How savvy real estate investors are using HELOCs to buy rental properties and build wealth

Mark, who prefers not to share his last name, retired early, thanks to his real estate investments. Courtesy of Mazske Finance

Homeowners are using home equity lines of credit, or HELOCs, to buy investment properties.

A HELOC lets a homeowner borrow against the equity in their property.

It works like a credit card, allowing you to borrow money as needed up to a set limit and pay it back.

Mark didn't have a six-figure salary when he started investing in real estate.

The Florida-based former police officer, who prefers not to share his last name for privacy reasons, said he never earned more than $52,000 a year. Still, he built a 25-unit real-estate portfolio in less than five years and retired from his day job at 50.

One tool that helped him get started was something he already had: equity in his home.

To fund his first investment property, a $100,000 single-family house in Virginia's Shenandoah Valley, Mark opened a home equity line of credit , or HELOC, against his paid-off primary residence.

His home was worth about $200,000 at the time, he told Business Insider. Rather than borrow close to the maximum amount he believed he could access, he took out a $30,000 line of credit — about 15% of his home's value — to help fund the investment.

Michigan investor Scott Steenbergh also tapped the equity in his primary residence when he and his wife bought their first sober-living rental . The investment property required a larger down payment than an owner-occupied home, he said, so the couple used a HELOC to help come up with the cash.

"We were able to refinance our primary, get some of the equity out, and put that to work," Steenbergh told BI.

Both investors were doing essentially the same thing: converting some of the wealth locked inside a home into capital they could deploy elsewhere.

How a HELOC works

A HELOC lets a homeowner borrow against the equity in their property — the difference between what the home is worth and what they still owe on it.

Unlike a home equity loan, which generally delivers a lump sum, a HELOC functions more like a credit card. A lender approves a maximum credit line, and the homeowner can borrow from it as needed during a set "draw period."

During the draw period, borrowers can typically access funds via checks or a credit card linked to the account. Once you start borrowing, you'll owe minimum monthly payments based on your balance. Some HELOCs allow interest-only payments during the draw period.

How much you can borrow depends on the lender, your home's value, how much you already owe on it, and your financial profile. Mark, for example, could have sought a much larger credit line against his fully paid-off home. Instead, he chose $30,000, which was enough to execute his investment plan without pulling considerably more equity from his home than he needed.

To qualify, borrowers need sufficient equity in their home, and lenders typically consider factors like income, existing debts, and credit history.

HELOC funds generally aren't restricted to home-related expenses. You can technically use it to finance anything, from starting a business to going on vacation or covering medical expenses. That flexibility comes with an important caveat: A HELOC is debt secured by your home. If you can't repay it, you could ultimately lose the property.

Using home equity to buy an income-producing asset

Mark used his HELOC to help buy a rental property that could generate income to offset the new debt. After securing a tenant, he said the property produced about $220 a month in profit. He used some of his cash flow to pay down the HELOC balance and put some into savings.

Steenbergh used his HELOC as a source of down-payment capital. He and his wife had built equity in their primary residence, but needed substantially more cash to purchase an investment property than they had needed for their own home.

That allowed them to put existing equity "to work," as Steenbergh described it, without selling their house.

The strategy can work when the asset purchased with the borrowed money generates enough income to justify the cost of the debt, but it also increases risk. Again, a HELOC is secured by your home. If you fall behind on payments, the lender may restrict additional borrowing, and if you're ultimately unable to repay the debt, your home could be at risk of foreclosure.

HELOC versus home equity loan

Kent He used a similar strategy to tap his home equity, but with a different product.

He and his wife bought their primary residence in San Diego in 2019. As the home appreciated, they built substantial equity and eventually used a home equity loan to pull out a portion of it and invest in a short-term rental.

"If I never bought my primary residence, then I probably wouldn't have gotten the equity to invest in short-term rentals," He told BI.

The distinction matters: A home equity loan generally provides a fixed amount of money upfront, while a HELOC provides a revolving credit line that can be tapped over time.

For homeowners who have built up equity, understanding their options can give them another way to put it to work.

"You are now equipped with another tool in your tool belt," He said. "With all this equity, maybe you can take it out and put it into an investment, as long as the investment makes sense and it fits your risk appetite."

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