An investment property line of credit is a revolving loan that allows you to draw funds on an as-needed basis. When you make a draw from the credit line, the money can be deposited into your bank account. Popular uses for the funds include paying for property improvements, repairs or other expenses that fix-and-flip or fix-and-hold investors commonly encounter. Interest is only paid on your outstanding loan amount, making it an excellent option for short-term and unexpected expenses.
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.
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
If you currently own a nonowner-occupied property and want to tap into the property’s equity, an investment property line of credit might be ideal if you fall into the following scenarios:
- 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 of 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 riskier, and lenders will want to reduce the likelihood of default 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 losing the home in foreclosure. As a result, you should ensure you can afford the monthly payments to pay it in full within the repayment term you’re given. Also, consider whether the interest rate is variable or fixed, and if you would be able to afford the payments should your rate go up.
- You want to purchase or conduct repairs to property: Investment property credit lines are 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’ll only be charged interest on the funds you draw. Many credit lines also give you up to 15 years to draw funds, making it a good option if you want the peace of mind of knowing you can pay for unexpected repairs or other 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.
If you want to see how other loan types can be structured to meet your financing needs, see our guide on investment property financing.
Investment Property Line of Credit Rates, Terms & Qualification Requirements
If you know that an investment property line of credit is right for you, the next step is to determine what terms you’re likely to get based on your qualifications. While the exact figures will vary depending on the specific lender you choose, we’ve provided a range of what you’ll be likely to find if you were to shop rates with different lenders.
Single-property Investment Line of Credit
Investment Portfolio Line of Credit
How To Get an Investment Property Line of Credit
You can get a line of credit on investment property in five main steps. You’ll need to confirm it’s the right type of financing, explore your available options, ensure you’re eligible, and then find a lender and provide the required documents to get approved:
- Step 1: Verify a credit line is right for you. Think about how you intend to use the line of credit to ensure it’s the best fit. 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. This will also give you an idea of what loan terms are acceptable to you, such as the interest rate, repayment term, and other loan fees.
- Step 2: Explore your financing options. This is the stage at which you can consider whether you want a single-property investment credit line or a portfolio investment credit line. Each has its own set of pros and cons with regard to things like rates and terms, so you’ll want to choose carefully to ensure it’s an ideal fit for your use case.
- Step 3: Review your qualifications and eligibility. Once you’ve decided what type of investment line of credit you want to get, consider your credit, income, and property qualifications. You can compare your qualifications against those we listed above, as this can give you an idea as to the likelihood of landing an approval. While specific eligibility criteria will vary from lender to lender, borrowers that are borderline may want to also seek alternative financing options proactively 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 the requested documentation. Once you’ve found a lender, you’ll need to submit a formal loan application and provide the required documentation. This will allow the lender to assess your credit and income to determine your eligibility.
For more details on each of the steps listed above, you can head over to our guide on how to get a business line of credit.
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.
- 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.
- 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 due to its fast funding speeds and excellent customer service.
If you’re considering one of the alternatives mentioned above, check out our article on commercial loan rates, where we go over how rates are determined to help you get the best deal possible.
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 because of 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 utilize third-party vendors, such as appraisers and title companies, to assess the condition and ownership status of the property.
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. 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
With an investment property line of credit, you can access funds on an as-needed basis to finance the purchase of a new property, cover expenses for property improvements, consolidate debt, and more. Since you only pay interest on what you draw, it’s an excellent way to cover emergencies or unexpected expenses. 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.