Believe it or not, the biggest obstacle real estate investors face is their ability to fund deals rather than find them. That’s why having multiple and varied capital sources is essential, such as knowing how to access a real estate line of credit. Most investors know about conventional financing, private and hard money lending, and even utilizing retirement accounts, but sometimes uncommon sources are the best answer. That’s why learning how to get a line of credit for real estate investing is so crucial. There are several options for drawing on lines of credit that real estate investors have, no matter their experience levels. Keep reading to learn how a real estate investor line of credit can provide you the resources to grow and expand your business in new ways.
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What Is A Real Estate Investor Line Of Credit?
A real estate investor line of credit is a financing option that allows investors to tap into a property’s equity, much like a business credit card. An investor line of credit is a relatively simple concept and provides investors with quick access to cash.
A real estate line of credit for real estate investors can be an excellent resource for a rapidly growing business. Typically, a line of credit can be drawn multiple times, meaning that you can even use it for multiple projects. Unlike a traditional loan, users only pay interest on the amount they draw, and the fees are usually much lower than they would be with a hard money lender.
Acquiring a real estate line of credit may provide you with flexible capital, making it an appealing financing option for the investor with a growing business. The accommodating nature of a business line of credit can be an essential piece of both short-term and long-term business financing plans for real estate investors and homeowners alike.
The Pros
- Long repayment term
- Tax benefits on interest paid
- Lower interest rate compared to other financing options
- You only pay interest on the amount you draw on
- Faster access to cash than a loan option
- No prepayment or early exit fees
The Cons
- Requires a high credit score to qualify
- Lower LTV than other financing options
- Restricted use of funds (i.e. you can’t use the money to start a business)
- Limitations on how many units the property can have
Loan Vs Line Of Credit
Real estate loans and credit lines can provide financing to investors for various projects, though there are a few key differences to consider before committing to one. Real estate loans typically provide investors with a designated amount of cash at a fixed interest rate. This means investors will be responsible for paying back this loan in full over the specified loan term.
A real estate line of credit, on the other hand, provides investors with what is often referred to as a “revolving account.” This means investors can access up to the credit limit at whatever time. If investors pay off the borrowed portion, they can borrow that amount again (much like a credit card). Interest payments and spending minimums will depend on the issuer.
Co-Founder of Mobitrix states that “a line of credit is essentially a revolving credit line that allows customers to borrow money on a short-term basis. For one reason or another, the customer may run into financial difficulty and need to borrow additional funds either for housing expenses or other temporary needs”.
Should I Use A Personal Loan Or Business Loan?
Investors who opt for a real estate loan must then decide whether a personal or business loan is better suited to their situation. The most common determining factor for investors is typically the number of funds needed. Business loans can be granted for higher amounts, though lenders will require more information. For example, when granting a business loan, investors may be required to provide their personal financial information, business plan, and more.
Lenders providing personal loans will typically only look at an investor’s personal financial information, though the total loan amounts can be lower and have higher interest rates. Another factor to consider is that investors will not keep their personal finances separate from their real estate business with a personal loan. This can come with its own set of pros and cons. Before taking out a personal or business loan, be sure to research the effects of both options to make the right choice for your business.
Investment Property Lines Of Credit Types
There are numerous ways investors can obtain a real estate line of credit. Review the following methods to find the most suitable option for your real estate investing business:
- Home Equity
- Single Investment Property Line Of Credit
- Portfolio Line Of Credit
- Commercial Equity Line Of Credit
- Acquisition Line Of Credit
Home Equity
A home equity line of credit (HELOC) is a revolving line of credit that grants you access to the equity in your primary residence. HELOC funds can be used for almost anything, from paying college tuition to consolidating debt and making renovations to your home. You will only pay interest on the funds you use, and they usually come with low-interest rates (.25% above prime rates for 1st position). However, it is worth noting that HELOCs will use the subject property as collateral, so spend the money wisely.
Single Investment Property Line Of Credit
A single investment property line of credit is similar to a HELOC, but the property from which you are drawing equity is an investment, not the primary residence of the owner. The funds from a real estate investment line of credit can be used for anything related to the investment property, so your options are slightly more limited than with a HELOC. If you want to draw funds from one property instead of your portfolio as a whole, a single investment property line of credit may be your best fit.
Portfolio Line Of Credit
If you are a high net worth investor with over $1 million in equity or you have a robust portfolio of properties, a portfolio investment property line of credit is right for you. With a portfolio investment line of credit, you can access equity from an entire portfolio of properties, meaning you have more capital at your disposal. If you are looking for a commercial real estate line of credit, a portfolio investment LOC (line of credit) is a great option for you. With this type of LOC, qualification is based more on your overall financial picture rather than just your credit score.
Commercial Equity Line Of Credit
A commercial equity line of credit taps into the equity built up in commercial investment. Depending on the lender, the line can be up to almost 80 percent of the property’s appraised value. Commercial lines of credit can be a great fit for investors taking on multiple investment projects or other commercial properties. Similar to other real estate lines of credit, the repayment period will vary from lender to lender.
