If you own residential or commercial property, you may currently be sitting on an untapped source of funds. If you have stagnant equity in your home, business, or investment property, you may be doing your finances a huge disservice. You can take that money and turn it into an opportunity for profit with the help of specialized financing.
Homeowners have traditionally used home equity lines of credit (HELOC) to pay for home improvements, pay off loans and credit cards, and finance other projects. These loans are based on the equity you have in your property and are generally easier to get than many other loans. A HELOC is an excellent way to put your property equity to work for you.
While these loans are most often associated with homeowners who need funds, you can also get a HELOC on investment properties. As someone who owns investment property or is considering buying investment real estate, a HELOC can be an excellent financial tool.
The goal for all property owners is to have their real estate grow in value. At the very least, you hope to expand the equity you have in your property so that you end up with significantly more value than debt. With a home equity line of credit, you use the equity you have acquired in your property as collateral for the lender. Your credit amount depends on the amount of this equity you have as well as your credit score and debt-to-income ratio.
These loans are desirable because they usually have higher limits and lower interest rates than other types of financing. Since your property is a valuable asset, the lender is taking less of a risk when they grant you a loan. Although many HELOCs have variable interest rates, which can complicate the length of your loan and the size of your payment, you may be able to take out a fixed-rate option, which is more predictable.
Paying back these credit lines is different than paying back a loan. When you receive a HELOC, you will have a draw period and a repayment period. During the draw period, you are able to access funds and make low interest-only payments. You have time to prepare for the repayment period. But be aware — during the repayment period, your payments will be much higher than your initial obligations.
Often, you will access your funds through a lender-issued credit card or checkbook, which makes it simple to draw out funds as needed. HELOCs are convenient, low-cost loans, but you must make the repayments on time. If you cannot, the lender has the right to foreclose on your property.
Uses for HELOCs
A home equity line of credit can be used in many ways. Some of the most popular are:
- Home Improvements: If your home needs work, you can often get a HELOC to pay for the renovations. When used correctly, the funds can add equity to your home equal to or exceeding your credit line. Of course, you need to research what improvements truly add value to your home before you begin construction.
- Medical Bills: If you are facing high medical bills, taking out a low-interest HELOC may be your most affordable choice. You can pay those hospital and treatment bills without being subject to crushing interest rates.
- Property Purchases: If you want to acquire more property, you can use a HELOC for a down payment. This option can help you buy a second home or vacation property.
- Other Debts: If you have a high credit card balance or are making high-interest payments on a personal loan, you may consider taking out a HELOC to pay them off. You will be able to save money in this way since you’ll be paying much lower interest rates.
You should consult with your financial advisor before taking out any type of loan to make certain that you are improving your finances and not taking on any unnecessary risk. HELOCs have many advantages, but they do come with some potential complications.
HELOCs for Investment Property
HELOCs can also be used as capital if you want to upgrade your investment properties. The conditions for these properties are stricter than with residential properties, however, so they are more difficult to get and the interest rates are higher. Lenders consider that you are more likely to default on your investment property than you would on your home.
Some of the primary differences between HELOCS on residential property and HELOCs on investment property are:
- Credit Score: For your residence, you generally need a 620 or higher score. For an investment property, you will probably need a 720 or higher.
- Loan-to-Value Ratio: For residential property, you can often get a line of credit up to 90% of your equity. For investment property, the ratio is usually limited to 80%.
- Cash Reserves: For investment property, you may need to show you have six months of cash reserves. Cash reserves may not be required for residential property lines of credit.
- Equity: Your lender may require that you have 20% equity in your investment property compared to 15% to 20% in your residential property.
- Appraisals: A computer program may determine your home’s value, while multiple appraisals may be required for investment properties.
HELOCs can be a source of capital for your investment property, but you may have to work a little harder to acquire one.
HELOCs to Buy Investment Property
You can sometimes use a HELOC to buy an investment property. These loans may come from the equity in your residence or from an investment property that you already own. As stated before, a residential HELOC is easier to acquire, even if you plan to use it to buy an investment property. In either situation, you may find that a home equity line of credit is a good choice
Some real estate experts see a HELOC as a way to avoid the waste of unleveraged equity. The money you have in your property is not paying you any interest and giving you little, if any, return on your investment. These loans can also help your rental tax situation. If your HELOC is secured by the rental property, the mortgage interest becomes a deductible expense which is a big help at tax time.
Of course, a HELOC is not without risk. If you cannot afford to make the payments during the repayment period, you risk losing your properties.
HELOCs vs. Home Equity Loans
Home equity loans (HELs) are sometimes considered an alternative to HELOCs, but they are really quite different financing types. If you qualify for a home equity loan, you will receive a lump sum of money and have a regular payment schedule, just as you do with most loans. In contrast, a HELOC is a revolving line of credit that you can use when needed instead of receiving the entire sum at once.
You also have two types of payment periods, with a HELOC requiring only interest payments and a HEL requiring much bigger payments. With a HEL, you will also likely have a fixed rate of interest instead of the usual variable interest rate that comes with most HELOCs. The two types of loans are definitely not interchangeable, although that is a common misperception.
Finding Investment Properties
If you want to use a HELOC to purchase an investment property, you’ll need to use your resources to locate promising real estate listings. As always, you should tap into your connections in the local real estate market to find potential investments. Local real estate brokers, mortgage lenders, and insurance agents are excellent resources for finding investment opportunities and perhaps partnering with you on one.
Online property databases such as ProspectNow are also excellent resources for finding solid investment properties to purchase with your HELOC. In-depth research efforts should help you find multiple properties with good income potential.
The ProspectNow Advantage
Finding the right financing method is key to real estate investment success. A HELOC can allow you to improve your existing investment properties or purchase new ones. These lines of credit offer you flexibility and low-interest rates while allowing you to use your equity to grow your finances. You can take the equity from your residence or investment property and turn it into more equity or active income.
Locating the right property to invest in is also essential for a successful HELOC transaction. You can find good opportunities by searching state and local government sites for tax sales and imminent foreclosures. You can also search your community for those diamonds in the rough properties. And remember, while local realtor listings are always helpful, using ProspectNow is a more efficient and comprehensive way to find investment properties with real potential.
ProspectNow has been a leading resource for real estate professionals since 2008. Our database gives you fast and accurate information on properties all over the United States. In fact, you can view approximately 100 million residential and 42 million commercial real estate listings on ProspectNow. If you are considering getting a HELOC on investment property, visit our site to learn about available listings in your area. Time is money, so check out your options now and get a free trial on ProspectNow.
You may be missing out on an excellent opportunity by not applying for a HELOC. Building equity in your property is an excellent thing, but too much stagnant equity can be holding you back. Careful planning and the judicious use of a HELOC on investment property or on your residence can open up increased profits and create more long-term security. You can use the loan money to get rid of high-interest loans and crushing bills or use it to acquire more property.
HELOCs on investment property are harder to get than those on residential property, but they are a viable option for many savvy real estate investors. Consider using your property equity to make profitable improvements or investment acquisitions. Put your current assets to work.