“HELOC. Yes, that is a good idea. I can take the equity from my house and use it for anything that pertains to my investment property! What a great idea!”
HOLD UP, WAIT A MINUTE!! While a HELOC may sound like a good idea, let’s digest this to see what it entails.
A HELOC is a Home Equity Line Of Credit. It is a loan that uses your house as collateral. It means the lender can take your house if you can't repay the loan. You can borrow money from the lender using your home equity. Home equity is how much your house is worth minus what you owe.
With a HELOC, the lender sets the maximum amount you can borrow based on your home equity. You can borrow money as you need it, up to the maximum limit, and you'll have to pay interest on the amount you borrow.
A HELOC can be a flexible way to borrow money, but it's important to be careful because your home is at risk if you can't repay the loan.
While it sounds like a good idea, there are differences between a primary residence and an investment property.
The eligibility criteria and terms and conditions may differ for an investment property from those for a HELOC on a primary residence.
Some lenders may require a higher credit score, a lower loan-to-value ratio, and a higher interest rate for a HELOC on an investment property. Additionally, the maximum amount that can be borrowed may be lower than a HELOC on a primary residence.
Some of the ADVANTAGES include:
Access to Cash: A HELOC allows you to tap into the equity in your investment property and borrow money for various purposes, such as financing repairs or renovations, investing in other properties, or paying off other debts.
Flexibility: A HELOC provides a flexible borrowing option where you can borrow and repay funds as needed, similar to a credit card. You only pay interest on the amount you borrow and can pay off the balance whenever you want. However, if you sell your investment property, the loan will be repaid in full at closing, and you will net less profit in your pocket.
Tax Deductible Interest: The interest paid on a HELOC on an investment property may be tax-deductible. Consult with a tax professional to determine if you qualify for this tax deduction.
Potential for Increased Property Value: Using a HELOC to make improvements or renovations to an investment property can increase its value, which can result in higher rental income or a higher selling price if you decide to sell the property.
Some of the DISADVANTATGES include:
Higher Interest Rates: HELOCs on investment properties may have higher interest rates than primary residences. This can increase the cost of borrowing and may impact the profitability of the investment property.
Risk to the Investment Property: A HELOC uses the investment property as collateral, which means that if you cannot repay the loan, the lender can foreclose on the property. This can result in losing the property and any potential profits from the investment, not to mention a potential lawsuit if there is a lease in place.
Lower Loan-to-Value Ratio: Lenders may offer a lower loan-to-value ratio for HELOCs on investment properties. This means you may be able to borrow less than you would with a primary residence HELOC.
Potential Negative Cash Flow: Borrowing against the investment property's equity can result in a negative cash flow, especially if the borrowed funds are not used for investments that generate positive returns.
Limited Financing Options: Not all lenders offer HELOCs on investment properties. This can limit the financing options and may require more research to find a suitable lender.
TAXES
While there may be tax benefits to using a HELOC on a rental property, such as the interest paid on a HELOC may be tax-deductible or lowering your taxable income and reducing your tax bill, the tax benefits depend on how the HELOC funds are used. The interest may be fully tax-deductible if the funds are used for business purposes, such as financing repairs or renovations on the rental property.
On the other hand, if the funds are used for personal purposes, such as paying off credit card debt, the interest may not be tax-deductible.
Always talk to a tax professional before making any decisions. If a HELOC is not in your future, other options are still available. Talk to your lender today!
