Using your home's equity to buy a rental property

To use home equity to buy a rental, you take a second mortgage on the home you live in and use the proceeds as the down payment on the investment property. A HELOC for an investment property down payment (a home equity line of credit) keeps the money available while you shop. A home equity loan for the down payment on a rental gives you a fixed lump sum once you have a contract. Your first mortgage stays untouched either way. The rental gets its own loan, so you end up with two new payments, and the rent has to cover its share. The calculator below shows roughly how much equity you could reach today.

The strategy in plain words

Most first-time investors have the income to carry a rental and no cash for a down payment, because the cash is in their house. Home equity solves that. You borrow against the equity in your primary home with a second lien, which is a HELOC or a home equity loan (often called a HELOAN), and that money becomes the down payment and closing costs on the rental. The rental is then financed with its own mortgage.

The appeal is that your primary mortgage is never refinanced. If you locked a low rate years ago, you keep it. A cash-out refinance would replace that loan at today's pricing on the entire balance, a poor trade just to free up a down payment. Our HELOC vs home equity loan vs cash-out refinance page walks through why.

The lender on the rental will ask where the down payment came from. Borrowed funds from a second lien on your primary are an accepted source with most programs, as long as the new payment is counted in your debts. We handle both sides of this regularly, so the two loans are sized to work together.

HELOC vs home equity loan for a down payment

A HELOC if you are still shopping

Buying a rental takes time. You may write several offers and lose a few before one sticks. A HELOC fits that process. You open the line while you are looking, it costs nothing to carry until you draw, and when an offer is accepted the down payment is already approved and a phone call away. The rate is variable, tied to the prime rate plus a margin, and many programs allow interest-only payments during the draw period. If a deal falls through, you have drawn nothing. Full mechanics are on our how a HELOC works page.

A line also makes you a stronger buyer. A HELOC with an available balance is proof of funds you can show a seller.

A home equity loan once you have a contract

Once a property is under contract and the down payment is a known figure, a home equity loan makes sense. The amount is fixed, the rate is fixed, and the payment is fixed for the term. The trade-off is that you pay interest on the full balance from day one, and the money has to be sized correctly the first time. See how a home equity loan works for the structure.

Some investors do both. They shop with a HELOC, draw the down payment at closing, and later move that balance to a fixed rate so the carrying cost stops moving.

The two-payment reality

After the purchase you have two new monthly payments. One is the second lien on your primary home. The other is the mortgage on the rental, plus its taxes, insurance and any association dues. Both are due whether the rental is occupied or not.

Run the rent against both. Take the expected monthly rent, subtract the rental's full payment, subtract the second lien payment, and then subtract an allowance for vacancy, repairs and management. What is left is your actual monthly result. Plenty of first rentals are close to breakeven or slightly negative on that math once the down payment loan is included. That can still be a good investment if you are building equity and expecting rents to rise, but know the number going in, and make sure your household budget can carry both payments through an empty month.

Both lenders will run their own version of this. The HELOC or home equity loan is qualified on your current income and debts, with no credit for the rental you do not own yet. The rental's lender will count the new second lien payment as a debt and may count a portion of expected rent as income. Better to learn whether the two fit before you are in contract. Call (916) 755-6080 and we will look at both loans at once.

Already own a rental?

If you already have an investment property with equity in it, you have a second source of down payment money that does not touch your primary home at all. A DSCR second mortgage is a closed-end second lien on a one to four unit investment property you do not live in. It qualifies on the property's debt service coverage ratio, which is gross monthly rent divided by the full property payment including the new second, rather than on your personal income. It is a business-purpose loan, and no personal income documentation is required. For an investor who wants to leave their primary home alone, it is often the cleaner route to the next purchase.

Self-employed investors

Write-offs that lower a business owner's tax bill also lower the income a conventional underwriter can use. Our bank statement home equity loan is built for this. It is a fixed-rate second on your primary home, qualified on 12 months of business bank statements. All deposits are added up and 50% of the total is treated as income to allow for business expenses. The deposits are the income verification, so no tax returns are needed.

What we need

We will tell you exactly which documents apply once we talk. Generally the list looks like this.

• Your most recent first mortgage statement on your primary home.
• Income documentation. Pay stubs and W-2s for employees, or 12 months of business bank statements if you are self-employed.
• Your homeowners insurance declarations page.
• If you have one, the purchase contract or listing for the rental you are pursuing, so both loans can be sized together.

1. Run the number. Use the equity calculator to see roughly how much equity you could reach. No credit pull, no contact info.
2. Map both payments. Call or text (916) 755-6080. A loan officer will lay out the second lien and the rental loan side by side, with the rent.
3. Open the line or close the loan. A HELOC while you shop, or a home equity loan once you have a contract. Appraisal and documents happen here.
4. Buy the rental. Draw the down payment at closing, finance the property with its own mortgage, and start collecting rent.

More questions? The full FAQ covers the rest, and pulling equity out of your home compares every route in one place.