Advice on financing or HELOC for long term rental w/ no debt
Judson HillPro Member
Member since 2022 · 3 posts · 3 votesAdvice on financing or HELOC for long term rental w/ no debt
8 Replies
- Member since 2026 · 97 posts · 57 votes8mo
Good question - this is exactly the kind of situation where the answer depends on your longer-term plans.
For a free-and-clear rental, you generally have two main options:
Cash-out refinance pros... You lock in a fixed rate, which gives you predictability on your monthly payments. Closing costs are typically 2-4% of the loan amount, but once you close, you're done. Since the tenant's rent is covering the payment, a fixed rate means you know exactly what your cash flow looks like for the life of the loan.
HELOC pros... More flexible since you only pay interest on what you draw. You can pay it down and re-draw without refinancing again. The downside is most HELOCs are variable rate, which means your payment can increase if rates rise. Also, HELOCs on investment properties are harder to find - most credit unions and regional banks that offer them require the property to be your primary residence or have stricter terms for rentals.
A few questions that would help narrow it down... What percentage of the property value are you trying to pull out? If you're looking at 70-75% LTV, most DSCR lenders or conventional lenders will work. If you want to pull out more, options get limited. Also, how soon do you think the tenant might want to buy? If there's a realistic timeline, you might consider a lease-purchase structure that gives them a path to ownership while you recapture some of your capital over time.
What's the ballpark on the current value vs what you paid?
- Member since 2022 · 3 posts · 3 votes8moLease purchase is an option for this property. In that case what loan option seems wise. I would like to "pay myself back" on the original loan outlay. Also property value is estimate $120k and out of pocket purchase was $90k.
Quote from @Alex Morales:
Good question - this is exactly the kind of situation where the answer depends on your longer-term plans.
For a free-and-clear rental, you generally have two main options:
Cash-out refinance pros... You lock in a fixed rate, which gives you predictability on your monthly payments. Closing costs are typically 2-4% of the loan amount, but once you close, you're done. Since the tenant's rent is covering the payment, a fixed rate means you know exactly what your cash flow looks like for the life of the loan.
HELOC pros... More flexible since you only pay interest on what you draw. You can pay it down and re-draw without refinancing again. The downside is most HELOCs are variable rate, which means your payment can increase if rates rise. Also, HELOCs on investment properties are harder to find - most credit unions and regional banks that offer them require the property to be your primary residence or have stricter terms for rentals.
A few questions that would help narrow it down... What percentage of the property value are you trying to pull out? If you're looking at 70-75% LTV, most DSCR lenders or conventional lenders will work. If you want to pull out more, options get limited. Also, how soon do you think the tenant might want to buy? If there's a realistic timeline, you might consider a lease-purchase structure that gives them a path to ownership while you recapture some of your capital over time.
What's the ballpark on the current value vs what you paid?
Judson,
The biggest dilemma I can see on the HELOC side is finding a lender who will do one on an investment property.
Specifically, HELOCs on Investments are pretty 'risky' from the lender's perspective because they are the easiest for a borrower to walk away from. A line of credit on a property they don't actively live in has very little dis-incentive from an investor's perspective that I've seen a lot of lenders just pull out of that space entirely.
Whereas if you were to refinance at a reduced leverage, you would likely land with a pretty low rate (comparatively) and would be easier to find a low-cost lender to do it.
All that to say, if you have a local credit union or bank that would do, I would go that direction.
Good luck! Happy to help connect
- 8moKyle HendricksPro MemberLender · Member since 2021 · 172 posts · 74 votes
Quote from @Judson Hill:
I own a single home rental property free and clear. Purchased it with cash last year and now want to pull out cash to repay myself as much of the purchase price as possible. Should I get a traditional mortgage and take cash out, or a HELOC on this property.
I have a long term tenant already whose lease payment can pay down the mortgage/HELOC. Some interior only repairs have been completed. Tenant may one day wish to buy the property. Due to the lower purchase price, the interior repairs completed and new HVAC the relator advised the property should appraise 15% - 20% higher.
Decision - pursue HELOC or mortgage on this property?
Hey Judson,
Lender here. It will depend on long term plans. We do have investment helocs that have no appraisal (uses auto eval) and helocs give you a bit more flexibility. They can be a lot easier and faster (just closed one in 5 days). But they typically also come with a bit higher rate.
Your standard cash out refi can be nice because you will most likely get a bit better terms, but they also take a bit longer and are often slightly more expensive.
Either can be good moves and happy to chat if you have any questions.
- Lender · Chicago, IL · Member since 2025 · 204 posts · 101 votes8mo
Most investors don’t realize the financing decision on one rental can impact their ability to scale, leverage equity, and acquire future cash flowing properties. From an investor and mortgage professional perspective, the question is not just HELOC versus mortgage. The question is how to optimize leverage, cash flow, and long term portfolio growth while keeping risk in check.
