How to use a HELOC on an investment property

By Carina Boucher | Citizens Staff

Television shows about real estate are all the rage right now — but the real estate craze isn’t just for “makeover” entertainment. In real life, too, the housing market is hot, with 42% of homebuyers agreeing that real estate is a better investment than stocks. But how can you get in on the action of purchasing a property without having all of that cash on hand? A home equity line of credit, or HELOC, on your current home might be just the way to do it.

A HELOC (sometimes referred to as a second mortgage), lets you draw cash on the equity that you have in your home. It’s a revolving line of credit, similar to the way a credit card works. So you draw on the loan, pay it down, and can continue to draw on it during the draw period. Another great perk of a HELOC is that during the draw period, you’re only required to pay interest on what you’ve used.

According to HELOC experts at Citizens, customers commonly use HELOCs for things like paying for home renovations or private school. They can also use it for making large purchases — some even use a HELOC for a down payment on an investment property.

Why a HELOC is a great tool

When you purchase real estate with the intention of earning a profit by renting it out, using it as a vacation home or eventually reselling it, you’re buying an investment property. An investment property can help you diversify your portfolio. 

A HELOC can be a great alternative to a traditional mortgage because you don’t typically have to pay any application or closing costs, which could save you thousands of dollars.

Real estate investing is also a great option because it offers a wide variety of properties for you to invest in, from residential to commercial. You could even dabble in house flipping and make a profit once you sell it. It's like your favorite real-life house flipping show! Well, without all of the cameras.

Weighing your options

HELOCs can often be overlooked when you’re considering buying an investment property, but it might be one of your best options. Using HELOC funds for a down payment is a common practice that can save you money as they usually have a lower interest rate than personal loans. And you can usually make interest-only payments for a certain period of time.

If you're looking to act fast on an opportunity, consider working with a HELOC lender who can work with you to close quickly and get you the funds you need — fast! Ask potential lenders about their appraisal process and average wait times before applying. Most lenders can help you close within 45 days, whereas others could help you close in as little as two weeks.

The process for applying is:

• Apply for the loan with a reputable lender
• Receive funds or your line of credit after closing
• Use the funds to cover the down payment of the investment property. Note: sometimes a HELOC won’t cover the whole property, depending on how much it is.

But do I even qualify?

All this talk of taking out a HELOC sounds great — but how do you know if you even qualify for one? A few key things that lenders will look for are:

• A credit score of 720 or higher
• A debt-to-income ratio of 43% or lower
• A combined loan-to-value ratio of 80% or less
• An income that meets the lender’s income requirements

It’s not required, but it can also be helpful to have 18 months worth of payments saved up, just in case an unexpected expense pops up. That way, you won’t have to worry about how you’ll be able to afford your new HELOC loan, as well as those new tires.

Reaping the benefits of a HELOC

With all of the different loan options out there, it’s important to make sure you’re choosing the best option for you. By using a HELOC to purchase an investment property, the interest rate may be lower than other forms of financing, like an unsecured home improvement loan. Lower rates equal saving more money — and who wouldn’t want that?! HELOCs are also great because they’re a flexible line of credit, and you can use them on an “as needed” basis. If you end up purchasing the investment property and still have money left on your loan, you can use those funds for a home renovation or maintenance, as well as repairs on your new property.

Another big perk to purchasing an investment property with a HELOC is the many tax deductions that come along with it. You can write-off things like mortgage interest, property tax, operating expenses, depreciation, home renovations and repairs. You’ll need to check with your tax professional to see what qualifies.

Make your dreams a reality

When you’re ready to make your dream of buying an investment property a reality, we’re here to help with a HELOC from Citizens FastLine®.  We know the housing market is competitive, so we’ve made the process quick and simple. You can receive a personalized offer in two-three minutes and have the cash in as little as two weeks — freeing up your hard-earned cash to spend on other things.