An investment property line of credit (LOC) is a short-term financing option for non owner occupied properties. Investors will typically qualify for a predetermined amount and then draw cash from that amount as they need it. It’s revolving like a credit card where you only pay interest on the money that you actually use.
If you’re an investor looking for an investment property line of credit of $1,000,000+, contact CoreVest. They offer fix and flip credit lines for investment properties with rates starting at 7% and terms of 18 or 24 months. You only have to pay back the money that you actually use.
Types of Investment Property Lines of Credit
There are two types of investment property LOCs. The first type is a single investment property line of credit intended for investors that want one line of credit on one investment property. The second type is investment property line of credit on a portfolio of properties. This is for larger investors looking for $1,000,000 or more.
Regardless of type, an investment property line of credit is a great tool to use if you have at least 40% equity in your property or portfolio and need cash for a specific purpose. However, it does have strict lending criteria such as a high credit score. If you don’t qualify, we list some alternatives below.
Single Property Investment Line of Credit
An investment property line of credit (LOC) on a single property gives an investor access to funds based on the equity of a single investment property. It is similar to a HELOC where an investor draws the funds that they need and only pay interest on the funds that are used.
However, unlike a HELOC, the property is an investment and not an owner-occupied primary residence. This type of investment property LOC is right for investors with one investment property who are looking for one line of credit to use at their leisure. Since investors can draw funds for anything related to their investment property, the uses vary but are typically used for rehabs and renovations.
Single Investment Property Line of Credit Rates and Terms
The rates for an investment property line of credit are based on the borrower’s credit score and credit history but also based on the investment property itself. The terms are set by the bank offering the line of credit.
The investment property line of credit rates and terms include:
- Interest rate of prime + 1% (larger LOC amounts have lower rates)
- Annual service fee of $75
- Closing costs between 1% – 5%
- Maximum credit line up to 60% LTV
- $25,000 minimum line of credit
- 30-year term (10 year and 1 month initial draw period, 20 year period where money can be paid back but not withdrawn)
You’re typically charged interest on any overdue amount not repaid, even during the initial 10-year period. There’s also usually a 3 year minimum on most LOCs and if it’s closed early the prepayment penalty is $300. Further, many investment property lines of credit have minimum payments of $100 or more when you draw.
Single Investment Property Line of Credit Qualifications
An investment property line of credit has certain qualifications that a borrower and their property must meet in order to get approved. The qualifications that need to be met include the amount of equity in the property as well as a minimum credit score and credit history of paying on time.
The investment property line of credit qualifications include:
- A credit score of 660+ (Check your score for free here)
- A single family home or a property with 1-5+ units
- Low debt to income ratio of 45% or less
- 10-20% Equity in the property must remain after the LOC and mortgage
Where to Find a Single Investment Property Line of Credit
Banks, credit unions, and online lenders typically all offer lines of credit for a single investment property. Call the financial institution’s line of credit department and let them know it’s for an investment property to make sure they offer applicable loan products.
Many private lenders will offer a cash out refinance loan instead of a line of credit. The cash out refi loans from LendingOne come as a 30-year fixed-rate loan or 3, 5, or 7 year ARM. You can borrow up to 80% LTV with a cap of $2MM. Rates start as low as 5.99% and their online application takes minutes.
Portfolio Investment Property Line of Credit
If you’re a high net worth investor with over $1,000,000 in equity or own a portfolio of properties then this line of credit for portfolio properties is for you. Large investors often use these portfolio LOCS as an alternative to raising capital and will sometimes use it to purchase new properties as well as rehab new and existing investment properties up to 20 units or more.
It’s important to note that while these portfolio investment property lines of credit are suited for larger investors due to the minimum LOC, they still work on single properties. So, if you’re working on a larger, single-asset project you can also use this investment property line of credit.
Portfolio Investment Property Line of Credit Rates and Terms
A portfolio investment property line of credit has its own credit rates and terms. Their rates are higher than a single family investment property’s LOC rates. Their term is shorter and their rates and terms are determined more by the borrower’s overall financial standing.
The investment property line of credit rates and terms include:
- Rates from 5% – 8%
- A term from 18 to 24 months
- $1,000,000 minimum LOC
- $50,000,000 maximum LOC
- Up to 75% LTV
- Generally no fees, just interest on the amount you borrow
Portfolio Investment Property Line of Credit Qualifications
A portfolio investment property line of credit has certain qualifications that a borrower and their property must meet in order to get approved. These qualifications include a high FICO score but are more based off of the investor’s overall financial picture including his assets, salary and investments.
