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Buying Investment Properties
With A HELOC: A Step-By-Step Guide


Wealth creation through real estate investing is possible, but it does require expertise and the right resources. After you have a firm grasp of what real estate investing is, finance becomes one of the biggest obstacles investors face.


Using a HELOC, often known as a "home equity line of credit," as a means of financing their subsequent investment is a popular choice for many investors. We'll delve into what a HELOC is, its benefits and drawbacks, as well as a step-by-step guide to using it to buy investment properties.



What Is A HELOC?


A HELOC is a loan that uses the equity in your principal property as security. In essence, you can use it as a revolving line of credit with a set limit to borrow money as needed. A HELOC is a popular choice for borrowing because its interest rate is often lower than that of a credit card or personal loan.


One advantage of a HELOC is that, as opposed to paying interest and principal on a conventional loan, you only pay only on the money you borrow. This can lower the cost of borrowing for a brief period of time.



How Does A HELOC Enable You To Buy Investment Properties?


There are a few ways that you can use a HELOC to purchase investment properties. 


1. Using HELOC For Down-Payment On Property

The most typical way to use a HELOC is to use this money to put a down payment on a house. This may enable you to make a property acquisition with less cash on hand and even use the equity of your principal dwelling as leverage to make investments in additional properties.


2. Fund Renovations & Improvements On Existing Property With A HELOC

Making modifications or renovations to a property is another option to use a HELOC. This may contribute to raising the property's worth and, ultimately, your return on investment.


3. Purchase Multiple Properties Using A HELOC

You can also use a HELOC to purchase multiple properties at once, allowing you to diversify your investment portfolio.


Things To Keep In Mind When Using A HELOC


It's important to keep in mind that a HELOC is a secured loan and that the property will be used as collateral, therefore it's crucial to use a real estate data tool to find a home that will be a good investment.


And it should go without saying that you must be able to afford the interest fees and monthly payments.



Couple applying for heloc to buy investment property


6 Steps To Using A HELOC To Buy Investment Properties


Step #1: Determine Your Eligibility And Creditworthiness

It's crucial to understand your eligibility and creditworthiness prior to submitting an application for a HELOC. 

Your credit score, income, and debt-to-income ratio are among the things that lenders will consider when determining how much you can borrow and what interest rate you will be eligible for. Before submitting an application for a HELOC, it's a good idea to verify your credit score and do a deep dive into your credit record.



Step #2: Shop Around For The Best HELOC Rates

When you’re confident in your borrowing capacity, you may start looking around for the best HELOC rates. It's crucial to evaluate offers from many lenders to discover the one that's best for you, because different lenders will offer varying rates and terms.



Step #3: Choose A Reputable Lender

It's crucial to choose a reputable, FDIC-insured institution when choosing a lender. 

It's a good idea to look into reviews of the lender and search online for any complaints or bad press. Furthermore, you might want to think about engaging with a mortgage broker who can assist you in locating the finest rates and conditions.

Using a boolean search on Google can help you do a true deep dive into the results to find bad reviews or experiences.



Step #4: Decide Which Residence Will Be Used As Collateral

You must choose how much of your primary house you will use as collateral when submitting an application for a HELOC. In general, you can borrow more money if you put up more collateral. But keep in mind that if you can't make the payments, utilizing too much collateral could put your house in jeopardy.



Step #5: Use The Funds For A Down Payment Or For Improving The Property

Funds from a HELOC can be used to purchase new property or improve existing properties in order to increase their value.

Step #6: Close The Loan And Make Payments

You can utilize the money from the HELOC to close the loan once you've discovered the home you wish to invest in. The cash will then be released by the lender, and it will be your responsibility to make loan payments. Before taking up a HELOC, make sure to calculate total monthly payments plus interest costs, and make sure that’s something you’re comfortable paying.



Couple purchasing property using HELOC

Pros and Cons of Using a HELOC for Investment Properties


Like any financial decision, using a HELOC to purchase investment properties has its pros and cons. Some of the pros include:


Pros Of Using HELOC To Buy Investment Property

  • The capacity to buy homes with less available cash.
  • The capacity to invest in additional properties using the equity in your principal residence as leverage.
  • The capacity to enhance and improve properties in order to raise their worth.


Cons Of Using HELOC To Buy Investment Property

  • The chance the property's value would drop, endangering the equity in the home.
  • The regular payments as well as loan interest fees.
  • The potential for foreclosure on your collateralized property if payments aren't made on time.



In the end, utilizing a HELOC to fund your real estate investments might be a terrific option, but it's crucial to carefully weigh the benefits and drawbacks and make sure that it's the best choice for you. If you do want to use a HELOC to buy an investment property, be sure to engage with a respectable lender and perform your due diligence on the property to make sure it's a wise investment.

And if you’re trying to find off-market properties on which you can use your HELOC for a down payment, make sure to grab your 7-day trial of Leadflow below and see what it’s all about!