Can You Get a Home Equity Loan on a Rental Property?

With owners of property considering an expansion of their portfolio or perhaps a renovation of their existing properties, cash flow can occasionally become an obstacle. Whether you're working with local rental property management in Shawnee, OK, like First Class Property Solutions or managing your own units, often, we speak with investors with a substantial amount of equity in their rental properties but are not sure how to tap into it. The first option that will come into consideration is a home equity loan, but most people have thought this type of financial instrument is solely for main residences.

The quick answer is: yes, you can take out a home equity loan on a rental property. But getting an equity loan on rental property is a very different experience from taking out a loan on your own residence. To lenders, investment properties are higher-risk investments. And this affects your chances of approval.

Eligibility Criteria for Investors

To qualify for a home equity loan for rental property, you need a strong financial background. To borrow money for an investment property, lenders will examine your credit report more thoroughly than they do when you borrow money for a primary residence. Although you can obtain a conventional loan if you have a credit rating in the mid-600s, most investment properties have a minimum credit rating requirement of 720 or better.

Your debt-to-income ratio is another key consideration. Generally, most lenders will want your debt-to-income ratio to be below 43 percent, but they will go up to 50 percent if you have sufficient cash reserves. To talk more about cash reserves, you can expect lenders to ask to see six months of liquid reserves in cash for your mortgage payments, taxes, and insurance on all your properties.

Differences in Loans for Rental Properties

The main point of differentiation is with respect to the "loan to value" ratio. For your main residence, you can borrow up to 85 or even 90 percent of your equity. Banks are much more conservative for a rental property. To be specific, you generally have to keep at least 20 to 25 percent equity in the property after taking out a loan. Therefore, your total "loan to value" ratio - the primary mortgage plus a new home equity loan - is actually not supposed to go beyond 75 to 80 percent.

The interest rates are always higher when it comes to investment properties too. Banks offset the additional risk of default by including higher premiums. As you face a financial struggle, you are more likely to keep your main residence intact before your investment property, and banks factor this into your loan pricing.

Weighing the Pros and Cons

There are perks to taking advantage of your equity in a rental property. The first is access to a lot of money at a lower interest rate than you would have to pay with a credit card or a personal loan. The money can be used for a renovation project to increase revenue or for a down payment on a new investment, thereby using your success to fuel your future successes. Moreover, interest paid on business loans, such as those used for maintaining or acquiring a business, is tax-deductible.

On the negative side, you are risking your investment asset. If you are not able to make payments on the new loan, you will face a foreclosure threat, just as in a primary mortgage. Additionally, closing costs can be quite high, which will cut into your funds for investment.

Other Options to Home Equity Loans

However, if you find the terms and interest rates offered in a home equity loan unfavorable, there are other methods available. Refinancing your mortgage with cash out involves substituting your existing mortgage with a new one, thereby increasing your mortgage balance and distributing the extra cash to you. Such an option can prove very effective if, presently, your mortgage interest is higher than the available interest rate. A personal line of credit can prove beneficial if your renovation project is not a big one.

What Is the Right Move in this Situation?



You might wonder, can you get home equity loan on rental property? Acquiring a home equity loan for your investment property can definitely be accomplished if you can qualify under the rigorous financial requirements. As a disciplined investor, this can be a very potent tool in your arsenal to leverage your growth. Our advice would be to consult a financial advisor to check if it all adds up for you!