Leveraging Massachusetts home equity to fund rental properties

The average Massachusetts rent of $2,947 is 47% higher than the national average due to low housing inventory and a strong job market, making the state an attractive option for real estate investors. In fact, Boston is the #1 rental market in New England and the #11 rental market nationwide, with increasing demand for rental properties in the coming years.

If you've thought about purchasing an investment property in Massachusetts, you'll likely need funding lined up before you make an offer to compete in a market of brisk home sales. A home equity line of credit (HELOC) is a revolving line of credit secured by the equity in your primary home, which means you can borrow from it as needed (up to an approved line amount) instead of taking one lump-sum loan.

How a HELOC works for investors: After you're approved for a line amount, you can draw funds during the draw period, repay and borrow again as your available credit replenishes. Payments during the draw period are often interest-only, which can help keep carrying costs lower while you close on the property, complete repairs, and find a tenant. When the draw period ends, the HELOC typically moves into a repayment period where you make principal-and-interest payments on the outstanding balance.

What is a HELOC for rental property financing?

In competitive housing markets like Massachusetts, home equity lines of credit (HELOCs) have become a popular funding source for real estate investors looking to act quickly and present a strong offer.

Similar to a credit card, a HELOC is an open line of credit secured by the equity in your primary home and can be used to fund purchases or investments. Most lenders prefer that you to maintain at least 20% equity in your home to qualify for a HELOC. Or in other words, your primary mortgage and HELOC balances don’t exceed 80% of your home’s value.

Having a HELOC in place prior to bidding on an investment property allows investors to provide proof of funds to sellers without needing to go through the traditional mortgage approval process.

How does a HELOC work for rental properties?

When using a HELOC to fund a rental property in Massachusetts, you can borrow from your available credit line during the draw period, then use those funds for common rental purchase needs like a down payment, closing costs, and repairs or renovations.

Step-by-step: How to use a HELOC for a rental purchase

1. Estimate available equity – Review your home's value and outstanding mortgage balance to understand how much equity you may be able to borrow against.
2. Apply and get approved – Lenders review credit, income, and property value among other things to determine eligibility and terms.
3. Receive your credit line – Once approved, your HELOC is available to draw from up to your line amount.
4. Use funds for the purchase – Common uses include your down payment, closing costs, or renovations that help prepare the property for tenants.
5. Repay based on usage – During the draw period, payments may be interest-only; later, principal and interest payments typically apply during the repayment period.

During the draw period (often 10 to 15 years), you only need to make payments on what you’ve borrowed, and you can choose to make payments toward both interest and principal if you want to reduce your balance faster. When the draw period ends, the HELOC typically transitions into a repayment period, when you begin making principal and interest payments on any outstanding balance.

Advantages of using HELOCs for rental properties

HELOCs can offer rental property investors several important advantages, especially in fast-moving markets. For example, a Citizens HELOC may offer added cost savings with no application fees or closing costs.

• Quick access: In competitive buying markets where desirable properties are snapped up quickly, investors benefit from a HELOC's speedy access to funds. With a Citizens HELOC, borrowers can access available funds through online and mobile banking, and many loans are approved in under three weeks (in some cases, as little as two weeks).
• Lower rates: Because HELOCs are secured by the equity in your primary home, they have lower interest rates than other types of rental property financing, like personal or mortgage loans.
• Flexibility: HELOCs offer purchase and payment flexibility. Once you’re approved for a HELOC, you’re free to tap into the line for virtually any purpose, from purchasing a rental property to paying for repairs or upgrades.
• Low payments: A HELOC's interest-only payment during the draw period gives landlords time to find a renter and generate a positive cash flow before full repayment begins.

That said, using home equity to invest also comes with tradeoffs. Before you rely on a HELOC for a rental purchase, it’s helpful to confirm that the repayment plan works even if the property takes longer to rent, expenses run higher than expected, or interest rates rise.

When a HELOC for a rental property may make sense (and when it may not)

May make sense if:

• You have substantial, stable equity and income to support repayment.
• You need flexible access to funds for bidding, deposits, or phased renovations.
• You have a clear rental income plan or exit strategy.
• You want liquidity without selling other assets.

May not be ideal if:

• Your budget depends on rental income immediately covering payments.
• You're uncomfortable with variable interest rate changes.
• You're already carrying significant mortgage or consumer debt.
• You don't have reserves for vacancies, repairs, or market shifts.

