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 the answer.
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 money via revolving credit. Depending on your situation, though, there may be other opportunities to get a line of credit to finance your business. If you’re looking to apply for a line of credit or a loan, Nav’s Business Boost plan can help you get ready.
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 financing alternatives for real estate investors.
Types of investment property lines of credit (LOC)
If you’re considering a LOC for your real estate business, and don’t want to pursue an investment property loan, there are four potential options available to you. With each, you’ll receive a line of credit that you can use, pay off and use again during the draw period—typically with a variable rate but some may offer a fixed rate.
This can be a great option if you’re regularly flipping houses and don’t want to apply for a new hard money loan or another loan type every time.
Once the draw period is over, the balance at that time is amortized over the predetermined repayment term and functions similarly to a fixed-rate loan with installment payments.
1. Get a HELOC on your home
If you’re just starting out and don’t have any investment properties yet or you don’t have enough equity in your properties to get the funding you need, you may be able to use your primary residence instead and get a home equity line of credit (HELOC).
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.
2. Get a LOC on your investment property
If you have one rental property, you may be able to get an investment property line of credit to provide funds for your business.
While this type of LOC is similar to a HELOC on a primary residence in many ways, it can be more challenging to get one. Because a rental property line of credit poses more of a risk to a potential lender than a HELOC, not as many lenders offer them.
You’ll also need to meet certain requirements for investors that HELOCs don’t have, which may include:
- You must have a lease in place on the property and be collecting rental income
- You’ve owned the property for 12 months or more
- Your credit is in good or excellent condition
- You have a strong track record with real estate investing
- You have a lot of cash reserves
If you do qualify for an investment property line of credit, expect to have a lower CLTV limit and a higher annual percentage rate (APR) than HELOC rates (again, due to the greater risk associated with these loans). But if you’d prefer to keep your business and personal assets separate and you meet the requirements, it could be a good option.
3. Get a portfolio LOC
If you own several investment properties and are looking to build up your portfolio, a portfolio LOC may be a better option. Instead of using just one property as collateral, the lender will use your entire portfolio.
Loan requirements are relatively similar, but you may need a higher credit score and more cash in reserves to qualify for a portfolio loan — 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 a bit higher.
You don’t have to get a portfolio LOC just because you have multiple properties. If you need an amount of money that an investment property LOC can provide, that may be enough.
4. Get a LOC for your business
If you have an established business already, 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, such as your investment properties, but some lenders offer unsecured LOCs with no collateral requirements at all.
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).
How to flip houses with ‘no money down’
If you’re in the business of fixing up and flipping houses, you may have several financing options for investment property loans, including bridge loans, hard money loans from private money lenders and others.
The problem is that many lenders that offer these short-term loans require a down payment. If you don’t have enough cash on hand or you want to maintain your cash reserves, you may be out of luck.
Investment property lines of credit and many other LOCs, on the other hand, don’t require a down payment at all. And again, if you’re fixing and flipping houses at a relatively quick pace, you may be able to use the same LOC over and over again for multiple properties, which can save you from having to go through the loan application and underwriting process with each home.
Just keep in mind that different LOCs may have varying acceptable uses for the money. Depending on your business plans, be sure to talk with each lender beforehand to make sure you can use the money for your intended use.
The bottom line
An investment property line of credit can be an excellent way for investors 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. It’s best to apply — or get quotes if they offer a pre-qualification process — with several lenders to get an idea of what the loan is going to cost you, as well as the terms.
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 your debt.As you compare your options carefully, pick the one that best aligns with your goals and your eligibility. Then be sure to make a plan to pay off the debt as scheduled to avoid running into problems with your business credit history and possibly losing your property.