Lacking the liquidity necessary to make your first real estate purchase? It’s a frustrating situation to be in—especially if you’ve found a great deal or a viable opportunity. You may be wondering what options you have or what steps you can take to get over the initial hump of not having upfront capital.
Table of Contents - Finance Corner: Use a HELOC to Finance Your First Property Investment
- How to tap into a HELOC
- HEL vs. HELOC
- Keep the model going
- Benefits of using a HELOC
- Qualifying for a HELOC
- Ready to get started with a HELOC to finance an investment property?
- Morris Invest: How to Use a HELOC to Purchase Rental Properties
Opening a home equity line of credit (HELOC) may be the answer. It’s a great way for prospective real estate investors to tap into the funds necessary to start investing in real estate by borrowing against an existing asset: Their home.
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How to tap into a HELOC
HELOCs allow you to open a line of credit based on the equity you’ve established in your home. Different from a home equity loan (HEL), HELOCs provide homeowners with the opportunity to leverage their most valuable asset – their house – to consolidate debt, remodel or repair their home or even put a down-payment on an investment property.
To tap into a HELOC, you’ll need to have a hard asset, like a home, with enough equity built up for you to borrow against. The lender will provide you with a maximum “draw,” rather than a dollar amount you can borrow, equivalent to the amount of equity in your home.
HELOCs are assigned a set period during which the credit issued can be used and another set period during which the borrowed money must be repaid. Typically, homeowners paying down HELOC loans have five to 10 years during which they only pay interest, and another 10 to 15 years to pay down the balance of the loan.
HEL vs. HELOC
Note the differences between HELs and HELOCs. HELs typically mirror a more traditional mortgage structure, and can often be thought of as a second mortgage on your home. HELs usually have a fixed interest rate and are a one-time loan paid back according to an established schedule.
HELOCs, on the other hand, usually feature variable interest rates and operate as a revolving line of credit you can access again and again. Because the interest rates can swing dramatically over time, the amount you owe on your HELOC payments each month may change significantly.
Keep the model going
Looking for a way to leverage your existing assets to begin investing in real estate? You may want to consider the benefits of HELOC lending. Once you’ve built up equity in an investment rental property, for instance, you can use a HELOC to borrow against that equity and purchase another rental asset.
HELOCs are a great tool savvy investors can use to quickly expand their portfolio of properties without tapping into their liquid cash.
Benefits of using a HELOC
First-time investors can tap into many benefits by borrowing against their home equity to acquire their first investment property. Here are just some of the reasons you may want to consider a HELOC for your first investment:
One of the primary benefits of using a HELOC is that it counts as a line of credit, just like a credit card, on your credit report. This means if you use less than 30 percent of the funds available through your HELOC, it will boost your score. Additionally, if you make your payments regularly and on-time, it will improve your overall credit score.
There are several reasons you may want to increase the amount of cash you have on-hand, from covering emergency expenses to buying an investment property outright. Regardless of your reasoning, you can use a HELOC to tap into financial assets currently tied up as equity in your home.
Finances real estate purchases
One of the most strategic decisions you can make with your HELOC funds is investing in real estate. Whether you’re using a HELOC to cover your down payment or are hoping to purchase an entire property outright, your HELOC can provide you with the flexibility necessary to make a purchase in-line with your goals as an investor.
Funds improvement projects
You’ve already purchased your investment property, only to find it needs a bit more love and care than you first anticipated. It happens to even the best investors. A HELOC may be the tool you need to fund your property improvements and prepare the asset for lease. HELOCs provide you with the flexibility to use the equity built-up in your home however you see fit.
Qualifying for a HELOC
The first things to consider when attempting to leverage a HELOC is whether or not you qualify for one, and whether it’s the right investment tool for you. If you are a homeowner with established equity in your house, you’ll likely qualify for a HELOC. Here are some of the factors impacting qualification:
As with any other type of credit line, your credit score plays a significant role in whether you qualify for a HELOC. Because you’re borrowing against the equity in your home, HELOCs are often seen as less risky for lenders when compared to unsecured lines of credit, like credit cards.
Your debt-to-income ratio, which factors into your credit score, may make or break your qualification for a HELOC. If you can’t afford to pay down what you already owe, banks are highly unlikely to issue you another loan. Most banks establish a maximum debt-to-income ratio somewhere around 40 percent.
Amount of equity
The amount of equity you’ve built up in your home will also determine whether you qualify for a HELOC, as well as the amount you’re eligible to borrow. A home has equity when the balance of the mortgage is less than the value of the home. If you’ve already taken out a second mortgage or HEL, you likely don’t qualify.
For those who don’t qualify for a HELOC product, don’t despair. There are plenty of other financial resources prospective investors can leverage to enter the real estate market. If you’re a determined, savvy business operator, you can always find an investment opportunity that meets your needs.
Ready to get started with a HELOC to finance an investment property?
Morris Invest: How to Use a HELOC to Purchase Rental Properties
Interested in Rental Property Financing? If so, contact us and we will show you how you can buy unlimited rental properties with great rates.