If your goal is capital recovery and redeploying funds into additional buy and hold properties, BRRRR deals, or value add real estate investments, a cash out refinance is often the more powerful solution. It allows you to convert trapped equity into usable capital at a fixed rate and fixed term. That creates predictable debt service and stable underwriting for long term rental analysis. Many conventional and DSCR loan programs for investment property cash out refinances go up to roughly 70 to 75 percent loan to value depending on credit, reserves, and rental income. A higher appraisal driven by renovations, market appreciation, and improved property condition directly increases how much capital you can recapture.
A HELOC on an investment property is more of a liquidity and reserve tool. It can work well for short term access to funds, gap funding, or light rehab financing. However, most investment property HELOCs have variable rates, lower combined loan to value limits, and stricter bank overlays. That can limit borrowing power for serious real estate investors focused on portfolio expansion, multifamily acquisitions, or scaling rental units. The solution often comes down to matching the loan structure to your investing strategy. If the tenant rent supports the new payment and your goal is to recycle capital into more real estate, a cash out refinance frequently aligns better with wealth building. If your focus is flexibility and you only need partial access to equity, a HELOC can serve as a supplemental tool.
In many cases, I help investors execute a cash out refinance first to pull out maximum equity for acquisitions, then later layer in a line of credit once the portfolio grows and more equity accumulates. That combination supports deal flow, acquisition speed, and stronger returns on equity. I structure these scenarios regularly for buy and hold investors, BRRRR investors, and small portfolio landlords. The right move is the one that improves your debt to income position, preserves cash flow, and supports your next acquisition.
The real question is not which loan is easier. It is which option puts you in position to buy your next property sooner than later.
- 8moStacy RaskinBusiness MemberLender · Member since 2022 · 1k+ posts · 522 votes
A factor to consider is if you would like to do an income based loan / conventional loan or a DSCR loan. A conventional loan will structure the loan off of your debt to income (DTI) ratios and middle mortgage credit score. There are HELOCs that are available on investment properties but they are income based loans and they will have a lower LTV compared to a HELOC on a primary home. There are less lenders that do them due to the perceived risk as most people will default on an investment property HELOC before their primary home HELOC.
Another route is to to do a DSCR loan which is not based on your income but on the rents of the property along with your credit score.
As mentioned, DSCR loans won't use your personal income to underwrite the loan. DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth.
Here's a bit more in detail about how rates are calculated for DSCR loans:
1. Credit score- the higher the best. 760-780+ generally gets best pricing for investment property loans with most lenders. From there every 20 point increment affect pricing differently. So for example, a 761 credit score will be in the 760-779 credit category, then going down to 740-759 and so on.2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.
3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.
4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs.
I've included an example below to help illustrate this.
So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.
See example below:
DSCR < 1
Principal + Interest = $1,700
Taxes = $350, Insurance = $100, Association Dues = $50
Total PITIA = $2200
Rent = $2000
DSCR = Rent/PITIA = 2000/2200 = 0.91
Since the DSCR is 0.91, we know the expenses are greater than the income of the property.
DSCR >1
Principal + Interest = $1,500
Taxes = $250, Insurance = $100, Association Dues = $25
Total PITIA = $1875 Rent = $2300
DSCR = Rent/PITIA = 2300/1875 = 1.23If a purchase, you also generally need reserves / savings to show you have 3-6 month payments of PITIA (principal / interest (mortgage payment), property taxes and insurance and HOA (if applicable). If a cash out refinance, many lenders will allow the cash out to satisfy the reserves requirement.
DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals. Happy to connect to discuss further.
Bright Skyline518 Reviews - Lender · Marlboro, NJ · Member since 2025 · 243 posts · 150 votes8mo
I usually think about this less as HELOC vs mortgage and more as flexibility vs certainty.
A cash-out mortgage gives you a clean structure, fixed rate, and long runway, but it locks you into a decision on timing and leverage right away. A HELOC keeps optionality, especially if you're still evaluating repairs, a potential tenant buyout, or future redeployment of capital.
A couple things I’d check either way:
- Whether the rent comfortably covers payments under conservative terms, not just today’s rate
- Any call risk, rate variability, or draw restrictions on the HELOC
- How much liquidity you want to keep available if another opportunity pops up
In situations like this, I often see people start with a HELOC for flexibility and then term it out into a mortgage once the picture is clearer and the value is fully supported. Not always the right answer, but it avoids forcing a long-term decision too early.
- 8moBenjamin AakerPro MemberRental Property Investor · Brandon, SD · Member since 2015 · 1k+ posts · 1k+ votes
Since there are no loans on the property, you should be able to get either a line of credit or a mortgage. The mortgage will have a lower rate, but will require payments immediately. The LOC can be attached to the property and keeps an account ready for a future purchase. It gives you money on hand quickly, the cost being a higher interest rate and an annual fee. If you are looking to purchase property in the future, a LOC is nice to have available. Generally, you'll want to focus on paying back the LOC quickly as the rate is higher.
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