Can You Use a HELOC to Invest in Rental Real Estate? (2024)

Individuals seeking funds to fuel their investment journey frequently overlook the equity that’s sitting in their home waiting to be turned into cash flow. They don’t realize they can make good use of it through a home equity line of credit (HELOC), which can cover the down payment of an investment property. It’s an exceptional financial tool that can place investors on the path to building great wealth. With that in mind, this article covers the ins and outs of a HELOC as it relates to rental real estate, which will provide you with the knowledge base needed to start investing with one. But first, let’s break down our focus question:

Can you use a HELOC to invest in rental real estate? A home equity line of credit offers the flexibility to withdraw funds for any purpose, including the purchase of a rental property, making it a good financial tool for investors. However, the individual typically needs at least 15% to 20% equity and a good credit score to qualify for a HELOC.

Using a HELOC to Purchase an Investment Property

A home equity line of credit enables investors to tap into their equity and direct it toward purchasing a rental property. So, if you have a good amount of home equity, or even equity sitting within an investment property you currently own, you’ll have the funds to make a down payment while a lender covers the rest. It’s a brilliant strategy used by savvy investors who put the power of leverage to work for them.

If all this has sparked your interest, then be sure to dive in to learn more about HELOCs and how they can help you achieve your investment goals.

What is a Home Equity Line of Credit?

A HELOC is a financial loan product that allows you to borrow against the equity of your property – in a nutshell, it converts your home’s equity into spendable funds. It’s similar to a traditional credit card in that it’s a revolving line of credit, meaning you start with a zero balance and can borrow up to the approved credit limit, repay, and borrow again. To access the funds, the borrower is provided with checks, a debit card, and the ability to do bank transfers.

A HELOC includes a draw period, which typically lasts ten years. It’s a time when you can withdraw funds to use as you please while only making payments on the interest. After this time, it kicks into full payback mode.

How Much Can You Borrow With a HELOC?

The credit limit of a HELOC will depend on several factors, one being the amount of equity built up in the home. Most lenders will let you borrow up to 80-85% of your home’s equity. For example, if you have a house with an appraised value of $300,000 and still owe $100,000 on your mortgage, you’ll have $200,000 in equity. If you borrow up to 80% of that equity, that would provide you with $160,000. This money could then be used as a down payment for maybe three rental properties.

Another important factor in determining the amount you’re approved for is your credit score; each lender may have their own set of requirements on this, so it’s a good idea to check before applying to make sure you meet their conditions. Additionally, many lenders will also want to see that you have at least 18 months of liquid reserves to reassure them you have the funds to repay the loan.

How Do I Get Started Using a HELOC to Invest in Real Estate?

Now that you know you can use a home equity line of credit to invest in rental real estate, you’re probably wondering how to get started. Below, you’ll find the main steps that will set you on the path to obtaining a HELOC that you can use to own a cash flowing asset:

First Step – Determine How Much Equity You Have in Your Property

To put your home’s equity to work, you’ll have to calculate how much you have built up over the years to ensure you have enough to work with. The value of your home’s equity is calculated by subtracting the total amount of debt, which will be your primary mortgage, from the current market value of your home. You can easily calculate your equity with the following equation:

Home Equity = Market Value of the Home – Outstanding Mortgage Balance

If you determine that you have at least 15 to 20% equity, then you can move on to the second step.

Second Step – Shop for a Lender That Will Give You the Best Rates and Terms

When it comes to finding a lender that will give you the best HELOC, you may need to shop around. And if you find that a lender doesn’t want to approve your application because it’s for an investment property, then just move on to the next one. You see, there are tons of lenders out there, and they are competing against each other. Because of this, you’ll find a lender that can assist you and meet your needs.

The best place to find a HELOC would be a smaller local bank, even a co-op. They generally give you a much better deal than the big institutional banks. You’ll most likely get better service walking into an establishment and speaking directly to a banker instead of calling an 800 number for a huge international bank. Smaller banks can work with you to get you a better rate and terms.

How HELOC Interest Rates Work – Fixed vs Variable

You’ll find that most lenders offer HELOCs with a variable interest rate, which is a rate that can fluctuate or move up and down based on the underlying benchmark interest rate. So, unlike a fixed interest rate that stays the same during the loan term, a variable rate can change. This means your payments could increase or decrease over the life of the loan. Basically, it’s a bit of a gamble – you’re betting on interest rates staying low. But this shouldn’t be a problem because many lenders allow you to convert from a variable to a fixed rate. This would be a good idea if interest rates were to drop significantly since it allows you to lock in a low rate.

