HELOC on Investment Property

39 Replies

I have an investment property that currently does not have any mortgage. I would like to open a line of credit on this property but the first 1/2 dozen places I have called, have done mortgages with these banks in the past, say that they will not give a HELOC on an investment property. Any advice? Is it not possible to get a HELOC on an investment property? I was listening to a podcast from BP recently, might have been an old podcast not sure, and the strategy the investor used for investing was taking out HELOCs on his properties once the mortgage was paid off. Hard to believe that his strategy is based on something impossible.

@Risha Walden Very very few banks will do a HELOC on an investment property and you will pay a very high rate, which will be floating (going up with fed rate). Why not get a 30 yr fixed?

I want to have accessible cash for various things at the quick.  I don't want to take out cash until I am needing it since it may be awhile.  And I want to pay it off as soon as I can rather than spread it out over months/years.  Moreover any money I take out is not taxable.  

@Risha Walden Most lenders won't do HELOCs on rentals, but some will. (I've actually taken out HELOCs on two of my paid off rentals.) HELOCs are just products of the individual banks that offer them, so just because one bank won't do them doesn't mean another won't. You'll just need to keep calling around to find a lender that will work for you. (It'll take calling multiple lenders.)

Here's some things to consider and questions you can ask when calling around: What You Need to Know When Shopping for a HELOC.

Kyle, These are great questions.  Some I know and others I think about after and some more I didn't think about.  I will not be deterred.  Will keep calling lenders until I find the product I need thanks!!!

I just close a week ago on a HELOC on one of my rentals. It is through BMO Harris bank. 30 year term, 10 year draw, 3.99 percent for the first year, and then goes to prime +2(?) percent. (I don't remember now) No closing costs as long as I don't pay it off in full within the first three years, otherwise I owe the $700.00 closing cost they covered.

I don't know if they operate in your area, but that might be an option for you.  I had to call about 10 banks before I found one that would.

I have also been told, and have used, Wells Fargo in the past for a HELOC, but due to personal reasons, I did not even contact them.

@Risha Walden I think the desire not to have a mortgage is what's making your life harder than it needs to be here. A better approach, IMO, is to take the long term mortgage debt and invest the capital in another asset that you can borrow against as a line of credit. In my case, that other asset is municipal bonds from my state. Others do it with whole life insurance. Pretty much all the sophisticated investors I know are doing this in one form or another. End of the day, it means I'm earning ~3.75% on any extra cash I have lying around in the bank ... plus an arbitrage, depending on the current state of interest rates and the bond market.

In short, it looks like this:

1. Take out a 30y fixed mortgage on the free-and-clear property for, say, $200k.  Assume this is at 5%.

2. Buy $200k of, say, NJ municipal bonds with an effective yield of, say, 4.8%.

3. Open an LOC against the bond portfolio. You should be able to borrow up to 80% of value, with a rate of, say, 4.5%.

4. When you need some capital, write a check from your LOC account.

Beyond the value of flexibility, you also get to write off the mortgage interest expense as a business expense, and the income from the bond portfolio is state and federal tax free.  Lots of variations on the general strategy, including using T-bills, whole life insurance, and other assets, depending on variables in your life.

End of the day, it's essentially always a missed opportunity not to take a FNMA-backed fixed rate mortgage if you can get it.

Originally posted by @Justin R. : In short, it looks like this:

1. Take out a 30y fixed mortgage on the free-and-clear property for, say, $200k. Assume this is at 5%.

2. Buy $200k of, say, NJ municipal bonds with an effective yield of, say, 4.8%.

3. Open an LOC against the bond portfolio. You should be able to borrow up to 80% of value, with a rate of, say, 4.5%.

4. When you need some capital, write a check from your LOC account.

You just blew my mind thinking of other assets to buy as collateral for lines of credit, Justin.  That's awesome!

In your muni bond example, do you buy the bonds through the institution (bank?) that extends the credit line I'd imagine?  Otherwise you may sell the collateral. Any clarification on this would be appreciated!

Originally posted by @Steve Vaughan :
Originally posted by @Justin R.: In short, it looks like this:

1. Take out a 30y fixed mortgage on the free-and-clear property for, say, $200k.  Assume this is at 5%.

2. Buy $200k of, say, NJ municipal bonds with an effective yield of, say, 4.8%.

3. Open an LOC against the bond portfolio. You should be able to borrow up to 80% of value, with a rate of, say, 4.5%.

4. When you need some capital, write a check from your LOC account.

You just blew my mind thinking of other assets to buy as collateral for lines of credit, Justin.  That's awesome!

