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 you actually use.
If you’re an investor looking for a line of credit on investment property of $1 million or more, 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 who want one line of credit on one investment property. The second type is an investment property line of credit on a portfolio of properties. This is for larger investment projects requiring $1 million or more.
Regardless of type, a line of credit on investment property is a great tool to use if there is at least 40% equity in the property and the investor needs 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, such as home equity lines of credit (HELOCs) on investment property, hard money loans, bridge loans, and rehab loans 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 available equity in a single investment property. It is similar to a home equity line of credit HELOC where an investor draws from the funds what they need and only pays interest on the funds that are used.
However, unlike a HELOC, the property is an investment and not a primary residence. The 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.
If you’re shopping for a home equity line of credit, you can reach out to one lender at a time hoping you find a good deal. Or you can visit an online marketplace, like LendingTree, and review offers from multiple lenders at once. Save time, shop smart, and find a HELOC that fits.
Single Investment Property Line of Credit Rates & Terms
The rates for a line of credit on investment property 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 plus 1% to 3% (larger LOC amounts have lower rates)
- Annual service fee of $75
- Closing costs between 1% and 5%
- Maximum credit line up to 60% loan-to-value (LTV) ratio
- $25,000 minimum line of credit
- 30-year term (10-year and one month initial draw period; 20-year period where money can be paid back but not withdrawn)
When you take out an investment property LOC, you’re typically charged interest on any amount that hasn’t been repaid—even during the initial 10-year period. There’s also usually a three-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 or higher
- A single-family home or a property with one to five or more units
- Low debt-to-income ratio of 45% or less
- 10% to 20% equity in the property must remain after the LOC and mortgage
Where to Find a Single Line of Credit on Investment Property
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. For example, Visio Lending offers a 30-year rental cash-out refinance loan for up to $2 million and 80% loan-to-value (LTV) ratio. Rates start at 5.2% and they can typically get you funded in as little as three to four weeks. You can get prequalified in minutes.
Portfolio Investment Property Line of Credit
If you’re a high net worth investor with over $1 million in equity or own a portfolio of properties, then this line of credit for portfolio properties is for you. Large portfolio investors often use these 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 investments 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 & Terms
A portfolio investment property line of credit has its own credit rates and terms. The rates are higher than a single-family investment property’s LOC rates. The term is shorter and the 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% to 8%
- A term from 18 to 24 months
- $1 million minimum LOC
- $50 million maximum LOC
- Up to 75% LTV
- Generally no fees, just interest on the amount borrowed
Portfolio Investment Property Line of Credit Qualifications
A portfolio line of credit on investment property 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 based more on 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 or higher
- A single-family home or a property with one to 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 two to three past projects, on average
When applying for an LOC, the personal credit score is pulled using a hard credit pull. For investors operating a real estate investing business, the business credit report and business credit score might also be pulled, especially if the property is in the business entity’s 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 million with interest rates starting at 7%. 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 a line of credit on investment property 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 four steps you need to apply for a line of credit on investment property:
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 million 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 lien holder’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 and employment information, so have a copy of your pay stubs and bank statements handy as well as your last two 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
A line of credit on investment property 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 draw and use the funds again. For example, if you have a $100,000 line of credit on investment property and only spend $25,000, you only pay interest on the $25,000 until you repay it. Once you pay back the $25,000, it’s available to spend again, 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 second lien holder, but for high net worth individuals, some lenders will make an exception. Lenders will also typically only allow one investment property line of credit per property.
Investment Property Line of Credit Allowable Uses
When you apply for a line of credit on investment property, you need to specify on your application how you will use the funds. 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 who have substantial equity in their property and 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 & 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 first mortgage is accepted
- Fast access to cash
Cons of an investment property line of credit include:
- High credit score needed in order to qualify
- A lower loan-to-value (LTV) ratio 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 four 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 loan-to-value (LTV) ratio 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 on an investment property can be the only loan on the home or it can take a second 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 withdraw 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 0.25% above prime rates for first position LOCs and slightly higher rates for second position LOCs. A 620 credit score is usually required for a HELOC, but each bank has its own requirements.
For those considering tapping into their property’s equity, take a look at LendingTree. Its 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 investors who want a short-term loan that can close quickly. Unlike LOCs, hard money loans aren’t intended for buy-and-hold property purchases. 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.
RCN Capital is a national, online hard money lender that offers competitive rates to prime borrowers. Receive a loan up to $2.5 million in as quickly as 10 days. Apply online in minutes.
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, high vacancy rates, or just trying to secure a property in a short time period.
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.
4. Rehab Loans
Rehab loans are short-term financing products used by both fix and flippers and investors who rent and hold. Rehab loans offer interest-only payments, which help keep carrying costs low.
Rehab loans can be permanent financing solutions, such as home style 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.
Rehab loans can be short-term or long-term loans, which are similar to LOCs although 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; LOCs can be used for a variety of purposes, such as buying a new property.
Investment Property Line of Credit Frequently Asked Questions (FAQs)
In this article, we have done our best to detail your options for using a line of credit on investment property. However, as with any type of financing, some questions are asked more frequently than others, and we have tried to address those here. If we have not answered your question, feel free to share it with us on the Fit Small Business forum and we will provide an answer.
Are investment property LOCs better than cash-out refinancing?
If you don’t need the funds right away, a LOC may be the better option. You can draw from it as needed, but the rates and fees are typically higher on a LOC. If you need the money right away, a cash-out refinance may be the better choice. Calculate the overall cost of each.
Are HELOCs a good choice for investment property?
A lender may restrict a HELOC on investment property. It also can carry risk if the rental property doesn’t perform as anticipated, so you’ll need a backup plan on how to cover the HELOC debt if the investment property is not able to. Ideally, the investment property should pay for the HELOC.
Is mortgage interest from my LOC deductible?
If you use the investment property LOC to produce income, you can deduct the interest when you file your taxes. However, you are not allowed to deduct interest on any part of the LOC that you used to cover personal expenses. For rental property, use IRS Schedule E, line 12 to claim the interest expense.
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.
If you’re looking for an investment property line of credit of $1 million or more, 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.