Investment Property Line of Credit: What It Is & How It Is Used
This article is part of a larger series on Business Financing.
An investment property line of credit (LOC) is short-term financing on a property that isn’t owner-occupied. A lender will place a lien on an investment property in exchange for a revolving line of credit against the property. It operates the same as a home equity line of credit (HELOC).
An investment line of credit is similar to a business credit card, where you only pay interest on the amount used at any given time. You can make payments against the amount owed or pay the balance down to zero with a lump sum payment.
You can use an investment line of credit for several purposes, including:
- Rehabbing an existing property in your portfolio
- Purchasing and renovating a new property
- Paying off expensive debt, such as a private money loan or a merchant cash advance
If you’re considering investment property financing by getting an investment LOC, CoreVest can help. CoreVest offers a line of credit of between $1 million to $50 million on investment properties. It offers fix-and-flip or rental aggregation credit lines for investment properties with rates starting at 7% and terms of 18 or 24 months. Visit CoreVest’s website for more information.
Who an Investment Property Line of Credit Is Right For
Investment property lines of credit are best for borrowers with a large amount of equity in the investment property and a high credit score. It’s also best for investors who want to renovate a current property to increase rental income or purchase an additional investment property.
While some investors might prefer a portfolio loan to purchase additional investment properties, by using an existing investment line of credit, the investor can get access to the funds needed much more quickly than waiting for a portfolio loan to close. However, a portfolio loan may be needed if there isn’t enough available credit remaining on the line of credit for the purchase.
Some lenders may shy away from borrowers who wish to use an investment line of credit to invest in their business. A business loan is better suited for this purpose.
Investment Property Line of Credit Pros and Cons
| PROS | CONS |
|---|---|
| Long repayment term | High credit score needed to qualify |
| Tax benefits on interest paid | Only allowed up to 60% loan to value |
| Relatively low interest rate | High amount of equity required in property |
| Interest only paid on what is used | Lenders may not allow you to invest the money in your business |
Types of Investment Property Lines of Credit
Investment property lines of credit come in two varieties: single investment property LOC and investment property portfolio LOC. Single property LOCs are for one line of credit on one investment property. Investment property portfolio lines of LOCs are a blanket line of credit on a portfolio of properties. These are typically high-value projects costing $1 million or more.
Single Investment Property Line of Credit
A single investment property line of credit is one line of credit on one investment property. The money obtained from the line of credit is usually used to renovate the investment property to increase its potential value. Typically, the draw period extends for 10 years with up to 20 more years to pay it back afterward. Some lenders will renew lines of credit as long as the borrower qualifies at the time of renewal.
Investment Property Portfolio Line of Credit
Investment property portfolio lines of credit require strong financials and good credit scores, as the risk involved to lenders is much higher than with a single property. As a result, many lenders don’t offer this product. You’ll most likely need a credit score above 700, a strong financial history, and at least two previously completed projects.
CoreVest is a lender that provides both single and portfolio lines of credit. Lines of credit start at $1 million, with commercial real estate loan rates starting at 7%. You can apply through CoreVest’s website or call a toll-free number to get started. Visit the CoreVest website for more information.
How to Apply for an Investment Property Line of Credit
When considering an investment property line of credit, there are four steps to follow to apply:
- Choose the right LOC: Determine whether you need a single or portfolio LOC.
- Gather required documents: You’ll likely need at least two years of financial information, lienholder information on the property, pay stubs, and, potentially, records of previous projects.
- Apply online: Most lenders allow you to begin the application process through their website.
- Get approved: Once the lender goes through all the paperwork, it’ll let you know if you’re approved. Then, the lender should notify you in writing of your approval. This process can take up to 30 days.
For more general information on the application process, check out our guide on how to get a small business loan.
Investment Property Line of Credit Alternatives
There are many alternatives to investment property lines of credit. Consider all available options before deciding to go forward with an investment property line of credit.
Home Equity Line of Credit
The difference between using a HELOC or an investment property line of credit is that a HELOC uses a primary residence of one of the business owners as collateral. As a result, interest rates and minimum requirements will be lower on a HELOC, but the risk to the borrower will be higher as their residence will be at risk if the loan is defaulted.
The local bank where you have your first mortgage is an excellent place to find a HELOC. However, if you don’t have a bank of choice, a marketplace like LendingTree is an excellent resource for shopping around with multiple lenders to find the best offers. Check out their website for more information.
Hard Money Loans
A hard money loan is a short-term loan used by investors to purchase, renovate, and sell an investment property. Fix-and-flip loans offer short terms, interest-only payments, and higher interest rates. Unlike LOCs, hard money loans aren’t best for purchase-and-hold investments. Hard money loans are also used for properties in disrepair that might not qualify for other types of financing, including lines of credit.
Kiavi is a good choice for hard money loans. With fast funding times, no hidden fees in its closing costs, and no personal income qualifier, Kiavi is an excellent choice for business owners looking for a hard money loan.
Commercial Bridge Loans
A commercial bridge loan is a flexible loan that provides short-term financing for the purchase of an investment property and funds for its rehabilitation. Unlike LOCs, a commercial bridge loan isn’t permanent financing and is often used by borrowers who cannot initially qualify for permanent financing. Before approving or rejecting a project, lenders will consider the property’s current condition, renovation plans, and market conditions.
AVANA Capital is an excellent choice for a commercial bridge loan. AVANA offers interest-only payments for up to three years, allowing borrowers to keep more cash on hand for other expenses.
Cash-Out Refinance
While some investors may prefer to have a revolving line of credit for continued use, some may choose just to obtain the built-in equity in an investment property as a cash-out refinance. This allows you to refinance a loan on an investment property to increase the loan amount, giving you access to the equity built up through property improvements or valuation increases.
RCN Capital offers a 30-year cash-out refinance loan for up to $2 million and an 80% loan to value. Rates are as low as 4.49%, and funding can be obtained in as few as 10 days. Check out RCN Capital’s website for more information.
Bottom Line
An investment property line of credit can be a convenient and affordable form of credit, whether you’re looking to invest in a single property or a whole portfolio of properties. It allows you to only pay interest on the amount borrowed and gives you the flexibility to access funds when they’re needed, as opposed to receiving a lump sum of money with a cash-out refinance. Consider your business plan for your investment property and consider alternative types of financing before moving forward with an investment property line of credit.
