Home Equity Loan On Investment Property

A home equity loan allows you to tap the value of your property to obtain a one-time lump sum you can use for any purpose. Most homeowners take out these loans on their primary residences. But can you get a home equity loan on an investment or rental property?

If you have sufficient equity in it — potentially, yes. That said, the application process can be more challenging, and you could end up with a higher interest rate and paying some extra expenses to boot.

So, if you’re considering a rental or investment property home equity loan, here are a few home truths to consider.

Can you get a home equity loan on rental property?

The short answer: Yes, it’s possible to get a home equity loan on a rental property.

However, in the eyes of a home equity lender, an investment property can seem like a riskier proposition.  “Investment properties, unlike your primary residence, come with the liquidity risk that tenants may leave or not pay rent,” says attorney Nik Agharkar, owner/managing member of Crowne Point Tax & Wealth Counsel in Wyckoff, NJ. That could jeopardize your repayments but – unless you also live in the rental – you’re more likely to just walk away and cut your losses (or so the lender figures).

As a result, it might be harder for you to find a lender willing to tie a home equity loan to an investment property or a rental. If you do find one, you’ll likely pay more in interest to compensate for that risk. Also, “the bank may be quicker to foreclose on an investment property that is not generating sufficient revenue to meet the monthly debt obligations,” Agharkar says.

Requirements for a home equity loan on investment property

The requirements for home equity loans for investment properties and rentals vary by lender. But they tend to be tougher than those on loans securitized by residences. In general, you can expect to need:

• Minimum credit score: 700 or higher
• Maximum debt-to-income (DTI) ratio: 43 percent (sometimes up to 50 percent)
• Maximum loan-to-value (LTV) ratio: 75 percent
• Reserves: six months’ to 15 months’ worth of home equity loan payments

Comparing home equity loans on residences vs. investment properties

Lenders may also look at the property’s income-generating record. If it has a history of a steady, positive cash flow and high occupancy, that’s a plus. In contrast, if it has a high turnover rate and long stretches of no income, that can be a potential red flag for lenders.

HELOC or home equity loan: Which is better when tapping investment property equity?

Deciding between a home equity line of credit (HELOC) and a home equity loan for tapping equity on an investment property depends on various factors, including your financial goals, risk tolerance, and specific circumstances. Here’s a comparison of the two products in a nutshell:

Consider the following factors when choosing between a HELOC and a home equity loan for tapping equity on an investment property:

• How do you plan to use the funds? If you need ongoing access to funds for various expenses or long-term projects — as you might with a multi-unit property — a HELOC may be more suitable. If you have a specific expense or project in mind, a home equity loan might be preferable.
• What are predictions for interest rates? If you anticipate interest rates to rise, a fixed-rate home equity loan may provide more stability. If rates are low or poised to fall,  a HELOC with its variable rates might be attractive.
• How much risk are you willing to tolerate? If you’re comfortable with potential interest rate fluctuations, a HELOC could be a better fit. If you prioritize predictability and want fixed monthly payments, a home equity loan may be more suitable. Consider how reliable the income from your property is (assuming you’ll be using it to pay the debt) — could it cover a big jump in repayments?
• What are your long-term financial goals? If you’re investing in the property to eventually sell it, the HELOC might be preferable as it keeps your cash flow fairly free. Bear in mind that both HELOCs and home equity loans must be paid back in full when a property changes ownership.

How to use a home equity loan or HELOC to purchase an investment property

You can use the proceeds from a home equity loan however you want. That includes repairing or remodeling the property used to secure the loan. It also includes buying another rental or investment property.

You could use the loan proceeds to cover just a down payment, assuming you could qualify for another mortgage. But with your home equity loan in the mix — and particularly because lenders will consider your overall debt-to-income ratio — this strategy might be tricky.

Generally, using a home equity loan to buy another property works best when the money’s being used for a cash offer. Maybe the proceeds from your home equity loan or HELOC will be enough to cover the purchase price, or maybe they’ll augment other assets (investments, savings), just helping you get to the number you need.

Even so, proceed with caution. As you already know from your first rental/investment property, real estate isn’t without its risks, appreciation-wise. If the local market shows signs of slowing, now might not be the best time to take on additional real estate-related debt.

Make sure you’d be in a good financial situation, even with multiple rental and investment properties — plus your home equity loan — to manage.

