An investment property HELOC (Home Equity Line of Credit) enables real estate investors to access the equity built up in rental properties or other non-owner occupied real estate as a flexible credit line. Unlike a lump-sum loan, this revolving credit allows repeated borrowing and repayment from an approved limit based on your property’s value minus outstanding mortgages.
How an Investment Property HELOC Works
This credit line functions similarly to a credit card secured by your investment property. The lender sets a credit limit reflecting your combined loan-to-value (CLTV), often around 70% to 80% for investment properties, lower than the 85% to 90% typical for a primary residence.
The HELOC has two main phases:
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Draw Period (usually 5-10 years): You can withdraw funds up to your credit limit for purposes like buying another property, renovations, or managing cash flow. Typically, only interest is required on borrowed amounts during this time.
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Repayment Period (usually 10-20 years): After the draw period ends, new borrowing stops and you repay principal plus interest in monthly installments.
Key Differences from Primary Residence HELOCs
Lenders perceive investment property HELOCs as higher risk because borrowers may prioritize their own home over investment properties if financial hardship arises. This results in:
- Lower loan-to-value limits (70%-80% vs. up to 90%)
- Higher interest rates, often 0.5% to 2% above primary residence HELOCs
- More stringent underwriting standards requiring proof of rental income, reserves, and creditworthiness
Uses for an Investment Property HELOC
Investors commonly use these lines of credit to:
- Fund down payments on additional rental properties
- Renovate or repair existing rentals to increase value and rental income
- Cover unexpected expenses, establishing a flexible emergency fund
- Support other business ventures or cash flow needs
Tax Considerations
Per IRS Publication 936, interest on a HELOC is deductible only if the loan proceeds are used to buy, build, or substantially improve the property securing the loan. For investment properties, interest may be deductible as a business expense if used appropriately, but consulting a tax professional is recommended due to complex rules.
Risks and Tips
- Understand variable interest rates which can increase payments
- Avoid overleveraging your portfolio to reduce market risk exposure
- Be prepared for payment increases when the loan switches from interest-only to principal and interest
- Compare offers carefully across lenders to find the best terms
For further details about HELOCs in general, see our Home Equity Line of Credit (HELOC) article, and for investment property financing options, visit our Investment Property Mortgage glossary page.
Sources:
- Consumer Financial Protection Bureau, Home Equity Loans and Home Equity Lines of Credit
- IRS Publication 936 (2023), Home Mortgage Interest Deduction
- NerdWallet, HELOC On A Rental Property: How To Get And Use One