For an investor, the upward trend in housing prices is always welcome news as that means they have more tappable equity than before. If you own a rental structure with a passive income stream, leveraging its equity can be rewarding with the right investment opportunity—but what is the sensible way to do it?
In this guide, we’ll discuss the logistics of getting a home equity loan on a rental property (or any investment property, for that matter) responsibly. Although you’re not dealing with an owner-occupied home, you should be mindful of the risk involved in investment-purpose mortgage products. The article will educate you on:
- Types of equity loans for investors
- Qualification requirements
- Viability of traditional and non-traditional lenders
- Risks of leveraging rental property equity
What Is Home Equity, and Can It Work for Rental Properties?
In real estate finance, home equity refers to the ownership value of the property. It’s the amount that’s left after clearing off the debt on the property, usually calculated by the following formula:
- Home equity=Current market value of the property–Outstanding loan balance
When you buy a new property, your equity is the down payment portion. It grows over the years as you cover your mortgage payments while also benefiting from the capital appreciation brought upon by the time value of money, local demand, and other environmental factors.
A home equity loan allows you to convert up to 80% of your equity value into cash. The amount is typically used for home renovation, but it also comes in handy for personal expenditures (like paying for tuition) and debt consolidation.
Investment property holders technically don’t use the structure as an owner-occupied “home,” but they still accumulate equity. For a hardcore investor, rental property equity is an optimal source of liquidity. It frees up cash for lucrative investment avenues, such as:
- Buying (or covering the down payment for) a new property
- Prepping up raw land
- Rehabbing a property to increase its market value
- Starting a new construction project
Source: Pavel Danilyuk
Home Equity Loans on a Rental or Investment Property—An Overview
For non-owner-occupied home equity loans—referred to as equity loans—a rental or an investment property is the same. Before moving forward with these products, it’s important to understand:
- Types of equity loans available
- General eligibility terms
Types of Equity Loans on an Investment Property
Home equity loan products for rental or investment properties are available in different forms keeping the borrower’s investment needs and financial convenience in mind. The three most popular options are:
- Basic equity loan—A basic equity loan implies a straightforward mortgage taken out on the equity portion of your property. You get a fixed interest rate for 5–15 years and settle the loan by making amortized monthly payments
- Home equity line of credit (HELOC)—A HELOC loan turns your equity into a credit facility with a maximum limit. You withdraw funds as per your needs and make monthly interest payments only on the borrowed amount. You typically have a lower interest commitment than for equity loans, but the rates tend to increase over time. You can consider HELOC loans for investment properties if you’re planning rehab and construction projects that require a draw schedule
- Cash-out refinance—If you have an existing mortgage, both equity loans and HELOCs can burden you with two separate mortgage payments. Getting a cash-out refinance is a sensible way to streamline your monthly interest outlay, as it combines your existing loan and equity component into a single mortgage. The product can have low to high interest rates depending on the tenure of the new mortgage
Equity loans (all variants) can be acquired traditionally, i.e., via banks, credit unions, and mortgage companies—and these institutions have pretty strict qualification requirements. You can always go for non-traditional or alternative lenders if regular lending channels don’t work out for you.
How Do You Qualify for a Traditional Equity Loan on a Rental Property?
Almost all major lenders, like Chase Bank, Navy Federal Credit Union, and TD Bank, have products to help homeowners tap into their home equity—but it’s your portfolio that decides whether you qualify for a conventional or commercial product.
According to Fannie Mae guidelines, you can only have up to ten properties financed by a traditional lender. Most lenders do not approve conventional loans to a single borrower for more than four properties. Depending on your holdings, you may have to get a commercial or investment property loan, both pricier than regular mortgages.
Source: Yan Krukau
An ideal borrower must display superb financial credentials to qualify for equity loans. The following table outlines the basics:
|Qualifier||Rental Equity Loans|
|Maximum debt-to-income (DTI) ratio||40% to 50%|
|Cash reserves||Enough to cover 6–15 months of payments|
|Equity component||At least 20%—you can get a loan-to-value (LTV) of up to 80% of the equity component|
Keep in mind that applying for any traditional loan program is a tedious process, often taking 2–3 months. Be prepared to submit extensive paperwork to verify your credibility as an investor, including:
- Proof of income
- Tax returns
- Statement of assets and debts
- Schedule of existing investment properties
- Information on current mortgages
- Rental property income
Traditional lending channels can be too stressful if you’re looking for speed and convenience. That’s why rental and investment property owners prefer alternative lenders for equity loans.
Rental Property Equity Loans—Alternative Financing
Alternative financing is offered by private lenders, fueling the investment real estate market with easy-to-qualify-for asset-based loans. Asset-based lending includes all products secured by collateral, but real estate investors are particularly fond of hard money loans.
Hard money loans are secured solely by the collateral or the hard asset, so the role of soft assets like credit score and future rental income during processing is reduced. To qualify for a hard money equity loan, all you need is a decent equity value in the property. These products are processed within weeks, if not days, mostly requiring light paperwork.