Are there tax benefits for using a home equity loan or HELOC on an investment property?

There could be, depending on how you use the money you get from your rental or investment property home equity loan.

You can take the funds for any purpose, but one of the most common uses of home equity loans is for renovations — and for a good reason: Under current tax law, it’s the only way to deduct the interest on the debt. Specifically, you must use the loan money to “buy, build or substantially improve” the property backing the debt (your investment or rental property in this case): repairs, upgrades or purchase of adjacent land or lot. And you’ll need to itemize your deductions — which means more work for you or your accountant — to realize the benefit.

Also, be advised that there are caps on how much you can claim with this deduction.

What are the alternatives to home equity loans on rental properties?

If you need funds to improve a rental property, and don’t want to borrow against it, there are other options available. Some are secured loans, and others aren’t.

Cash-out refinance

Cash-out refinancing means you pay off your primary mortgage with a new, larger one and then take the difference between the two mortgages in cash. The amount of money you can access will depend on your home’s current value and the equity built up in your home.

You may be able to secure a lower interest rate or renegotiate the terms of your mortgage. The downside? Your new mortgage payment will likely be more expensive (since the loan’s for a larger amount), and you will have less equity in your home.

In addition, a mortgage uses your home as collateral, so if you turn your equity into cash to buy another property, you risk losing your primary home if you default on your mortgage.

Unsecured personal loan

If you don’t have enough equity in your home to use it, consider a personal loan. While you may not be able to secure enough cash to buy a house outright, it may be enough for a sizable downpayment. If you qualify, you might be able to borrow as much as $100,000 from a credit union, bank or an online lender.

Of course, you will have to make monthly payments with interest, but if you are able to buy a rental property and earn passive income on it, you may be able to pay back the loan with your earnings from the rental. These types of loans do not require collateral ,but to get the best interest rates, you will need excellent credit (a credit score of at least 750). In addition, the lender may look at your income and assets. Your debt-to-income (DTI) ratio should be below 36 percent — the lower, the better.

Bridge loan

A hard-money loan, also known as a bridge loan, can help you access cash for a rental or investment property. While its credit score and debt-to-income requirements are more flexible, you still need to have at least 15 percent equity in your home. It’s a short-term loan, intended to “bridge” a transitional period, until you can secure more permanent financing.

So, having a plan for paying back these loans is important, as their terms typically last just six months to a year. Also, be prepared for higher interest rates than traditional mortgages, upfront fees or a large balloon payment at the end.

Final word on home equity loans for investment properties

Can you get a home equity loan on a rental or other investment property? Maybe. But should you? That depends. “There are three key risks to watch out for here: leverage, liquidity, and interest rates,” says Agharkar.

Using home equity gives you options in buying or upgrading investment properties that you might not otherwise be able to afford. However, securing a home equity loan on a rental property can be tougher.  The loans usually come with higher costs and more stringent requirements for your credit score, debt-to-income ratio and cash reserves.

You’ll be taking on some risk, as well. Similar to a mortgage, when you borrow against a home’s equity, you could lose the property if you fail to keep up with payments. In addition, you could find yourself in a state of negative equity if the building’s worth declines, due to a recession or some other drop in property values. That would make it difficult to sell.

FAQ

• How long does it take to get a HELOC or home equity loan?
  

  After completing an application and supplying the necessary documents to your lender, the underwriting and approval processes generally take between two and six weeks. The industry average is 37-8 days, according to the Mortgage Bankers Association’s “2025 Home Equity Lending Study.” Some online lender promise results in as little as five days, provided you are able to upload all your paperwork promptly.

• Can you buy another home with a home equity loan?
  

  Yes. Assuming you have enough equity in your home and meet other requirements set out by the lender, you can buy another house using the equity from your primary residence. Though this carries risk and is not a solvent approach for all real estate investors, it can be one way to begin building a real estate investment portfolio.

• Can you use a home equity loan to cover expenses on a rental?
  

  Yes, you can use a home equity loan to cover some or all of your expenses on a rental property. However, home equity loans are most useful for a one-time expenditure, not necessarily ongoing or  maintenance costs. For this reason, it might make more sense to take out a revolving home equity line of credit (HELOC), either via the equity in your primary residence or the rental home itself, to pay for these expenses — as you can withdraw funds as needed to cover them.

Additional reporting by Meaghan Hunt.