In your muni bond example, do you buy the bonds through the institution (bank?) that extends the credit line I'd imagine?  Otherwise you may sell the collateral. Any clarification on this would be appreciated!

Glad I could offer some value ... that's the best case for BiggerPockets, yeah?  (!!)

Muni bonds in CA are kinda tricky since it's such a large market and there's so many issuers, so I think it's important to have as much of an advantage to buy the highest quality at best value as possible. For that reason, I work through the bond desk at a large Wall Street bank (think JP Morgan, Goldman, Credit Suisse, etc). They're ecstatic to give you an LOC - it's practically a risk-free loan for them.

As a practical matter, this works better as the LOC size gets larger. In my case, I always have a balance on the LOC - when I get a chunk of capital from an investor or wherever, I drop it into the LOC and thereby essentially earn 3.75% (or whatever the current interest rate on the LOC is) on that money while it sits waiting to go to work. Some would say it's a form of infinite banking ... without paying the stupid sales commissions that whole life insurance involves.

@Risha Walden I ran into this exact problem. I was told some credit unions offer HELOCs on rental properties. My calls to about 10 credit unions actually were 'worse' in that none of them offered loans nor refinancing nor helocs at all on investment property. I am in the Midwest so it may be that other areas have other policies. But that was just my experience. Hopefully there is someone out there that has done this recently who can respond to your post. Best of luck!

@Risha Walden Residential loan officers know only about the HELOC on a primary residence (owner occupied), and they will tell you is not possible to get one one rentals (false!). You need to inquire with the commercial loan officer and ask about portfolio line of credit or asset based line of credit.

Most of the banks and credit unions offer this product - we got a LOC from a CU secured by two paid off rentals - and is a matter of figuring out who gives you the best terms and in what conditions. You should end up with something like this, allowing you for an apple-to-apple comparisson:

Originally posted by @Justin R. :
Originally posted by @Steve Vaughan:
Originally posted by @Justin R.: In short, it looks like this:

1. Take out a 30y fixed mortgage on the free-and-clear property for, say, $200k.  Assume this is at 5%.

2. Buy $200k of, say, NJ municipal bonds with an effective yield of, say, 4.8%.

3. Open an LOC against the bond portfolio. You should be able to borrow up to 80% of value, with a rate of, say, 4.5%.

4. When you need some capital, write a check from your LOC account.

You just blew my mind thinking of other assets to buy as collateral for lines of credit, Justin.  That's awesome!

In your muni bond example, do you buy the bonds through the institution (bank?) that extends the credit line I'd imagine?  Otherwise you may sell the collateral. Any clarification on this would be appreciated!

Glad I could offer some value ... that's the best case for BiggerPockets, yeah?  (!!)

Muni bonds in CA are kinda tricky since it's such a large market and there's so many issuers, so I think it's important to have as much of an advantage to buy the highest quality at best value as possible. For that reason, I work through the bond desk at a large Wall Street bank (think JP Morgan, Goldman, Credit Suisse, etc). They're ecstatic to give you an LOC - it's practically a risk-free loan for them.

As a practical matter, this works better as the LOC size gets larger. In my case, I always have a balance on the LOC - when I get a chunk of capital from an investor or wherever, I drop it into the LOC and thereby essentially earn 3.75% (or whatever the current interest rate on the LOC is) on that money while it sits waiting to go to work. Some would say it's a form of infinite banking ... without paying the stupid sales commissions that whole life insurance involves.

 You may not like paying "the stupid sales commissions that whole life involves" but you would do better in the end. 

First, a permanent life insurance policy for this purpose is designed for minimum death benefit and maximum cash value, so the commissions are minimized. They're not nearly as high as you might think.

Second, even after the fees and costs are subtracted, you can still get a higher credit line. So you have access to a higher credit line. In a properly designed policy, the cash value will be about 85% of the premium for the first few years of the policy and much less later.

From a security perspective, the cash value of a whole life will have a lower risk profile than Municipal Bonds. And you also have the benefit of the death benefit.

I have clients doing just this. I certainly don't advocate strategies like this, but as you show, this is a "Triple Play": Home/REI, Cash Value, REI

@Risha Walden , I’ve come across a couple of lenders that will do HELOCs on non-owner owned properties: US Bank, TD Bank and PenFed come to mind. They are out there.
Originally posted by @Risha Walden :

I want to have accessible cash for various things at the quick.  I don't want to take out cash until I am needing it since it may be awhile.  And I want to pay it off as soon as I can rather than spread it out over months/years.  Moreover any money I take out is not taxable.  