Acquisition Line Of Credit
A real estate acquisition line of credit is a relatively new but rapidly growing method for financing investment deals. Unlike traditional financing, acquisition lines of credit can be obtained without drawing on the equity in your portfolio. Lending is, instead, based on your profile as an investor and your financial wherewithal. Essentially, with unsecured real estate lines of credit, your approval depends on your track record as an investor. This is a powerful financing option for an experienced real estate investor with a proven record of successful investing.
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How To Qualify For A Real Estate Acquisition Line Of Credit
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Choose The Right LOC: There is a variety of LOCs available, so you will want to choose the one that best fits your business and your goals. If you own one investment property, a single home investment property line of credit may be for you. If you own a portfolio of properties, drawing a line of credit on the portfolio as a whole will allow you access to more capital. Take a look at the options available to you and then align those options with your investing goals to choose the smartest LOC for your situation.
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Gather Required Documentation: You will need any current property-related documents, along with pay stubs, bank statements, and your last two years of tax information. You should have these scanned and digitized to make submitting your application online a breeze. In some cases, loan providers may request to see records of previous investment property projects you have completed. It can be helpful to have these ready to go just in case.
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Complete A LOC Application: You can complete your LOC application online, making the application process as flexible, convenient, and painless as possible. You will be asked to submit your documentation as part of your application. Double-check everything before you submit, and don’t be afraid to call the provider with any questions. Online applications are there to make things more convenient, not to make them more confusing.
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Review Your Application: After submitting your LOC application, a representative will contact you to review your application. You can expect them to go over the documents you submitted and ask for any additional documentation they may deem necessary. This is where it helps to be prepared with extra information, as you can easily send it their way at the time of the call. In some cases, they will even be able to approve you that day — or at the very least, give you information on what to expect in their response.
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Receive Your Approval: Once your LOC representative approves you, they will typically call to let you know right away. However, the formal letter of approval will be sent in the mail. This process can take up to 30 days to complete. Upon arrival, you will be able to begin drawing on your new real estate investor line of credit within 10 days.
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Tax Benefits Of Equity Loans
If you decide to tap into your home’s equity, there are certain tax benefits involved. The IRS allows homeowners to write off a portion of interest payments on equity loans when itemizing deductions. According to the IRS, interest on equity loans can be deducted if the loan is used to build or "substantially improve" the property. Previously, homeowners were able to deduct equity loan interest in more circumstances; however, the code has recently evolved. If the equity loan does meet the requirements outlined by the IRS, this deduction can have substantial benefits for homeowners.
Flipping Houses With No Money Down
A real estate line of credit is one of the best options for flipping houses with no money down. While it does require you to have equity built up in a previous property, you don’t need to raise additional funds. Many investors can utilize one line of credit for multiple properties, paying back and borrowing funds as needed. The specifics will depend on the lender you work with, but this is a great option for flipping houses.
Many traditional forms of real estate financing, such as mortgage lenders and even some private lenders, will require an initial down payment. Certain financing options will allow you to make a smaller down payment, rather than the traditional 20 percent. But, there is still a required down payment all the same. For this reason, investors hoping to flip houses with no money down often have to consider creative financing methods, such as a LOC.
Alternatives To A Real Estate Line Of Credit
As a real estate investor, it’s crucial to have several creative financing techniques up your sleeve. A real estate line of credit is just one of several opportunities that could help finance your next deal. Below are a few common alternatives to a real estate line of credit:
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Home Equity Line of Credit (HELOC): A HELOC is most similar to a real estate line of credit, except it is used to pull equity from your primary residence. A HELOC can have lower interest rates when compared to a real estate line of credit, but you are using your home as collateral.
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Cash-Out Refinance: A cash-out refinance is exactly what it sounds like: you take out equity in a home and refinance the existing loan. This can provide you with a lump sum of funds for your next deal, as long as you have enough built up in one of your properties.
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Private or Hard Money Loans: Perhaps the most popular financing method in the industry, private and hard money loans are short-term loans provided by another real estate investor. They are often associated with higher-than-average interest rates, but the approval requirements are negotiable.
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Bridge Loans: A bridge loan acts as a lien against a property. Investors can then use the funds to finance a new deal before selling a property they already own.
Summary
Raising capital and financing deals is an essential part of a savvy real estate investor’s day-to-day operations. With more capital, investors can acquire more deals, tackle more projects, and reach new heights in their careers. That’s where a real estate line of credit comes in. By understanding this creative financing tactic, investors can open themselves up to more opportunities, ultimately increasing their long-term success. Have you utilized a real estate line of credit? Which option did you find worked best in your case? Please feel free to let us know how the process worked out for you in the comments below.
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The information presented is not intended to be used as the sole basis for any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. Nothing provided shall constitute financial, tax, legal, or accounting advice or individually tailored investment advice. This information is for educational purposes only.
