If you’re hoping to get more money for your real estate business, look no further than the properties you already own to help you get the financing you need. A line of credit on investment property could be a way to get more funds to continue to expand your business.
What Is An Investment Property Line Of Credit?
An investment property line of credit is a type of short-term financing that utilizes the equity in a non-owner-occupied property to provide ongoing access to funds via revolving credit.
If you qualify, you’ll get a line of credit that you can use, pay off, and use again. It gives you access to a specific amount of funds you can borrow against as needed, up to your credit limit.
Lines of credit often have a draw period during which you can borrow money. You will likely still make monthly payments during the draw period, but they may be interest-only payments. Once the draw period ends, the remaining balance is amortized over a set repayment term and you’ll make monthly payments until the loan is repaid. (There are short-term lines of credit that immediately amortize and require full payments immediately, though, so make sure you understand the terms.)
Lines of credit typically carry a variable interest rate that can change if interest rates change. It’s rare for a line of credit to offer a fixed interest rate though it is certainly possible.
A line of credit is different from, say, a 30-year mortgage, where you borrow a lump sum and pay it back over that 30-year repayment period, usually with fixed payments and fixed rates.
If you’re considering getting an investment property line of credit, there are a few different options available. Here’s what you need to know about each and how a line of credit may be a better option than some of the other types of financing for real estate investors.
Types of Investment Property Lines of Credit (LOCs)
If you’re considering a LOC for your real estate business, and don’t want to pursue an investment property loan, here are five options to consider.
1. Investment Property LOC
If you have at least one rental property, you may be able to get an investment property line of credit to provide funds for your business. Here, the equity you own in your property will serve as collateral for the loan. Equity refers to the difference between the value of the property and any outstanding loans.
Is It Hard To Get A HELOC On An Investment Property?
It does take some work to qualify for an investment property line of credit. If you already have a first mortgage on the property, the lender will be in “second position” if you default and the property is foreclosed upon. That’s risky and that means your loan application will be carefully scrutinized.
Additionally, because a rental property line of credit poses more of a risk to a potential lender than a HELOC on a home you live in, not as many lenders offer them.
You’ll need to meet the lender’s requirements for investors, which may include:
- A lease in place on the property and be collecting rental income
- Minimum time of ownership, which could be 12 months or more
- Good to excellent credit scores
- Strong track record with real estate investing
- Sufficient cash reserves
If you do qualify for an investment property line of credit, expect the lender to require a lower loan-to-value (LTV) and/or combined loan-to-value (CLTV limit) than typical HELOCs. The annual percentage rate (APR) will likely be higher too, due to the higher level of risk. But if you’d prefer to keep your business and personal assets separate and you meet the requirements, it could be a good option.
2. Portfolio Line of Credit
If you own several investment properties and are looking to build up your portfolio, a portfolio LOC may be an option.
What is a Portfolio Line of Credit?
A portfolio loan or line of credit is secured by an investment that serves as collateral. As an individual you may use investment accounts to qualify. As a real estate investor, you may use your part or all of your real estate portfolio to qualify.
Loan requirements are relatively similar, but you may need a higher credit score and more cash in reserves to qualify for a portfolio LOC — you’ll also typically be borrowing more money this way than with an investment property line of credit. For that reason, interest rates tend to be somewhat higher.
You don’t have to get a portfolio LOC just because you have multiple properties. It depends on the loan amount needed and your qualifications.
3. Business Line of Credit
If you have an established business, you may be able to get a business line of credit using your company’s credit history.
In some cases, you may need to provide collateral for a business line of credit, but some lenders offer unsecured LOCs with no collateral requirements.
4. Business Credit Cards
Some real estate investors will use business credit cards to help fund renovation expenses. Not only are credit cards a great way to track expenses to make sure you take advantage of all available tax deductions, but they also offer a short-term line of credit.
Credit cards can be easy to get as long as you have good credit, and card issuers won’t scrutinize the details of your real estate transaction. Credit cards do tend to carry higher interest rates, but there are business credit cards that offer 0% intro APRs for as long as a year or longer.
It can be helpful to use credit cards that do not report to personal credit so those balances don’t affect your personal credit scores. (Business credit card balances can affect your business credit scores, but not all business credit cards report to all business credit reporting agencies.)
The minimum payments will be low and once you complete the renovation and sell the property you can pay off the credit cards and free up those credit lines again!
5. HELOC on Your Home
Homeowners just starting out who don’t have any investment properties, or can’t qualify for an investment property may be able to get a home equity line of credit (HELOC) or home equity loan on their primary residence.
Refinancing your current mortgage and taking out cash to help finance your investment property activities may be another option. (This is called a “cash out refinance.”) However, this option may have higher closing costs and can result in a higher mortgage payment.
Of course, this works only if you own the home and have enough equity to get what you need. If you’re considering this option, take some time to compare lenders to find the right fit. You’ll also want to make sure you feel comfortable financing your business venture with what is likely your biggest and most important personal asset.
If you decide to go this route, some lenders may only lend up to a combined loan-to-value ratio (CLTV)—that’s the sum of your first mortgage and the HELOC divided by the property’s value—of 80%. Others, however, may go up to a CLTV of 100%.
One thing to keep in mind with this option is that your primary residence is an asset that isn’t protected by your business as a rental property would be. If your business doesn’t turn out as well as you thought it would and you can’t repay the HELOC, you may lose your home.
How to Apply for an Investment Property Line of Credit
As with any type of business, your first step is to gather documentation so you are prepared to demonstrate information about your qualifications, including:
- What is the value of the property?
- What type of property is it? (e.g. single-family or multi-family)
- How much equity do you have in your property?
- How long have you owned it?
- What are the lease agreement terms?
- How do you plan to use the funds you borrow?
- What is the structure of the business that owns the property (e.g. LLC)?
- What are your credit scores (business and/or personal)?
- How much do you have in cash reserves?
You may need to document these factors with business bank account statements, your LLC operating agreement (if applicable), and some lenders may require tax returns.
If you’re not sure where your business credit history stands, register with Nav to gain access to your business credit scores and reports (as well as your personal credit score).
You’ll then need to find a lender that offers investment lines of credit. You may be able to get funding through your bank or credit union, but don’t be surprised if those financial institutions don’t make these loans. Not all do.
You may also want to search for financing through a loan broker, online lender or online lending marketplace. An online marketplace like Nav, can help you save time by helping you find lenders based on your business needs and your qualifications.
The Bottom Line
If you’re in the business real estate investing, you may have several financing options for investment property loans, including bridge loans, hard money loans from private money lenders and others.
An investment property line of credit can be an excellent way to get the financing you need for your real estate business. Depending on how much experience you have and how many properties you own, there are a few different options available that can help you achieve your goals.
As you consider the best option for you, take a look at the different types of LOCs, and also the lenders that offer them. You’ll want to compare your options to get an idea of cost and terms that are available.
For example, if you want to maximize a LOC for multiple fix-and-flip investments, a loan with a longer draw period may be worth it even if its interest rate is slightly higher than a loan that gives you less time to revolve debt. As you compare your options carefully, pick the one that best aligns with your goals and your eligibility.
This article was originally written on December 13, 2019 and updated on February 3, 2023.