Can you buy an investment property with a HELOC?

This article is for educational purposes only. JPMorgan Chase Bank, N.A., does not currently offer home equity lines of credit (HELOCs) in all states. Please talk with a Home Lending Advisor to see if HELOCs are available in your state. Any information described in this article may vary by lender.

Quick insights

• It’s possible to use the equity in a property to fund an investment in another property.
• One strategy for buying an investment property involves a home equity line of credit (HELOC).
• This approach may provide the money needed to invest in a property, along with other benefits, but it has its risks, too.

The association of real estate with investing is rooted in several aspects of the industry, namely property value and home equity. Some people use it to fund their investments in additional properties.

Below, we’ll discuss how buying an investment property with a HELOC typically works, along with several pros and cons of doing so.

How do you use a HELOC?

A HELOC is a revolving line of credit with a dollar limit you can borrow from. There can be different ways of accessing your HELOC, such as access checks, a debit card and electronic transfer capability—the options vary by lender. You can draw up to the credit limit during a draw period, usually several years, multiple times if you need to. After the draw period, you enter the repayment period to pay off what you borrowed.

How you can buy property with a HELOC

You could use the money from a HELOC to help finance a property or buy it outright. As part of the approval, your HELOC limit will be set based on the amount of equity you have in your home, among other factors. The lender will provide options for drawing on your HELOC, such as checks or electronic transfers.

HELOC for a down payment

You can usually put money down on a home with certain types of checks and electronic funds transfers. To draw on a HELOC, having both of those options are commonly offered. Depending on the lender and size of the down payment, you might be able to provide it with another payment method.

HELOC for a full purchase

If a HELOC has a high enough limit, you can draw from it to fund the entire purchase of an investment property. For example, if you have a $200,000 HELOC, and you want to flip a property you bought for $100,000, you can draw from the HELOC to fund the full purchase. Then, you could continue to draw from the $100,000 left in your HELOC during the draw period, perhaps to fund renovations.

Can you use a HELOC for a rental property?

Even if you plan to rent out a house that you’re buying with a HELOC, the homebuying process won’t be much different. Checks and electronic transfers are common funding options, either for the down payment or entire home sale.

“Rental property” and “investment property” are somewhat interchangeable terms with slightly distinct aims. The primary goal of a rental property is to generate income from the rent charged to tenants. Investment property is a broader term that describes real estate purchased to earn a return, either from resale, rental or both.

Pros and cons of using a HELOC to buy investment property

Buying property with a HELOC can be attractive to investors for various reasons, including the flexible access to money. However, buying property with a HELOC can also have potential drawbacks.

Pros

• Access to money: A HELOC can be used for the down payment or full purchase of an investment property when you lack sufficient cash. A HELOC can also fund home improvements after a purchase if you’re still in the draw period.
• Interest-only payments: You may have the option to make interest-only payments on what you borrow during the draw period. Doing that could lower payments during the repayment period.
• Revolving credit: As a revolving line of credit, a HELOC generally offers a flexible source of money. You can continue borrowing portions of the available credit as long as you are within the draw period. This revolving aspect of a HELOC provides access to money within the draw period, perhaps for property-related expenses or additional investments.

Cons

• Collateral: HELOCs are backed by the equity you have in a property. Whether or not that’s your primary residence, defaulting on a HELOC risks foreclosure and repossession. If you are, in fact, borrowing against your home’s equity, this risk could feel more significant.
• Interest and fees: HELOCs are known to have variable interest rates that could cause your monthly payments to fluctuate during repayment. This isn’t always bad but could increase the cost of borrowing. Plus, setting up a HELOC may have closing costs depending on the lender.
• Debt: Using a HELOC increases your total debt and changes your credit profile. The additional housing debt can affect how lenders evaluate future applications for credit. Debt can also accrue quickly and difficult to reduce.

Other ways to buy an investment property

A couple direct alternatives to buying an investment property with a HELOC would still leverage home equity. Meanwhile, there are additional processes you can go through if you don’t want to use equity at all.

Home equity loan

A home equity loan provides a sum of money that you can keep in an account and use how you see fit, usually just like cash. The lender will set the conditions for repayment, such as the interest rate and loan term.

Cash-out refinance

Cash-out refinances involve refinancing your mortgage for more than you currently owe. Your current mortgage would be replaced, so the monthly payments and loan term would change. Then, you’d receive the difference in cash.

Traditional mortgage

These long-term loans (15 to 30 years) are usually available at fixed or adjustable interest rates. The mortgage options for purchasing investment properties may have stricter requirements to manage the lender’s risk. For example, you may have to put more down on an investment property than you would on a property where you intend to live.

Cash purchases

Buying a home with cash eliminates the need for various financing options, including mortgages and home equity loans. Having cash can also make the approval and closing procedures of a home sale more straightforward.

In conclusion

When leveraging home equity for an investment property, a HELOC may be the right choice for you. There are several ways to draw from a HELOC that can help finance or fully fund an investment home purchase. Common benefits are the flexible access to money and the potential to make interest-only payments during the draw period.

Most of the potential drawbacks and risks are related to real estate market trends. Equity is tied to property value, and that can fluctuate over time. Direct alternatives to funding investments with home equity are home equity loans and cash-out refinances.