I am not a tax professional (accountant, attorney, etc.), so verify this with your tax professional...

I would be leery of thinking your HELOC funds would not be taxable post the new tax laws. For you primary residence the HELOC is only tax free if used on that residence. I expect the same rule would apply to an investment property. To be tax free, the HELOC would need to be spent on the same investment property that secured the loan.

IMO this effectively added another parameter in the should I refinance or should I HELOC decision. I would think that many cases were a HELOC was a good option prior to the new tax rules, it is no longer a good option.

Good luck

Originally posted by @Dan Heuschele :
Originally posted by @Risha Walden:

I want to have accessible cash for various things at the quick.  I don't want to take out cash until I am needing it since it may be awhile.  And I want to pay it off as soon as I can rather than spread it out over months/years.  Moreover any money I take out is not taxable.  

I am not a tax professional (accountant, attorney, etc.), so verify this with your tax professional...

I would be leery of thinking your HELOC funds would not be taxable post the new tax laws. For you primary residence the HELOC is only tax free if used on that residence. I expect the same rule would apply to an investment property. To be tax free, the HELOC would need to be spent on the same investment property that secured the loan.

There's a difference in whether something is taxable or tax deductible. The interest on a HELOC may or may not be tax deductible, but the HELOC funds themselves are not taxable because they're loan proceeds and have to be paid back. The new tax law didn't change that so you're still good there.

PenFed is your answer if you own 3 properties or less. Huntington will do one but its prime +1.9 Otherwise, if you have a primary residence do a cash out refinance on your investment property, use that to pay off your primary residence mortgage. Almost any bank will do a HELOC on your primary. Basically just transferring the equity from your investment to your primary.
@Risha Walden I recently did a HELOC with Wells Fargo on an investment property. They will loan 60% ltv and the banker said typical HELOCs are 0.75 over prime. I havent closed on this loan yet, but he said it would be a slightly higher rate. Also Wells Fargo pays the closing cost. The only fee they charge is $75/year if you don’t carry a balance. I see this as an option to have access to quick cash for a flip, but without the obligation of paying a mortgage in between flips.
Originally posted by @Justin R. :

@Risha Walden I think the desire not to have a mortgage is what's making your life harder than it needs to be here.  A better approach, IMO, is to take the long term mortgage debt and invest the capital in another asset that you can borrow against as a line of credit.  In my case, that other asset is municipal bonds from my state.  Others do it with whole life insurance.  Pretty much all the sophisticated investors I know are doing this in one form or another.  End of the day, it means I'm earning ~3.75% on any extra cash I have lying around in the bank ... plus an arbitrage, depending on the current state of interest rates and the bond market.

In short, it looks like this:

1. Take out a 30y fixed mortgage on the free-and-clear property for, say, $200k.  Assume this is at 5%.

2. Buy $200k of, say, NJ municipal bonds with an effective yield of, say, 4.8%.

3. Open an LOC against the bond portfolio. You should be able to borrow up to 80% of value, with a rate of, say, 4.5%.

4. When you need some capital, write a check from your LOC account.

Beyond the value of flexibility, you also get to write off the mortgage interest expense as a business expense, and the income from the bond portfolio is state and federal tax free.  Lots of variations on the general strategy, including using T-bills, whole life insurance, and other assets, depending on variables in your life.

End of the day, it's essentially always a missed opportunity not to take a FNMA-backed fixed rate mortgage if you can get it.

 
One thing to be concerned with this strategy is that the interest expense related to the mortgage to acquire tax-free bonds may not be deductible.

As others above have mentioned, call smaller banks and talk to their commercial lending department. There are absolutely LOC's for investment properties - I do this all the time.

@Risha Walden

National banks that perform LOC on investment properties that I've personally worked with over the last 12mo...

Huntington (huntington.com) - 80% LTV, paying approx. 7%

NFCU (navyfederal.org) - 80% LTV, paying approx. 6.5%

PenFed (penfed.org) - 80% LTV, I didn't follow through with the LOC but rates run prime +1%.

As @Owen Dashner mentioned, your local banks will probably offer something more competitive with less underwriting - call them and ask to speak with the commercial lending department. I'm seeing 80% LTV at PRIME here in Texas.

PenFed has a 5/5 product (for owner occupied as well as for non-owner occupied properties) that adjusts every 5 years.  That could be appealing in a rising interest rate environment.