The investment property line of credit qualifications include:
- A credit score of 700+ (Check your score for free here)
- A single family home or a property with 1-20 units
- 20% equity to remain in the property or must show enough assets to use as collateral
- An overall strong financial standing determined by the lender after reviewing the portfolio
- An experience level equal to 2 – 3 past projects, on average
When applying for a LOC your personal credit score is pulled using a hard credit pull. If you’re running a real estate investing business, your business credit report and business credit score might also be pulled, especially if the property is in your business’ name.
Where to Find a Portfolio Investment Property Line of Credit
Since this is such a specific loan product only certain financial establishments offer them. They aren’t always available at your local bank. One company that offers portfolio investment property lines of credit is CoreVest. They offer lines of credit starting at $1,000,000 with interest rates starting at 8%. You can apply online and then you will be assigned a personal representative to work with you.
How to Apply for an Investment Property Line of Credit
In general, you can apply for an investment property line of credit on the financial institution’s website or over the phone with a representative. You can apply in person if they have a brick and mortar location. You will need to have proof of property ownership such as the settlement sheet or the deed in hand, along with other requirements.
Here are the 4 steps you need to apply for an investment property line of credit:
1. Choose the Right LOC
Choose the right LOC based on your investment property and your financial goals. If you own one investment property and have $100,000 worth of equity in the property, a single home investment property line of credit is for you. If you own a portfolio of properties and need $1,000,000 to purchase another property then a portfolio LOC is right for you.
2. Get Required Documents
Besides providing proof of property ownership, you will need the lienholder’s information if there’s already a mortgage on the property. Have all your property related documents ready to speed up the application process. The lender will also check your credit score (check your score free here) and employment information so have a copy of your paystubs and bank statements handy as well as your last 2 years of tax returns.
3. Apply Online
Applying online is the fastest and easiest way to apply for a LOC. It gives you the flexibility to apply from the comfort of your home and office when it’s convenient for you. You won’t have to worry about what time the lender is open. After you finish your online application, a representative will contact you to go over your application.
4. Get Approved
The LOC representative will call you using the contact information you listed on your application. They will ask for any outstanding documents and will then be able to let you know if you’re approved. This will be followed up with a formal letter of approval. The process can usually be done within 30 days.
How an Investment Property Line of Credit Works
An investment property line of credit works by giving the investor access to funds secured by the equity in their investment property. You use the funds when you need them and only pay interest on the money you use. These LOCs are flexible and you repay them monthly or in a lump sum before the due date.
An investment property line of credit allows you to pay off the amount you use and then use the funds again. For example, if you have a $100,00 investment property line of credit and only spend $25,000, you only pay interest on the $25,000 you used until you repay it. Once you pay back the $25,000, it’s available to be spent again. This is why it’s similar to a business credit card.
Investors use an investment property line of credit for the following:
- Rehabbing an existing property in their portfolio
- Purchasing a turnkey property
- Paying off expensive debt, like a private money loan
- Purchasing and renovating a new property
A LOC is generally a first lien position. Most lenders don’t want to take the risk of being a 2nd lien holder, but for high net worth individuals, some lenders will make an exception. Lenders will also typically only allow 1 investment property line of credit per property.
When you apply for an investment property line of credit you need to specify what the funds will be used for on your application. Your investment property will be the collateral for the LOC. Once you receive the funds you can do with them what you like, but it’s recommended to use them for the purpose stated on the application, such as to consolidate debt or to purchase another property.
Most lenders allow the funds from a LOC to be used for purchasing additional properties, while some discourage it. The majority of lenders don’t allow the funds to be used to invest in a business due to the high level of risk. If you need the money to fund a business, use a business loan instead. The lender can terminate the LOC and require that it be immediately paid back if you use it for something they don’t permit. The loan documents will tell you if the LOC can’t be used for a certain type of investment.
Who an Investment Property Line of Credit is Right For
An investment property LOC is right for short and long term real estate investors that have substantial equity in their property, a high credit score, but may be short on cash. It’s also right for an investor who wants to either fix up their current property in order to increase the rental income or buy an additional investment property.
A fix and flip investor is well suited for an investment property line of credit. They can take advantage of the short term loan length and rehab the property and then flip it and pay off the line of credit. A line of credit for investment property is also beneficial for landlords or rent and hold investors. They can use the funds to renovate their investment property and demand higher rents.
An investor looking to purchase properties and build up their real estate portfolio will typically use a portfolio loan but can also consider an investment property line of credit. Lenders generally allow one line of credit per investment property as long as the borrower and the property meet their qualifications. These lines of credit can be used in conjunction with cash or other financing to purchase additional properties.
