Can You Use a Home Equity Loan for Investment Property? (2024)

FAQs

How can I use equity in an investment property? ›

A home equity loan allows you to tap the equity in a property to obtain a one-time lump sum you can use for any purpose. Most homeowners take out these loans on their primary residences. But can you get a home equity loan on an investment or rental property? If you have sufficient equity in it — potentially, yes.

No matter how important some purchases seem, using your home as collateral to pay for nonessential expenses isn't a good idea. A one-time expense, such as a wedding or vacation, isn't optimal for a home equity loan. Here are some common expenses you shouldn't finance through a home equity loan.

Yes, it's possible to use funds from either a HELOC or a home equity loan to pay off an investment property purchase. However, it's important to understand the risks associated with these types of loans before taking them out — especially if used for real estate.

Broadly, if you're making capital improvements to your rental property such as a kitchen remodel, replacing the roof or installing a new HVAC then it's likely you can deduct the interest payments of the HELOC used to fund the cost. You won't be able to deduct the actual expenses incurred, but they can be depreciated.

Typically, HELOCs will have lower interest rates and greater payment flexibility, but if you need all the money at once, a home equity loan is better. If you are trying to decide, think about the purpose of the financing.

HELOCs can often be overlooked when you're considering buying an investment property, but it might be one of your best options. Using HELOC funds for a down payment is a common practice that can save you money as they usually have a lower interest rate than personal loans.

The amount of equity you can use to buy a new house depends on several factors, including the current market value of your home and your outstanding mortgage balance. Typically, lenders allow you to access a percentage of your home's equity, often up to 80%–85% of the total equity.

Absolutely. You can tap into your home's equity without refinancing your existing mortgage. Home equity loans and Home Equity Lines of Credit (HELOCs) are popular choices that let you borrow against your home's equity while keeping your original mortgage intact.

Under the Tax Cuts and Jobs Act, the IRS allows homeowners to deduct interest paid on a home equity loan or home equity line of credit only if they used the funds for the house. This can include both necessary repairs as well as substantial cosmetic upgrades. These rules are in effect from tax year 2018 through 2025.

Starting in 2018, all businesses with average gross receipts of $25 million or more over the prior three years can deduct interest payments only up to 30% of their adjusted taxable income. (IRC § 163(j).) This limitation applies to landlords who earn this much income from their rental business.

Is getting a HELOC a good idea? ›

If you don't have a solid estimate—or you need access to money over an extended period (for college tuition or a home renovation, for instance)—a Heloc may be the better option, as it will allow you to withdraw money as needed, up to your credit limit.

You can convert equity to cash through either a sale or a loan, which can then be used in multiple ways, including investments in stocks, bonds, real estate, and business opportunities. By converting equity to opportunity, you can grow your total assets and sources of income.

As a general rule, you should aim for a 20% deposit for your new property. Remember, your usable equity that you could put towards a deposit for a new property is 80% of the current value of your home, minus what you still owe on the loan.

Home equity loans can be a great way to improve your home, consolidate debt, pay for student loans or help alleviate other financial strains on your budget. On the flip side, a home equity loan can also lead to more debt if the lump sum is used to cover expenses that provide no financial short- or long-term gain.