Here’s a great video that takes a deep dive into the topic of fixed vs variable HELOC interest rates:

Paying Interest – HELOC vs Cash-Out Refi

It’s also worth mentioning that one of the benefits of a HELOC, compared to a cash-out refi, where the lender provides you with a check for the entire amount, is that you only make interest payments on what you use with a HELOC. For instance, with a cash-out refi, if you’re approved for $90,000 based on your equity, they cut you a check for the entire amount, and then the interest payment clock starts ticking. In other words, you’re in immediate debt for $90,000. In contrast, if a HELOC gives you a credit line of $90,000 and your balance begins at zero, you’re not paying interest on the $90,000 from the start.

Interest accrues only on the amount you use, and your strategy should be to have your tenant quickly pay the loan down for you to minimize interest charges on it. While we’re on the topic, I highly recommend diving into our book that you can pick up on Amazon – How to Pay Off Your Mortgage in 5 Years. It details how to use your home equity line of credit to rapidly pay off your primary mortgage in five years instead of 30.

Third Step – Locate a Rental Property in a Lucrative Housing Market

With your HELOC in place and your down payment in hand, it’s now time to do some research to locate a rental property in a prime location, one that will yield a high ROI. Unless you’re a seasoned real estate investor, you may not have the resources or the knowledge to secure a property that will perform well. If this is the case, then it’s best to work with a real estate company that does this full-time.

Obtain Properties Through a Full-Service Real Estate Investment Company

Morris Invest deals in highly profitable rental properties with proven returns of 18-20+% IRR. Our team spends years researching hot rental markets in recession-proof locations. The rental properties we provide are in locations that have a booming economy, low crime rates, a strong job market, and a high demand for rentals.

We build new construction rentals, single-family housing and multi-family duplexes, providing the investor with a new property that’s ready to rent. On top of this, we make things super simple for the investor by assigning a tenant and a property manager to each rental. We also assist with incorporating and converting 401(k)s into a retirement vehicle that can provide additional funds for investing, such as a self directed IRA.

Morris Invest also assists with financing, which we’ll cover next.

Fourth Step – Finance the Remaining Balance

A HELOC is an excellent solution for coming up with the down payment for the investment property, but what about the larger part of the balance? What’s your strategy for obtaining financing for this? If you’re not sure, know that it’s not as difficult as you may think. Why is this the case? Because you actually have multiple options to choose from, and when you work with Morris Invest, we help you secure the financing you need.

We have financing built right into many of our properties, and we work with 200 banks, so if one lender doesn’t approve your application for some reason, we move on to the next. Additionally, the team at Morris Invest is known for putting together personalized investment plans that suit the specific needs of each client.

Obtaining Additional Money Through Fund & Grow

You also have other options for securing additional funds, such as utilizing Fund & Grow. Many of our clients have worked with Fund & Grow to obtain 0% interest introductory offer business cards that were used toward an investment property purchase. Head over to our page, where you can learn how it all works. You can also visit our personal page for more information.

Don’t let a lack of funds stop you from achieving your dream of becoming financially independent through rental real estate. There are plenty of financing options out there, and we can help you find them. View our video interview with a client who utilized one option called non-recourse financing – Zero to 15 Rental Properties in 3 Years – Interview with Don.

Morris Invest Financial Resources & Programs

• The Freedom Number Cheat Sheet
• Financial FreedomAcademy
• The 90-Day Financial Empowerment Bootcamp

Use a HELOC to Invest in Rental Real Estate to Secure Your Financial Independence!

We hope this article has shed some light on the fact that with the power of leverage and a home equity line of credit, you’ll have the tools needed to move forward so you can start creating passive income and financial freedom. If what you read has inspired you, and you’d like to begin your investment journey, let Morris Invest do all the work for you to get you set up with a cash flowing property. We would be more than happy to answer any questions you have and explain the process of purchasing a rental property, so feel free to Schedule a complimentary call with our team so we can help you achieve your investing goals.

Before you go, check out our video that covers equity, HELOCs, and other forms of financing:

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