An investment property line of credit is a revolving credit facility that allows you to request funds via a draw, have the funds deposited to your account of choice, and use the funds on an as-needed basis. For an investment property, a line of credit can be used to finance property improvements, repairs and upgrades, or other expenses that fix-and-flip or fix-and-hold investors commonly encounter.
An investment property credit line is similar to a home equity line of credit (HELOC) but uses the investment home as collateral for the loan. Rates also tend to be higher as lenders view investment properties to be riskier than owner-occupied properties. Interest is only paid on your outstanding loan amount, making it an excellent option for short-term expenses.
If you’re considering an investment property line of credit to acquire or conduct repairs on a property, we recommend considering CoreVest. It can provide short-term investment lines of credit to purchase, renovate, and refinance existing properties.
Investment Property Line of Credit Types & How They Work
An investment property line of credit can be structured as a single-property investment credit line or as an investment portfolio credit line. With a single-property investment line of credit, only one nonowner occupied property is used as collateral to determine your loan eligibility. In determining the rates and terms you’ll get, lenders will assess the property’s value, the equity you have, and your own qualifications.
Meanwhile, an investment portfolio credit line operates in a similar manner but uses two or more properties as collateral. Some lenders may require a minimum number of properties to qualify for a portfolio loan. While a portfolio line of credit can help in simplifying your finances and give you the ability to get larger loan amounts, it can also be more difficult to qualify for. This is because the risk to the lender is greater since there are multiple properties involved.
Who Should Consider an Investment Property Line of Credit
A line of credit for real estate investors can be particularly useful if you own a nonowner occupied property and are in need of flexible financing opportunities. However, this financing option may be best suited for you for the following reasons:
- You have a lot of equity in the property: Getting an investment property credit line can require you to have 40% or more equity in the home. This is because lenders view nonowner occupied homes as a higher risk. By having more equity in the property, lenders have a greater chance at recouping losses in the event they must foreclose and resell the home.
- You have strong credit and income: Investment property credit lines will often have stricter requirements for credit and income. Again, this is largely due to the fact that nonowner occupied homes are considered to be more risky, and lenders will want to reduce the likelihood of default and mitigate risk by requiring good credit and solid financials.
- You can pay off the loan balance within the repayment term provided: Borrowers who are unable to make timely payments risk going into default and potentially losing their assets, inclusive of the properties securing the loan. As a result, you should ensure that the required monthly payment fits your budget. You should also consider whether the interest rate is variable or fixed and if you can afford the varied payment structure.
- You want to purchase or conduct repairs to property: Investment property credit lines are ideal for short-term financing needs and commonly used by fix-and-flip and fix-and-hold investors. You can access funds to acquire property and conduct any necessary repairs. Once completed, you then have the option to resell the property and use the sales proceeds to pay off the credit line.
- You want the flexibility of accessing funds in an emergency: With an investment property line of credit, you have the option to only borrow what you need and pay interest based on only the outstanding balance. Many credit lines also give you several years to draw and repay funds, making it a good option if you’re looking for a financial cushion in the event of an emergency or if you’re faced with other unplanned expenses.
- You want to consolidate high-interest-rate debt: Investment property lines of credit can have lower interest rates than many other types of debt. As a result, you can pay off higher-rate debt to save on interest charges in the long run.
Investment Property Line of Credit Rates, Terms & Qualification Requirements
Depending on your financing needs, there are various forms of a line of credit for an investment property. Each has varying rates, terms, and qualifications that you’ll need to consider. You should determine which option is best for your financing needs based on your investment goals, budget, and qualifications. Keep in mind that exact figures will vary depending on the specific lender you choose; however, we’ve provided a range of what you’ll be likely to find if you were to compare rates with different lenders.
Single-property Investment Line of Credit
Investment Portfolio Line of Credit
Typical Rates & Terms | |
Interest Rate | 7% and up |
Loan Amount | Varies based on equity |
Repayment Term | 24 to 36 months |
Loan Fees | Varies by lender |
Funding Speed | 10 to 30 days |
Typical Qualification Requirements | |
Credit Score | 720-plus |
Loan-to-Value Ratio (LTV) | 75% |
Asset Reserves | 24 months of housing payments |
Prior Investment Experience | Yes; a history of 2 or more managed investment properties |
How to Get an Investment Property Line of Credit
If an investment property line of credit is applicable to your real estate investment goals, there are a few steps to take to secure financing:
- Step 1: Verify a line of credit is right for you. Depending on your financing needs and real estate investment goals, consider how you intend on using the line of credit. This can include how frequently you plan on using it for funding, whether you can afford the monthly payments, and how quickly you plan on paying it off. These considerations can also help you determine what loan terms may be acceptable to you, such as the interest rate, repayment term, and other loan fees.
