Using HELOC To Buy Investment Property: Guide for Investors

You want to invest in another property, but taking out a whole new mortgage? That just sounds like too much. We get it — no one’s excited about more loans, more paperwork, or more stress. That’s why some investors are trying something easier: using a HELOC to buy investment property.

In this article, we’ll help you get familiar with how using a HELOC to buy investment property actually works.
We’ll walk you through the requirements, show you how to calculate how much you can borrow, and break it all down in simple terms. Read on to learn more.

Main Takeaways

Is using HELOC to buy investment property a good idea?

• HELOCs offer a flexible way to invest in property without taking out a new mortgage, helping investors access funds more easily while skipping some of the typical loan hurdles.
• Using home equity as a financial tool allows property owners to grow their portfolios while benefiting from lower interest rates, repayment flexibility, and potential tax advantages.
• It’s important to be mindful of the risks, including fluctuating interest rates, potential declines in property values, and ensuring responsible borrowing to protect your home and financial future.

What is a HELOC and How Do You Use It? 

As rental property management in Baltimore, we’ll show you a simple scenario to understand HELOC.

So, imagine you own a house. Let’s say it’s worth $500,000, but you still owe $200,000 on the mortgage. That means you’ve already paid off $300,000. That $300,000 is what we call equity. It’s the portion of the house you truly own.

Now, instead of letting that equity just sit there doing nothing, the bank comes in and gives you a credit line (like a loan) based on that $300,000 you’ve already paid off. You can borrow from it whenever you need—just like a credit card.

And that, in simple terms, is a HELOC (sometimes referred to as a second mortgage). You’re using the value you’ve already built in your home to borrow money from the bank. Then, you can take that borrowed money and invest it in something else, like another property. 

Pros of Using HELOC to Buy Investment Property

A HELOC can be one of the most cost-effective ways to buy another property without going through the hassle of applying for a new mortgage. You might even be able to skip some of the closing costs. Here’s why many investors choose HELOCs:

Lower Interest Rates

HELOCs tend to have lower interest rates than personal or home improvement loans. After all, HELOCs are secured by your home, so they’re a safer bet for lenders than unsecured loans. Meaning, you could save thousands in interest over time. This can make it a cost-effective way to access funds.

More Control Over Your Money

You only borrow what you need—and only when you need it. As such, you can have more control over your money. Unlike lump-sum loans, a HELOC allows you to take out cash incrementally, so you can avoid unnecessary debt. What’s more, the draw period typically lasts several years, giving you ongoing access to funds when needed. Plus, some plans have repayment flexibility. This lets you manage payments in a way that fits your budget.

Portfolio Growth

HELOCs help you grow your portfolio without selling what you already own. Rather than liquidating assets to fund new investments, a HELOC lets you leverage the value of your current home. This way, you can maintain ownership and expand into additional properties for long-term wealth building.

Tax Breaks

HELOCs present one of the ways you could get tax breaks as an investor. More specifically, HELOC interest may be tax-deductible if you use its funds for qualified home improvements. That said, sometimes general expenses, some repairs, and investment purchases may not qualify, so you should check with a tax professional.

Risks of Using HELOC to Buy Investment Property

Using a HELOC can be a smart move, but like any investment decision, it comes with a few things you’ll want to keep in mind before jumping in. That said, let’s look at possible risks: 

Your Home Is on the Line

This is the biggest one. A HELOC uses your home as collateral. In other words, if you can’t pay it back, the bank could take your home. So, it’s not the kind of loan you want to gamble with. That’s why it’s important to use it wisely, like when you’re confident that your new property will make you money in return.

Property Values Can Go Down

Sometimes, real estate values might not go up. If the market dips and your investment property loses value, you could end up owing more than it’s worth. Or, similarly, you could find it harder to sell and make a profit. Also, this could limit your refinancing options and make it harder to leverage your home equity for future investments. So, be aware.

Payments Can Change Over Time

HELOC rates aren’t always fixed. So, the amount you pay each month can change, depending on how the market is doing. In turn, if interest rates go up, your payments could go up, too.

Repayment Periods Can Sneak Up

Most HELOCs have two phases:

• A draw period (usually 5–10 years) where you can borrow money and make interest-only payments.
• A repayment period (10–20 years) where you have to start paying back both the interest and the principal.

When the repayment phase hits, your monthly payment likely will jump significantly. After all, there’s no such thing as a free lunch. So, you need to be sure you’re in it for the long haul. 

It’s Easy to Overborrow

Because HELOCs work like a credit card, it’s tempting to borrow more than you actually need. But remember — the more you borrow, the more debt you carry. Then, the more pressure it puts on your finances. Needless to say, you should spend judiciously. 

Requirements for Using HELOC to Buy Investment Property

By now, the idea of using a HELOC might sound exciting, right? But how do you know if you qualify for one? Here are a few things lenders usually check before considering you for a loan:

• Your credit score — Most lenders prefer a score of 720 or higher. (Some may accept lower, but higher scores get better deals.) A strong credit score not only improves your chances of approval but also helps you secure lower interest rates, making borrowing more affordable in the long run.
• Your debt-to-income ratio — This means how much of your income goes toward paying debts. Ideally, no more than 43% of your monthly income should be going to loans, credit cards, or other debts. Keeping a low debt-to-income ratio signals to lenders that you have enough financial cushion to manage additional debt responsibly.
• How much you still owe on your home — Lenders look at something called a loan-to-value ratio. They want your total loans (mortgage + HELOC) to be 80% or less of your home’s current value. This ensures that you maintain enough equity in your home, reducing the lender’s risk and keeping your financial position more stable.
• Your income — You need to show that you earn enough money to afford the payments. Lenders typically ask for income verification through tax returns, pay stubs, or bank statements to confirm your ability to make timely repayments without financial strain.

A Calculation Example

Let’s go with the previous example we gave in the beginning. Your home is worth $500,000, and you still owe $200,000 on the mortgage. That means you’ve built up $300,000 in equity. 

Now, as we have already mentioned, most lenders will let you borrow up to 80% of your home’s total value, including your existing mortgage. That’s what’s called the combined loan-to-value ratio (CLTV).

Here’s how to figure it out:

1. Find 80% of your home’s value:
   $500,000 × 0.80 = $400,000
2. Subtract what you still owe on your mortgage:
   $400,000 – $200,000 = $200,000
   

That means you could qualify for a HELOC of up to $200,000.

So instead of taking out a new mortgage or loan, you’re tapping into the value of your home to access cash, and you can use it to invest in property, renovate, or cover big expenses.

Make Smarter Investment Decisions Today

As we’ve seen, using HELOC to buy investment property can be a clever way to tap into the resources you already have. But like any big financial move, it works best when you have a clear plan. You’ll want to understand the risks, too… because the last thing you want is to find yourself stuck with payments you can’t manage or an investment that doesn’t pan out.

In the meantime, if you do find that HELOC is the right choice for funding your next investment, we can help you make sure that investment is a success. At Bay Property Management Group, we manage over 6,000 units in Maryland, Pennsylvania, Washington, D.C, and more. Our professionals can analyze your target market, develop a marketing plan for it tailored towards various social media channels, and crunch the numbers to set a competitive rental rate. Ready to make your next move with guidance you can trust? Contact us today, and let’s talk about your next steps.