Should I try to buy rental property using HELOC?

Question

I’m about to done with mortgage on my primary resident and has estimate equity of $210k. Is it wise to tap into my HELOC. Should I try to buy rental property using HELOC?

Aaron Zimmerman · Answer

Heloc can be a great resource -just know that you're going to be highly leveraged in this situation so the margins will be tighter. In a perfect world, you're adding value to the property and then refinancing to pay off some of the heloc.

Ashish Acharya · Answer

Hi @Junji Yokota, it sounds like you're in a good spot and you’ve got the right mindset going into this! Turning your current primary home into a rental could be a smart move because it lets you get into real estate investing without needing an investment loan and allows you to upgrade if you want. I’d start by talking with a lender to see the best way to access your equity, whether that’s a HELOC, cash-out refinance, or another option.

From a tax perspective, if you do turn your home into a rental, you could deduct mortgage interest, property taxes, and rental-related expenses, take depreciation on the property, and deduct costs for repairs and improvements.

If you decide to tap into your equity to buy a rental property, the key is that the interest is only deductible if the funds are used for investment purposes, like purchasing or improving a rental property. That means using it for personal expenses or your new primary home wouldn’t give you the same tax benefit.

You’ll also want to see how rental income interacts with your current income and understand passive vs. non-passive income to make sure you aren't missing out on any other tax-saving opportunities and to determine whether a short-term or long-term rental makes the most sense. You've got some good options. I would first work with a lender to weigh them and then eventually work with a CPA who specializes in real estate to make sure you're getting the most tax advantage from whichever route you choose.

Good luck and happy to connect!

Juan Yepes · Answer

Hi @Junji Yokota, tapping into the equity in your primary residence to invest in other properties is a great investment strategy and one of the most popular. It allows you to use your idle equity to generate new cash flow/wealth. HELOC is a great option but it's not the only one. If you'd like to discuss further feel free to DM.

Caleb Brown · Answer

HELOC is a good resource. With a HELOC you want to refinance out of it or not hold a balance for awhile. A lot of of people use HELOCs to purchase BRRRs or flips and then pay off the HELOC to repeat.