar with them, we’ll discuss a few of the benefits below.

Extra Funds

Most obviously, rental property HELOCs are an avenue of borrowing large amounts of money. Unlike credit cards and various personal loans, you can borrow thousands of dollars at a time, and you won’t be expected to make substantial repayments for years. This is a great option for rental property owners who are in need of business funds but may not have it in the moment.

Only Borrow What You Need

HELOCs provide you with instant access to funds as you need them. So, rather than being handed a large sum of money to budget out, you’ll be able to pull funds as you go (typically in the form of a card or a checkbook). Once the repayment period hits, you’ll be tasked with paying back only the funds you used and interest.

Improving Your Investments

The funds made available through HELOCs are typically used to better rental property investments in some way. Through renovations, added amenities, repairs, property improvements and more, investors can simultaneously better their investments and increase their value. Plus, HELOCs can be used to consolidate other rental-related debts: paying off multiple balances or mortgages can lower monthly payments and total accrued interest, saving you money in the long run.

Cons of a HELOC on Rental Property

Like most things, there are a few risks you take on when acquiring a rental property HELOC. You’ll need to understand exactly what you’re getting into before making any big decisions, so we’ve outlined a few potential cons below.

Harder to Qualify

For starters, it’s generally more difficult to get approved for a rental property HELOC as opposed to one for a primary residence. You’ll be expected to have great credit scores, as well as a lower debt-to-income ratio. Lenders will also likely want to see a considerable amount of equity in the form of cash and other assets to determine your trustworthiness and business’s success.

Higher Interest Rates

Since rental property HELOCs are typically perceived by lenders as riskier, interest rates tend to be higher on them. Like other types of borrowing, this all depends on the borrower’s financial history and projected future, as well as the state of the real estate market. Likewise, rates may be variable or invariable, which can make all the difference in the long run.

Potential Restrictions

Some HELOCs have spending restrictions, meaning you must limit your fund usage to business-related expenses only. Others don’t, and will let you use the funds for medical bills, auto loans, property improvements, and everything in between. Make sure that the lender you choose has restrictions (or lack thereof) that align with your needs.

Other Options

Of course, HELOCs aren’t the only way for investors to get access to extra funds. There are a variety of loan and credit options available, a few of which we’ll outline below.

Cash-Out Refinance

A cash-out refinance is another way to access your property’s worth. Like HELOCs, this method of borrowing uses your property’s value as the basis for the loan amount. The major difference is that rather than a line of credit, a cash-out refinance (as the name suggests), gives investors a lump sum of cash all at once. Normally, cash-out refinancing is used to pay off the preexisting balance of a first mortgage or something similar.

Credit Cards

Credit cards are one of the most popular ways to loan money for any purpose. They’re straightforward too—once borrowers are approved for cards, their credit limit is set, and they may begin borrowing right away. This varies depending on the type of card, each user’s financial history/information, and a number of other factors. Business credit cards are good options in a pinch, though the funds available are often quite limited, and their APRs (Annual Percentage Rates) tend to hover around 20%, which can result in some hefty accrued interest.

Personal Loans

Another option for borrowing is acquiring a personal loan. These can be secured or unsecured, meaning they are either backed by some sort of collateral (like a primary residence, personal assets, etc.), or they are not, respectively. Without collateral, unsecured personal loans tend to come with higher interest rates, whereas secured loans are typically more forgiving.

Primary Residence HELOC

A HELOC on a primary residence functions relatively the same as a HELOC on rental property. However, using personal property as collateral for a loan can be risky, so caution is advised when going this route. There are fewer restrictions on primary residence HELOCs, as they tend to be easier to acquire. Plus, investors will be able to spend the funds more freely, as there are not as many spending regulations on primary residence HELOCs.

Conclusion

The field of investment property works often in slow gains and calculated steps, and HELOCs are all about securing long-term financial returns. Having access to the large line of credit they provide can give you the cash needed to secure your rental property’s future. If you’re seriously considering a HELOC for rental property, do your research and pick whatever lender is the right choice for you.

FAQs

Can you get a HELOC on rental property?

Yes, you can obtain a HELOC on rental property. It's a strategic financial tool used by investors to access funds for costs like renovations and paying off first and second mortgages.

How to qualify for a HELOC on rental property?

Qualifying for a HELOC on your rental property involves meeting stricter lender requirements than for primary residence HELOCs, including higher credit scores, favorable debt-to-income ratios, and substantial equity.

What are the benefits of a HELOC on rental property?

A HELOC on rental property provides access to extra funds for property improvements, consolidating debts, and potentially enhancing property value and rental yields.

What risks are associated with a HELOC on rental property?

When considering a HELOC, be aware of higher interest rates and the need for solid financial standing. The real estate market impacts lenders' perception of risk, influencing HELOC terms.

What alternatives exist to a HELOC on rental property?

Consider cash-out refinancing, personal loans, or primary residence HELOCs for different borrowing options that meet your investment needs.