This is because you can pocket the value of your capital when you sell your home. You can also take advantage of your capital through cash-out refinancing, HELOC or HELOAN. This allows you to borrow money for things like home improvements, a new business, or college tuition. There are several challenges that investors must overcome to successfully use a HELOC in rental properties.
For starters, banks are less inclined to lend on investment properties, since homeowners are more likely to default on homes that are not their primary residence. Therefore, the incentive to keep up with a main home is less evident in investors with rental properties. It can also be difficult for investors to qualify for a HELOC. Lenders look at the debt-to-income ratio, credit score, other open accounts, and the lender's available cash cushion.
Even if you have cash flow available, it doesn't necessarily make you the right candidate. A HELOC is the lender's promise to advance the lender up to the set amount at the time you choose, instead of a normal mortgage that is normally paid in full at closing. A HELOC can also be used to finance home improvements to your rental properties, just as a landlord would for their primary residence. Using a HELOC in investment properties will allow investors to take advantage of assets that have managed to accumulate capital.
In fact, if you're going to use a HELOC on anything, you could also invest it in a good investment. The use of a HELOC in investment properties can become an invaluable source of alternative funding as soon as investors accumulate sufficient capital in an asset. The costs associated with a HELOC are similar to the closing costs of most other loans, including application, appraisal and attorney fees. While there are many benefits to using a HELOC in your home or investment property, there are alternatives to HELOCs that are still desirable.
Keep in mind that investors (and homeowners) who opt for the HELOC option will find it easier and more feasible to qualify for a line of credit for a primary residence. The best way to find a lender for a HELOC on investment real estate assets is to take advantage of your existing network. Smart investors will even get a HELOC on their main homes to pay off the mortgages on their investment properties or even any high-interest debt. This is not to say that a primary loan is necessarily the best option compared to a HELOC for an investment property.
A primary loan refers to a traditional mortgage that is taken out to buy a new property, while a HELOC for an investment property takes advantage of existing capital.