A home equity line of credit, or HELOC, is a line of credit that you can use against the existing equity in your home. Most lenders will allow you to leverage up to 75% of your current home value. Check with a lender to find out what you qualify for. Let’s jump on how you can purchase an investment property with a HELOC.
Your home is worth $150,000, and you owe $75,000 on the current loan. Let’s use 75% of the current home value in this example. A lender might use a different value based on your credit and DTI(Debt to Income ratio). Reach out to a lender to get an idea of what you can expect.
75% of $150,00 = $112,500
$112,500 – $75,000 = $37,500
In this example, you have the potential of up to $37,500 in equity for a HELOC.
Why Would You Purchase An Investment Property With A HELOC?
A cash-out refinance isn’t the best option for you. Cash-out refinances are also a commonly used tool for real estate investors. You might already have a great interest rate and don’t want that to change with a refinance. You come across a deal but don’t have the funds to make a move on it. It will take you years to be able to save the money to purchase a rental. If you have equity in an existing property, this can be a great way to put that money to work.
How do You Get A HELOC?
Obtaining a HELOC is similar to taking out a personal loan. Work with a bank or lender to get approved. Once approved, you’ll have an appraisal done on your property to determine the value. I got in touch with the same bank that we have our checking and savings accounts to get our HELOC. Shop around to find the best rate.
What Are Some Options Other Than A HELOC
- Utilizing a cash-out refinance to pull home equity out in cash.
- Saving up for a down payment with cash of your own. This can take quite of bit of time in an expensive market.
Downsides To A HELOC
- The bank could take the property if you don’t make the payments. Be sure that you have a solid plan to make the payments on time.
- You may end up with a variable interest rate on your HELOC. Your payments may go up due to the variable rate.
- Interest-only payments during the draw period mean that you aren’t paying towards the principle until later.
Upsides To Using A HELOC
- It’s a line of credit that you can reuse as you pay the balance down.
- This allows you to leverage your home equity instead of leaving that money sitting idle.
- Scale purchasing investment properties by building a system to pay the balance down. That frees up the entire amount within the HELOC to be used again and again.
How to Use A HELOC To Purchase An Investment Property?
You could go the traditional route and use the HELOC to put 20% down on an investment property and finance the remaining 80%.
Depending on your market, you might be able to leverage your HELOC to purchase a property outright with cash. This can give you some negotiation power with an all-cash offer.
We took out a HELOC on our first home and used a portion of it to put a 5% down payment on a new primary residence. Then we turned our first home into our first rental property! This was a great way to get some experience as real estate investors. I’m a huge fan of this strategy, the nomadic strategy, to get started with your first rental.
No matter what route you go, make sure to have a solid plan on how you intend to pay the HELOC balance down. Will you be using cash-flow from your rental to pay it down? Can you use a refinance later to pay the balance down? Will you be paying the balance out of your own pocket? Always make sure to have a plan to pay off your debt promptly.
How do you plan on obtaining your first or next investment property?
Hi, I’m Richard. I’m passionate about figuring out how to make my money work for me and getting outdoors into mother nature.