Accessing capital is key to growing your real estate investment portfolio. Many landlords wonder if they can tap into the equity built up in their rental properties using financing options like a home equity loan or a Home Equity Line of Credit (HELOC).
Getting a home equity loan on a rental property is indeed possible, but it comes with specific requirements and considerations that differ from borrowing against your primary residence. This guide explores eligibility, the process, risks, and alternatives for leveraging your rental property equity.
Key takeaways
- Lenders typically have stricter requirements for investment properties, including higher credit scores and larger equity reserves.
- Interest rates on investment property home equity loans are usually higher than those for primary residences.
- Understanding the risks, such as potential foreclosure, is crucial before proceeding.
- Several alternative financing options exist if a home equity loan isn’t the right fit for your situation.
Understanding home equity on rental properties
Equity represents the portion of your property’s value that you truly own, calculated by subtracting the amount you owe on the mortgage from the property’s current market value. For rental properties, this equity is a valuable asset that can potentially be converted into usable cash.
While the calculation is the same, lenders view equity in an investment property differently than in a primary home. They see rental properties as higher risk because they are not where you live, potentially making you less likely to prioritize payments during financial hardship. This perception influences loan terms and eligibility criteria.
Eligibility requirements for a home equity loan or HELOC on a rental property
Qualifying for a home equity loan or HELOC on an investment property requires meeting specific lender criteria. These requirements are generally more stringent compared to those for a primary residence.
Equity requirements and LTV ratios
Lenders need to see substantial equity in your rental property. You typically need at least 15% to 20% equity remaining in the property after the new loan is factored in.
This translates to a lower maximum loan-to-value (LTV) ratio. Lenders commonly look for a maximum LTV of around 80% for investment properties, meaning you can borrow up to 80% of the property’s appraised value, including the existing mortgage balance.
Credit score requirements
A strong credit history is vital. Lenders typically require a minimum credit score of 680 or higher for investment property loans.
Some lenders prefer a score of 700 or even higher to qualify for the most favorable terms. A higher score signals to the lender that you are a reliable borrower.
Debt-to-income ratio limits
Your debt-to-income (DTI) ratio is another key factor. This ratio compares your total monthly debt payments to your gross monthly income.
Expect a maximum DTI ratio of around 43% for most lenders when applying for a home equity loan on a rental property. However, some lenders may accept up to 50%, depending on other factors in your application.
Reserve requirements
Lenders often require borrowers to have significant cash reserves on hand. These reserves demonstrate your ability to continue making loan payments even if the rental property experiences vacancies or unexpected expenses.
While the exact amount varies, lenders might ask for reserves equivalent to several months of mortgage payments. This provides a financial cushion against potential income disruptions from the rental.
Property performance and cash flow
Some lenders may evaluate the rental property’s income potential and cash flow. They want assurance that the property generates sufficient income to help cover the added debt payment.
Positive cash flow can strengthen your application. It shows the property contributes to your financial stability, rather than solely relying on your income.
Home equity loan vs. HELOC for investment properties: Which is right?
When accessing equity, you typically have two main options: a traditional home equity loan or a HELOC. Both use your property as collateral but function differently.
A home equity loan provides a lump sum of cash upfront. You receive the full loan amount at closing and begin repaying it immediately in fixed monthly installments over a set term. This offers predictability in your monthly payments and interest costs.
A HELOC, on the other hand, is a revolving line of credit. You can draw funds as needed up to a certain limit during a draw period, similar to a credit card. Payments during the draw period might be interest-only, followed by a repayment period with principal and interest payments.
For rental properties, a HELOC offers flexibility if you need funds intermittently for ongoing repairs or potential future property acquisitions. A home equity loan might be better if you have a large, one-time expense planned, like a major renovation. Consider your planned use of the funds when choosing between the two.
The application process
Securing a home equity loan or HELOC on a rental property involves several steps. Understanding the process can help you prepare and navigate it more smoothly.
Finding lenders
Not all lenders offer home equity products for investment properties. Start by researching banks, credit unions, and online lenders specializing in investment property financing. Comparing offers from multiple lenders is crucial to find competitive rates and terms.
Look for lenders with experience in the rental property market. Their understanding of investment property nuances can streamline the process.
