One of the best ways to build net worth is through investing in real estate. Whether you buy and flip or buy and hold, real property can generate tremendous profits for individuals and businesses. The average ROI on real estate investment is in the 12-16% range, which is quite a bit higher than the stock market.
Once you get serious about your real estate investment strategy, you need to explore all of your financing options. Here, I want to talk specifically about real estate investor lines of credit.
Here’s what we’ll cover:
- What is a Real Estate Investor Line of Credit?
- Frequently Asked Questions
What is a Real Estate Investor Line of Credit?
A real estate investor line of credit is a revolving credit line dedicated to the purchase, repair, and renovation of investment property. This type of financing is extended based on equity in a real estate investment and can be used much like a credit card, which means that an investor can tap into the funds multiple times.
These credit lines are extended from banks and credit unions to individuals and businesses for the purpose of funding new investments or rehabilitating or updating an existing investment. The process is fairly straightforward and similar to a HELOC loan on an owner-occupied home.
And, here’s how these dedicated credit lines stack up against some of the most common real estate (RE) investment financing options.
Credit Cards vs Loans vs Lines of Credit vs Hard Money
Let’s quickly clarify the differences between credit cards, loans, lines of credit, and hard money as they can apply to real estate investing.
First, a credit card is a revolving line of credit that can be used for various purposes. Visa, Mastercard, American Expresss, and Discover cards can be used universally to pay for almost anything, as long as the seller accepts these payment forms. While most home sales channels don’t accept credit cards, you can convert credit cards into cash to pay for investments. Credit card interest is around 15% on average.
Next, a loan is usually extended with set terms. This means that you will be given a certain amount of cash to be used at one time then paid back by a given date. In Real Estate terms, a loan typically refers to a mortgage and can be taken in the full amount of the property, less any down payment. Typical repayment terms are 15, 20, and 30 years. Right now, the average interest rate on a mortgage is between 2.3 to 2.9%.
Then, lines of credit can be used like credit cards with revolving terms, yet typically have interest rates akin to mortgages. In a sense, it may seem like they provide the best of both worlds. However, lines of credit typically can’t be used to fund an entire home purchase and instead provide a short term solution to an immediate real estate investment need.
Finally, hard money loans are usually reserved for investors with less than ideal credit as a short-term funding option since the average interest rates are between 11 and 18%. A hard money loan is usually extended to a buyer by a private party like an investor, business, or the seller of the property.
Frequently Asked Questions
Here are answers to some of the most common questions I hear when discussing real estate investing with both BCW members and colleagues.
Can you get a line of credit on an investment property?
Yes. As long as a property has equity in it, whether it is used as your primary residence or place of business or solely as an investment, it can be leveraged to obtain a line of credit.
How do real estate investors get financing?
Real estate investors fund their home purchases and renovations through a variety of financing options including loans, credit cards, lines of credit, and other less common channels.
What is an investment line of credit?
An investment line of credit is a short-term financing solution that provides the borrower with a revolving line of credit on either a property that is not occupied by the owner or another investment.
Can you take out a line of credit on a rental property?
Yes. You can take out a home equity line of credit (HELOC) for a property that you rent the same way you can a home that you occupy.
Can you get a 30-year mortgage on an investment property?
Yes. 30-year mortgages are available for investment properties and owner-occupied properties.
How can I invest in real estate with no money and bad credit?
The most common way that people with bad credit can get started with real estate investing is through hard money lenders. These situations are usually short-term (until the buyer can improve their credit) and used as a last resort.
Can I use a business line of credit to buy a house?
If you have a large enough business line of credit, you can use it to buy a house, but you should not treat it as a 30-year mortgage because this would incur much higher costs than necessary. Learn more about the BRRR method of real estate investing.
Is it smart to use home equity to buy an investment property?
If an investment can generate more income for you, it can often be a smart move to use your home equity to buy another property.
If you’re looking for a line of credit that you can tap into repeatedly on your real estate journey, you will use the funds solely for real estate, and you already have equity in property along with a good credit score, a real estate investor line of credit may help you make your next move to secure your future. I find that it’s best to diversify your funding options.