HELOC vs. rental property mortgage

When considering your funding options, it’s helpful to understand the differences between a HELOC and a traditional mortgage for rental properties.

Qualification requirements

You'll need good credit to qualify for either a mortgage or a HELOC. However, lenders generally classify rental property loans as riskier than the purchase of a primary home, so you may face stricter approval requirements when seeking a mortgage loan for investment properties.

Down payments

You typically need to put money down for a mortgage approval. HELOC borrowers do not need to provide a down payment, but must show proof of their equity, or ownership percentage, of their primary home.

Interest rates

Fixed-rate mortgages result in stable payments over the term of the loan, but you can expect to pay higher interest rates. A HELOC's variable rate may be lower than a fixed-rate mortgage initially, but borrowers assume the risk of changing interest rates affecting future payments. For example, Citizens HELOC rates are variable and tied to the Prime Rate, and borrowers may be able to lock a portion of their line into a fixed rate after closing.

Fees

You'll likely pay closing costs to purchase a rental home with both a mortgage and a HELOC, though fees vary by lender. For example, some lenders (including Citizens) may offer HELOCs with no application fees or closing costs. Ask lenders if they assess additional charges such as prepayment penalties or annual fees." (prepayment penalties are not limited to primary mortgages). Mortgage borrowers with less than 20% for a down payment may also be required to pay private mortgage insurance (PMI).

Loan-to-value (LTV)

Typically, you can receive HELOC funding of 80-85% of the home's value, as long as you have enough equity to cover the remaining 15-20%. For a mortgage loan with a similar LTV, the buyer provides a cash down payment in lieu of home equity. The median down payment for home buyers in Massachusetts was recently measured at 18%.

Massachusetts-specific considerations for HELOC rental investors

Massachusetts investors should consider several state-specific factors before making an investment decision:

• State and local ordinances: You may need to fund repairs or renovations to ensure the rental home complies with the State Sanitary Code and any historic home preservation guidelines. Local ordinances, particularly in short-term rental markets like Nantucket, may also establish specific rules and regulations for rental properties.
• Upcoming legislation: It's essential to be aware of current or pending legislation, such as recently proposed rent control restrictions in Massachusetts, that could impact future cash flow.
• Specific market potential: Calculate your anticipated cash flow and profitability based on how you intend to market and lease the property. The cash flow for vacation rentals in Cape Cod or the Berkshires differs significantly from annual leases for student housing in Medford or Cambridge, as well as longer-term rentals in the Boston suburbs.

Knowledgeable lenders operating in these rental markets can suggest funding options based on your current finances and the property you want to purchase.

How to get a HELOC for a rental investment in Massachusetts

If you're thinking about opening a HELOC, start with an equity assessment of your primary home. Lenders may request an expert home appraisal to further establish the current value. Once you understand how much equity you have available, You can explore options like Citizens FastLine®, which lets you see what you could qualify for in minutes with no commitment and no impact to your credit score, while also allowing you to compare HELOC interest rates before moving forward with a preliminary approval.

When submitting a HELOC application, you'll provide additional documentation to your lender, which may include proof of income, tax information and a personal credit history. By gathering this paperwork ahead of time, you can move through the process efficiently and potentially receive funding in as little as two to three weeks.

Potential risks for rental property HELOCs

Like most investments, a rental property purchase is not without risk, no matter what type of funding you use. While long-term real estate market fluctuation should always be an investment consideration, HELOC-specific risks to consider include:

• Rate variability: Typically, the interest rate on a HELOC resets in line with the movement of an underlying base rate, such as the U.S. Prime Rate. This means that your HELOC payments can increase or decrease based on the interest rate environment.
• Insufficient rental income: You’ll need a strategy to pay down your line as you build equity in the rental property. Look at local rental listings to ensure you can generate enough income to cover not only your HELOC payments, but also expenses like property taxes, repairs and insurance.
• Impact on your primary home: Because HELOCs are secured against your primary home, failure to make timely payments could result in property foreclosure.

Making your rental property purchase decision

If you own a home in Massachusetts and are looking to buy a rental property, you may want to consider using a HELOC as a funding option.

With a HELOC through Citizens, you can leverage the equity in your home to take advantage of lower interest rates and quick access to funds to improve your chances of capitalizing on valuable rental opportunities.

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