Real Estate Investing: One of the Best Uses for a HELOC

A Home Equity Line of Credit, also known as a HELOC, allows you to borrow money from your home’s equity (the value of your home minus the outstanding balance on your mortgage) for a number of scenarios, like financing home improvements or paying off high-interest debt.

What you might not know is that one of the top recommended uses for a HELOC—and one that can make you money in the long run—is helping you fund an investment property.

An investment property has a number of financial benefits, including:

• The ability to earn passive income. Once you’ve purchased the property and made improvements to prepare it for tenants, you can devote most of your time to your regular job and bring in money on the side. (Before buying your investment property, you’ll want a professional to provide you with a market evaluation to make sure your property will bring in enough money to at least cover your mortgage payment—and help you to turn a profit each month.)
• Every month, you’re paying down your mortgage balance, building the equity in your property. And with an investment property, it’s a tenant paying the mortgage. Cash isn’t coming out of your pocket to gain that equity.
• Real estate investing helps to balance a portfolio against some higher-risk holdings.
• Retirement income. A property purchased well before you retire can be paid off before retirement and generate income; or, you can sell it, cash out and live off the proceeds.
• Potential tax benefits. (Consult your tax advisor to learn more.)

If you’re a current investment property owner, you can also use a HELOC to:

• Use the money in one rental property to fund the next rental property.
• Make home improvements on rental properties or pay for unexpected expenses.
• Pay off high-interest debt.
• Boost your credit score.

Buying a second home is popular among Americans. A study from the National Association of Realtors shows that 14% of recent home buyers own more than one home.

If you’re considering joining the ranks of investment-property owners, or, are looking to expand your current investment property portfolio, how do you get started financially?

How to Use a HELOC to Fund an Investment Property

Before you take the leap into investment properties, be sure to weigh the risks. Homes inevitably need repairs (sometimes expensive or inconvenient ones). If your tenants move out, you’ll be paying the mortgage on your own. And if you need money and want to pull out of your investment, selling a rental may not be as easy as selling a different investment (stocks, for instance).

Once you’ve decided to pursue investment property ownership, you’ll need to secure your down payment and loan. As with all home purchases, lenders will look at factors such as your credit score, employment history and debt-to-income ratio.

Understand that buying an investment property has more stringent financial requirements than when you purchase a primary residence. Down payments are often higher (think 20 – 30 percent), as lenders recognize that should a borrower become strapped for cash, their likelihood for making payments will be focused primarily on the house they reside in). The interest rate will most likely be higher than an owner-occupied property, as well.

If you don’t have access to a large chunk of money, a HELOC can assist with the down payment or—depending on your amount of equity you have in your home and the price of your investment property—the whole thing.

How to Use a HELOC to Fund a Second Investment Property

For those who already own an investment property, you may not realize that you can use the equity in your current investment property to help finance your second.

Your financial institution, therefore, will look at your credit score and employment history, in considering your HELOC, but also will want to see sources of steady income and cash on hand. You will need to show that you have sufficient income to pay multiple mortgage payments and also have enough money in the bank to cover at least one month’s payment, taxes and such on the second investment property. Should you not have a tenant for a month of two, the lender will want to know that you can make your mortgage payment without rental income.

A HELOC is a wonderful tool when used to save money or make money. Paying off a big credit card bill will allow you to save money on interest. Real estate investing and investing in a rental property could pay big dividends.