Pre-qualification and application
Many lenders offer a pre-qualification step, providing an estimate of how much you might borrow based on initial information. This helps you understand your potential borrowing power early on.
The formal application requires detailed financial information, including income, debts, assets, and specifics about the rental property. Be prepared to provide extensive documentation to support your application.
Appraisal and underwriting
The lender will order an appraisal to determine the rental property’s current market value. This value is essential for calculating the available equity and the maximum loan amount.
Underwriting involves the lender reviewing your application, credit report, appraisal, and documentation. They assess your financial health and the property’s value to determine approval and terms.
Closing
If approved, you proceed to closing. This is where you sign the loan documents, and the funds are disbursed.
Closing costs, which may include appraisal fees, title searches, and other charges, are typically paid at this stage. Be sure to review the closing disclosure carefully before signing.
Interest rates and costs
Interest rates for home equity loans and HELOCs on investment properties are generally higher than those for primary residences. This is due to the perceived higher risk associated with financing non-owner-occupied properties.
Investment property home equity loan rates are often 0.5 to 1 percentage point or more higher than rates for primary residences. As of May 2025, general home equity loan rates averaged around 8.24% for a 5-year term, implying investment property rates could range from the high 8% to the low 10% range or potentially higher, depending on the market and your qualifications. Keep in mind that rates fluctuate based on market conditions and individual borrower profiles.
Beyond interest, you may encounter various costs. These can include appraisal fees, title insurance, origination fees, and other closing costs. Factor these into your calculations when evaluating the total cost of the loan.
Using home equity from a rental property
Once you access equity from your rental property, you have several options for using the funds. Strategic use can help you grow your real estate business.
Funding renovations or improvements
A common use is funding substantial improvements or renovations to the rental property itself. This can increase its value, attract higher-paying tenants, or improve energy efficiency. Using funds for improvements on the property, securing the loan is key for potential tax benefits.
Using equity to buy another rental property
Accessing equity can provide the capital needed for a down payment or even a full purchase of another investment property. This allows you to expand your portfolio without needing to save cash separately. It’s a strategy leveraging existing assets to acquire new ones.
If you are exploring funding options for your next acquisition, learning how to get a loan for a rental property can provide valuable insights into various financing types.
Consider different types of loans for investment property.
Other potential uses
While using funds for investment purposes is common, some landlords might use the money for other needs. However, using the funds for personal expenses not related to the property may impact potential tax deductions on the interest paid. Always clarify with your lender and a tax professional how you plan to use the funds.
Risks of using a home equity loan on a rental property
Leveraging equity comes with inherent risks, especially with investment properties. It’s important to understand these before committing to a loan.
Higher interest rates and stricter terms
As mentioned, expect higher interest rates compared to primary residence loans. This increases the overall cost of borrowing.
Lenders also impose stricter terms and may require larger down payments or reserves. These terms can make the loan less flexible or more expensive.
Risk of foreclosure
The most significant risk is foreclosure. If you default on the home equity loan or HELOC payments, the lender can foreclose on the rental property that secures the loan.
In some cases, particularly if you cross-collateralized the loan, your primary residence could also be at risk.
Market value decline risk
If property values decline after you take out the loan, your equity buffer shrinks. This could leave you owing more than the property is worth.
While this doesn’t directly cause default, it can make it harder to sell the property or refinance if needed. It adds a layer of market risk to your financing.
Managing multiple loan payments
Adding a home equity payment on top of an existing mortgage means you have multiple payments to manage. This increases your monthly debt obligations.
Careful budgeting and financial planning are essential to ensure you can comfortably cover all property-related expenses and loan payments. Using tools to track income and expenses can help manage this complexity.
Uncertainty of investment returns covering debt
There’s no guarantee that your rental income will always be sufficient to cover the home equity loan payments. Vacancies, unexpected repairs, or declining rental rates can impact cash flow.
You must have a plan for covering payments even during periods of low or no rental income. Relying solely on rental revenue to service the debt is risky.
Tax implications
Understanding the tax implications of a home equity loan on a rental property is crucial. The deductibility of interest depends heavily on how you use the funds.