- Step 2: Explore your financing options. If you decide to proceed with a line of credit, you’ll need to choose which type is suitable, whether it be a single-property investment credit line or a portfolio investment credit line. Each has varying pros and cons with regard to factors such as rates, terms, and fees, so you’ll want to choose carefully to ensure it’s an ideal fit for your investment needs.
- Step 3: Review your qualifications and eligibility. After choosing your line of credit type, you’ll need to consider your credit, income, and property qualifications. While specific eligibility criteria will vary from lender to lender, borrowers should aim to meet the minimum qualifications required to improve their odds of approval. Those that may fall short of the required criteria may also want to proactively seek alternative financing options if fast funding is needed.
- Step 4: Find a lender. Investment property credit lines are issued by many different types of lenders. This includes credit unions, banks, brokers, and online lenders. Consider what you value most in a lender and in a loan before making any final decisions. Some examples of items to consider can include hours of operations, branch locations, rates, and loan terms offered.
- Step 5: Apply and provide requested documentation. Once you’ve found a lender, you’ll need to submit a formal loan application and provide required documentation. This will allow the lender to assess your credentials to determine your eligibility.
Pros & Cons of an Investment Property Credit Line
| PROS | CONS |
|---|---|
| Interest rates can be lower than many other forms of financing | Strong credit and income required to qualify |
| Long repayment terms available, which can give you low monthly payments | Properties must typically have 25% to 40% equity to get approved for a loan |
| Flexibility to draw funds on an as-needed basis | Interest rates are usually variable |
| Interest is only charged on the funds you draw | You risk losing the home if you default |
| Funds drawn have few, if any, restrictions on what they can be used for | You’ll need to pay 1% to 3% in closing costs |
Alternatives to an Investment Property Credit Line
An investment property line of credit won’t be right for everyone. If you are having trouble qualifying or are seeking a type of loan with different terms, you can consider the following alternatives. Be sure to also check out our guide on how to get a small business loan for insights on the loan process and tips on improving your approval odds.
- HELOC: This is nearly identical to an investment property line of credit but instead uses your primary residence as collateral for the loan. This might be an option if you don’t have enough equity in your investment property to meet the underwriting requirements for an investment property credit line. We recommend visiting LendingTree for this type of loan.
- Cash-out refinance: If you don’t need a revolving credit line, a cash-out refinance can be ideal to give you the lump sum of funds you need. Doing so will also replace the existing mortgage on the property, which can be beneficial if you can find a more competitive interest rate. For this type of financing, check out RCN Capital.
- Hard money loan: Hard money loans can have easier qualification requirements and more flexible loan terms, although at the cost of higher rates. This can make it a good choice if you’re having trouble qualifying for other financing options. We recommend checking out Kiavi because of its fast funding speeds and excellent customer service.
- Commercial bridge loan: This is short-term financing that’s often used to acquire and conduct repairs on a property. Once completed, fix-and-flip investors will then resell the property and use the sales proceeds to pay off the loan. Fix-and-hold investors, on the other hand, will replace the bridge loan with permanent financing once repairs are completed and the property is eligible for traditional financing methods. Visit AVANA Capital, as it offers a streamlined process to switch from a bridge loan to permanent financing.
Frequently Asked Questions (FAQs)
Yes, it is, because most lenders require a significant amount of home equity and strong credit and finances. This is largely due to the increased risk of lending on a nonowner occupied property. From a lender’s perspective, having strong qualifications not only reduces the risk of default but can also make it more likely for it to recoup losses in the event of nonpayment.
It typically takes anywhere from 21 to 45 days to get an investment property line of credit. Much of this time is used by a lender to evaluate your eligibility. In addition to reviewing your finances, lenders use third-party vendors, such as appraisers and title companies, to assess the condition and ownership status of the property.
Yes. Funds from an investment property line of credit can be used for virtually any purpose. Common uses include property repairs, property acquisition, and debt consolidation. All of which can be applicable to nonowner occupied rental properties. Some lenders, however, place restrictions on how you may use the credit line, so you should read the terms of your specific loan agreement to make this determination.
Bottom Line
Getting a line of credit on an investment property can provide you with quick access to funds on an as-needed basis. Funds can be used for a wide variety of expenses, whether it be to purchase a new investment property, cover expenses related to property repairs or upgrades, consolidate debt, or cover short-term financing emergencies.
It’s an ideal financing option for borrowers in need of short-term financing since you can borrow only what you need and repay the balance over time. However, interest rates tend to be higher on nonowner occupied properties, so you should consider your business plan for your investment property and consider alternative methods of financing.