Source: Antoni Shkraba
While hard money loans are ideal products for rental or investment property owners, do the necessary groundwork when you search for lenders. A simple online search will display many private lenders in your area—evaluate them based on:
- Competitive pricing—Hard money loans are usually short-term products, so their interest rates are 1–5 points higher than prime lending rates. It’s always wise to compare lenders to get the best quotes. You should also check the hidden fees of these lenders, which often turn out to be junk cost components (up to $8,000) that inflate the borrowing expenses
- Customer service—A private lender’s advertised profile never reveals the full picture. You have to consider their product/service reviews to make an objective assessment
- Lending ethics—Some of the most valued principles of hard money financing include adequate transparency and property appraisal practices. Don’t fall for eager-to-lend companies with predatory terms
Talk To Hard Money Loan Solutions for Customized Investment Property Equity Loans
If you want to mobilize the money sitting idle on your rental or investment property, get a flexible equity loan from Hard Money Loan Solutions (HMLS). The lending group provides a whole range of hard money products suitable for:
- Rental property owners
- Property investors
- Construction contractors
- House flippers
- Homeowners (financing for owner-occupied structures)
HMLS equity loans can be acquired for up to 70% LTV, which is the standard in the hard money lending scene. Hard money lenders do not offer full or steep LTVs as the loan is only guaranteed by the property—a 30% LTV gap protects the lender if the real estate prices start tanking. Check out other lending parameters followed by HMLS:
|Interest rate type||Fixed|
|Interest rates||9.99%–12% (depends on LTV)|
|LTV||Up to 70% (calculated on the lower value of the current market price or the appraised asset value)|
|Origination fee||2 points or 2%|
|Closing time||3 days to 2 weeks|
|Amortization||No amortization (interest-only payments)|
|Prepayment penalty||No penalty after 6 months|
|Minimum equity component||Negotiable|
|Credit score and DTI values||No minimum values|
|Cash reserves||Not required (HMLS never asks for bank statements or other sensitive financial documents)|
Apply for an HMLS equity loan today and get quotes tailored to your deal. You can also go for the group’s other real estate programs, such as:
- Refinance and cash-out refinance
- Asset acquisition
- Commercial financing
- Land purchase
- Rehab/fix and flip
- Foreclosure management
- Short sales
- Bridge funding
Source: Kampus Production
HMLS Follows Industry-Best Financing Ethics
Getting serviced by HMLS (rated 5 stars on Google) is a personalized experience unmatched by large banks and mortgage companies. The group operates from Florida and is handled by an eclectic group of real estate business veterans who:
- Manage to fund less-than-ordinary deals
- Assist you with free one-on-one guidance on your portfolio
- Provide innovative solutions to remove funding roadblocks
- Help plan out construction or rehab funding
The HMLS team honors the best lending ethics in the industry, guaranteeing clients with:
- Easy entry requirements—HMLS lenders look at your equity before approving loans. In the case of rehab or business loans, they will consider the profitability of the deal. The group serves everyone without prejudice, including:
- People with an unattractive credit history
- Foreign nationals
- Bank-rejected applicants
- Fair pricing—HMLS lends at the most competitive interest rates. The closing cost is minimal and free from junk components like processing or digital retention fees
- Priority funding—At HMLS, there are no middlemen to slow down your deal. You talk to the lender directly and can often access funding within a week. The delivery speed is enhanced because of the minimal paperwork and scrutiny
- Transparent processing—HMLS maintains its reputation by meeting client transparency expectations. Right from yes/no decisions to the funding status, everything is communicated to the borrowers promptly
- Legally compliant products—HMLS lends within state guidelines and uses property appraisal to ensure the loan is based on a tangible value
HMLS lenders can take a look at your property and approve your loan within a day—start by making a funding request online!
How To Make HMLS a Part of Your Next Real Estate Adventure
Whatever your real estate funding situation is—HMLS can step in with timely funds. Here’s how you apply for a loan:
- Click on the Get Approved Today button on the website
- Enter your phone number (a lender will make direct contact after you submit)
- Add details about your self-occupied/investment property (all residential and commercial properties are acceptable)
- Upload a photo of the structure (if available)
- Submit the form
If HMLS approves your request, you are guaranteed to receive the funds. We recommend providing truthful details about the deal so that the lenders can design a package beneficial to you.
Source: Anna Shvets
Equity Loans on Rental Properties—Risks To Watch Out For
Any borrowing activity comes with risks. An upside of investment property equity loans is that defaulting won’t impact your housing situation (unless you go for recourse loans). Watch out for the following risks as a vigilant investor:
- Payment default—Defaulting on your payments will lead to foreclosure, causing you to lose the entire property. Such events impact your portfolio ROI (return on investment) and also damage your appeal as a borrower
- Value depreciation—If a property drastically loses its value, you may have to sell other assets to cover the equity loan. It’s a lose-lose situation, so keep an eye out for massive price drops
- Taxation errors—You can deduct equity loan interest payments only if you use the amount for home repairs. The deduction is not available to taxpayers who use the product for investment or personal goals
Reach out to Hard Money Loan Solutions if you have any other queries about tapping into investment property equity.
Featured image source: Andrea Piacquadio