Interest on a home equity loan or HELOC is tax-deductible only if the funds are used to buy, build, or substantially improve the property securing the loan. If you use the funds for personal expenses or to buy a different property, the interest is generally not tax-deductible.
There is also a limit on the amount of home equity debt on which interest can be deducted. Currently, the deduction is limited to interest paid on up to $750,000 of qualified home equity debt. This limit applies to the total debt across all qualified residences and investment properties.
Tax laws are complex and subject to change. Always consult with a qualified tax professional to understand how a home equity loan or HELOC on your rental property specifically impacts your tax situation.
Alternatives to home equity loans on rental properties
A home equity loan or HELOC isn’t the only way to access capital from your rental properties. Several alternative financing options might be a better fit depending on your needs and qualifications.
Cash-out refinance
A cash-out refinance replaces your existing mortgage with a new, larger one. You receive the difference between the new loan amount and the payoff of the old mortgage in cash. This allows you to tap into equity while potentially securing a new interest rate or term on the primary mortgage.
A cash-out refinance may result in a higher interest rate than your original mortgage. It also resets your mortgage term, meaning you’ll be making payments for a new 15 or 30 years.
Unsecured personal loans
Unsecured personal loans do not require collateral, meaning your property is not directly at risk if you default. They can be quicker to obtain than property-backed loans.
However, personal loans typically have higher interest rates and lower borrowing limits compared to home equity loans. They are generally better suited for smaller funding needs.
Bridge loans hard money loans
Bridge loans or hard money loans are short-term financing options, often used by investors for quick acquisitions or renovations. They are typically asset-based, relying heavily on the property’s value rather than solely on the borrower’s creditworthiness.
These loans come with high interest rates and fees. They are usually repaid within a year or two, often by refinancing with a conventional loan or selling the property.
Other rental property financing options
Beyond these, a wide range of specific rental property financing options exist, tailored to investors.
For instance, if you’re investing in tourist areas, exploring Airbnb loans or short-term rental financing might be relevant.
Traditional conventional mortgages designed for investment properties are also a primary option. You might also consider a commercial loan for rental property, especially for multi-unit properties.
Some government-backed options exist, though often with restrictions on use, such as potentially using an SBA loan for real estate if the property is used for your business operations or meets specific criteria.
Understanding the current rates for rental property across different loan types is crucial for making informed decisions. Each financing method has its own set of requirements, benefits, and drawbacks.
Exploring various rental property loans helps identify the best fit for your investment strategy.
This could include learning more about specific loans, like an FHA loan for investment property, or understanding SBA 7a loan requirements.
Regional differences matter too, like understanding investment property loans Florida. Even specific loan types like a VA loan for rental property have unique considerations.
Baselane understands the complex financial landscape landlords face. Our platform provides tools like banking tailored for rentals, streamlining rent collection and bookkeeping, helping you manage your finances effectively regardless of your financing strategy. This clarity and control are essential when taking on additional debt.
Get quick and easy financing at competitive rates from top lenders across 48 states.
Bottom line
Tapping into your rental property’s equity can be a powerful way to fund renovations, expand your portfolio, or cover significant expenses. While home equity loans and HELOCs are options, they come with unique challenges for investment properties. By understanding the requirements, risks, and alternatives available, you can make an informed decision that aligns with your long-term investment goals.
Managing the finances of a growing portfolio, especially with multiple loans, requires robust tools. Baselane offers a banking solution built specifically for landlords, designed to simplify bookkeeping, track income and expenses property by property, and provide financial clarity. This can help you stay organized and on top of your financial obligations as you leverage your equity.
Create your free Baselane account today and gain the financial clarity you need to manage your rental properties effectively.
FAQs
Yes, you can typically get a HELOC on an investment or rental property. However, lenders often have stricter eligibility requirements, such as higher credit scores and lower maximum Loan-to-Value (LTV) ratios, compared to HELOCs for primary residences.
Yes, interest rates for home equity loans and HELOCs on investment properties are generally higher than those for primary residences. This is because lenders consider non-owner-occupied properties to be a higher risk.
Interest on a home equity loan for a rental property is only tax-deductible if the funds are used to buy, build, or substantially improve the property securing the loan. Using funds for other purposes, including buying another property, may not qualify for the deduction.
