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Can you get a home equity loan on investment or rental property?

  //house-home.news-articles.net/content/2025/08/3 .. quity-loan-on-investment-or-rental-property.html
  Published in House and Home on Saturday, August 30th 2025 at 13:10 GMT by KUTV
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Using Home‑Equity Loans to Build a Rental‑Property Portfolio

When the housing market is booming and interest rates are relatively low, many homeowners are exploring ways to leverage the equity in their primary residence. One increasingly popular strategy is to tap that equity through a home‑equity loan or line of credit and use the proceeds to purchase rental properties. The Kutv Money segment, “Home Equity Loan Investment Rental Property,” breaks down how this approach works, the potential benefits and pitfalls, and what investors need to know before they dive in.

1. What Is a Home‑Equity Loan?

A home‑equity loan is a second mortgage that lets you borrow against the value you’ve built in your house. Unlike a traditional mortgage, which covers the purchase of the home, a home‑equity loan is a separate debt that must be repaid on a fixed schedule—often over 5‑15 years. Some lenders offer a home‑equity line of credit (HELOC) instead, giving borrowers a revolving credit facility that works more like a credit card but with a lower interest rate.

Key features highlighted in the Kutv article:

• Fixed vs. Variable Rates – Conventional home‑equity loans typically come with fixed rates, while HELOCs usually have variable rates that can rise or fall with the market.
• Interest‑Only Periods – Some HELOCs allow borrowers to pay only the interest for a set period (often 5‑10 years), which can reduce early monthly obligations.
• Credit Impact – Applying for a second mortgage may trigger a hard inquiry on your credit, slightly lowering your score for a short period.

2. Why Investors Consider This Route

The central appeal of using home‑equity money to buy rental property is simple: you’re turning your existing, relatively stable asset into a new source of income. The Kutv segment outlines several advantages:

1. Leverage Existing Wealth
   Homeowners often have substantial equity—especially after paying down a sizable portion of their mortgage—without needing to sell their house or take a conventional bank loan for a new investment.

2. Tax‑Friendly Structure
   Because the loan is secured against your primary residence, you can often deduct the interest on the home‑equity loan on your federal tax return—though the Tax Cuts and Jobs Act limits this deduction to interest paid on up to $750,000 of combined mortgage debt (or $375,000 for married filing separately).

3. Lower Interest Rates
   Compared with unsecured personal loans or credit cards, home‑equity loans typically offer lower rates, reducing the cost of borrowing.

4. Speed and Convenience
   The application process can be faster than applying for a commercial real‑estate loan, especially for first‑time investors who don’t yet have a track record of owning rental properties.

3. Qualification and Practical Steps

The article walks readers through the steps needed to secure a home‑equity loan:

1. Determine Equity
   Lenders usually require at least 15–20% equity. You can get a free home‑equity estimate from your bank or a professional appraiser.

2. Shop for Rates
   Compare offers from banks, credit unions, and online lenders. Pay attention to the APR, points, and any penalty fees for early repayment.

3. Prepare Documentation
   Typical documents include recent tax returns, pay stubs, a property appraisal, and proof of ownership.

4. Calculate Affordability
   Use the loan’s monthly payment estimate and compare it with projected rental income. The Kutv guide recommends that rental income should comfortably cover at least 110% of the total monthly debt service (mortgage + home‑equity loan + property taxes).

5. Close the Loan
   Once approved, the lender will disburse funds—often directly into a separate bank account—to be used for the property purchase.

4. Financial and Tax Implications

While the concept sounds attractive, investors must weigh the long‑term implications:

• Debt Burden
  Adding a second mortgage increases your overall debt-to-income ratio. If rental markets soften or vacancies rise, you’ll still need to service both loans.

• Tax Deductibility
  The interest on a home‑equity loan can be deducted only if the loan proceeds are used for “qualified home‑building or home‑improvement” expenses. Using the loan to buy a rental property typically falls outside this definition, meaning the interest may not be deductible. The article stresses reviewing IRS guidelines or consulting a CPA to confirm the treatment.

• Capital Gains and Depreciation
  Owning a rental property introduces new tax considerations—depreciation schedules, passive activity rules, and potential capital gains when you sell.

5. Risks and Alternatives

Risks Highlighted

• Variable Rate Exposure – If you choose a HELOC with a variable rate, rising interest rates could balloon your payments.
• Property Value Declines – If the rental property's value drops, you could end up with negative equity, especially if the rental income doesn’t keep pace.
• Cash Flow Shortfalls – Unexpected repairs or long vacancy periods can create cash crunches.

Alternatives Discussed

1. Traditional Real‑Estate Financing – Conventional loans often have lower rates for investors with a strong credit history and can provide larger loan amounts.
2. Private Lenders – Peer‑to‑peer or private money lenders may offer faster funding, though at higher costs.
3. Crowdfunding Platforms – Real‑estate crowdfunding can allow smaller equity investments without taking on debt.

6. Bottom Line

Using a home‑equity loan to purchase a rental property can be a powerful lever for those who already own a house and have built substantial equity. The strategy offers lower borrowing costs, quicker access to capital, and the potential to generate passive income. However, the benefits must be weighed against increased debt, possible tax complexities, and the inherent risks of real‑estate investing.

As the Kutv piece concludes, “It’s not a one‑size‑fits‑all solution, but for the right homeowner with a solid financial plan, a home‑equity loan can open the door to a profitable rental‑property portfolio.” If you’re considering this route, start by reviewing your equity, consulting a financial advisor or CPA, and carefully mapping out how the loan will fit into your broader investment strategy.