Investment Property Line of Credit Pros and Cons
As is the case with each financing tool, an investment line of credit has pros and cons that should be carefully considered. This product offers benefits such as a fixed rate and a long loan term. However, you still need to consider the fact that it has strict lending criteria.
Pros of an investment property line of credit include:
- Long repayment term
- Tax benefits on the interest paid
- Relatively low interest rate
- Interest is only paid on what you draw
- A 1st mortgage is accepted
- Fast access to cash
Cons of an investment property line of credit include:
- High credit score needed in order to qualify (Check your score for free here)
- A lower LTV than other financing options
- High equity needed in the property
- Can’t use the money to fund a business
- Limitations on how many units the property has, some lenders will allow up to 4 units and others will finance up to 20 units
Investment Property Line of Credit Alternatives
We’ve established that certain criteria need to be met in order to qualify for an investment property line of credit. If you need a higher LTV or if you don’t qualify due to personal credit issues, it’s important to know what alternative financing methods are available to investors.
Alternatives to an investment property line of credit include:
1. Home Equity Line of Credit
A home equity line of credit (HELOC) is a revolving line of credit that a lender gives a borrower where the collateral is the borrower’s primary residence. A HELOC can be the only loan on the home or it can take 2nd lien position to a mortgage. The home equity line of credit can generally be used for anything you like.
Popular HELOC uses are renovating a current house or investment property, paying for college tuition or consolidating credit card debt (like we said, you can use it for pretty much anything). You can draw the money as you need it and similar to an investment property LOC, you only pay interest on the funds that you use.
HELOCs give homeowners with equity in their homes access to funds with low interest rates, usually .25% above prime rates for 1st position LOCs and slightly higher rates for 2nd position LOCs. A 620 credit score is usually required for a HELOC but each bank has their own requirements. For more information, you can read our HELOC ultimate guide.
For those considering tapping into their property’s equity, take a look at LendingTree. Their online marketplace has a large number of lenders allowing you to compare rates, offers, and find a good fit. Seeing your options takes just a few minutes.
2. Hard Money Loans
A hard money loan is a short term financing tool for investors looking to purchase a property, renovate it, and make a speedy exit. Hard money lenders offer short terms, interest only payments and higher interest rates. Since the payments are interest only, investors can keep the carrying costs relatively low.
A hard money loan is ideal for an investor who wants a short term loan product that can close quickly. Unlike, a LOC, a hard money loan isn’t intended for a rent and hold property purchase. Instead, they’re ideal for fix and flip properties with an exit strategy in mind. Hard money loans have higher interest rates than LOCs. Investors typically use hard money loans when they have a house flipping business or if they want to fix and flip a house.
For more information on hard money loans and lenders that offer them, check out our guide to the best hard money lenders. It will show you who lends money and the differences between them as well as the qualifications these lenders require.
3. Bridge Loans
Since investment property lines of credit are funded based on the equity in a property, bridge loans can be a good short term financing alternative. Bridge loans are typically used when permanent financing isn’t an option. This can be due to the property being in poor condition or high vacancy rates or just trying to secure a property in a short time period.
A residential bridge loan can be used by an owner occupant or an investor. An owner occupant may use a bridge loan to purchase a new primary residence without having to sell another residence first. An investor would use a bridge loan to snap up an investment property and be able to compete with the fast timelines of cash buyers.
A bridge loan is a short term loan product used in the interim of other financing methods. Unlike LOCs, these loans are geared towards both owner occupants and investors. Bridge loans have higher interest rates and fees than LOCs. A bridge loan doesn’t have a revolving credit line either.
For more information on bridge loans, check out our in depth guide on bridge loans and how they work.
4. Rehab Loans
Rehab loans are short term financing products used by both fix and flippers and investors that rent and hold. Rehab loans offer interest only payments which help keep carrying costs low.
Rehab loans can be permanent financing solutions such as a homestyle renovation mortgages or they can be short term loans used to fix up a property or fix up multiple properties at the same time using a blanket mortgage. For more information on rehab loans check out our in depth guide on rehab loans for investors.
Rehab loans can be short term or long term loans which are similar to LOCs but LOCs have a more flexible time frame since you can use the funds as you need them. Rehab loans are specifically for rehabbing a property and LOCs can be used for a variety of purposes such as buying a new property.
An investment property line of credit can be a smart financing tool for investors looking for access to funds to fix up the property. Although there are some stringent qualifications, it’s a great tool since you only pay interest on the money that you draw.