Home Equity Lines of Credit for Fixing and Flipping Multifamily Properties

If you're an investor with significant equity built up in your primary residence, you may be considering using a home equity line of credit, or HELOC, to finance a fix-and-flip project. HELOCs work like credit cards, allowing you to borrow against your home during a specified draw period, typically between five and 10 years. There is typically no minimum amount that the homeowner has to borrow, so they can take out as little or as much as they want, up to their credit limit.

Once the draw period is over, the repayment period begins. This typically lasts another 20 years, giving these loans a full term of around 25 to 30 years. In most cases, there are no limits on what a borrower can do with their HELOC funds, making them ideal for financing a fix-and-flip transaction.

Plus, since borrowers don't need to pay back the principal on their HELOCs for several years, it gives them ample time to look for the right property to invest in. 

HELOCs, Equity Limits, and Owner-Occupied Multifamily Properties 

Since the borrowing limit on a HELOC is based on the equity in your home, it may only provide you the funds to purchase a smaller multifamily property such as a duplex or triplex. However, if your home has lots of equity in it — say, a few million dollars, there's nothing to prevent you from using your HELOC funds to purchase a multifamily property of any size.

Most HELOCs allow combined LTVs of up to 85% for qualified borrowers. For example, if you had a home valued at $1.5 million, with $500,000 remaining on the mortgage, you would likely be able to take out a maximum of around $775,000 with a HELOC. Some investors will use the money from a HELOC as a down payment for a hard money loan. This can be risky, but it greatly improves an investor's leverage and the size of the property they can buy. 

It's important to keep in mind that HELOCs, unlike investment property lines of credit (LOCs), typically need to be taken out on an owner-occupied residential property, usually a single-family home. 

If you live in and own a property with two to four units and rent the other units to tenants, you may still be able to get a non owner occupied HELOC. You may just need to look a little bit harder for a lender.

Below, you'll find sample terms and some pros and cons for using HELOCs for a fix-and-flip project. Get a free quote on a HELOC by filling out the quick form below.

Sample Terms for Fix and Flip Home Equity Lines of Credit in 2023

Size:  Varies, limited by equity in the property and maximum LTV allowance 

Term:  5- to 10-year interest-only draw period, 15- to 20-year repayment period 

Maximum LTV/Leverage:  Up to 85% for single-family homes, may be slightly lower for 2-4 unit properties

Interest Rate:  Variable interest rates typically tied to SOFR

Closing Costs: 2.00% - 5.00%

Credit Requirement:  640+ 

Debt-to-income (DTI) ratio: 45% or less

Origination Fees: Typically around 2.00% 

Timing:  These loans can typically close in around 30-45 days 

Advantages

Low Interest Rates

One of the biggest advantages of using a home equity line of credit to finance a fix-and-flip project is a potentially lower interest rate. HELOCs typically offer lower interest rates than hard money loans, which are another common source of financing for fix-and-flip projects.

This can save you money in interest payments over the course of the loan, especially if you're able to repay the HELOC quickly. However, it's important to remember that interest rates can fluctuate over time, so it's crucial to budget carefully and be prepared for potential rate increases in the future.

Reinvesting Equity in Current Properties

HELOCs can allow real estate investors to reinvest the equity in their current properties elsewhere, making it easier to take on new projects and expand their portfolio. By tapping into the equity of their primary residence, investors can access cash to fund down payments or renovations on new investment properties without having to sell their existing properties. This can be especially beneficial for investors who have built up significant equity in their primary residence but may not have a lot of cash on hand.

Using Funds as a Down Payment on a Hard Money Loan

Another advantage of using a HELOC is that the funds can be used as a down payment on a hard money loan. Hard money loans are often used by fix-and-flip investors because they offer quick access to cash and have fewer qualification requirements than traditional loans. However, hard money loans typically come with higher interest rates and shorter repayment terms than other forms of financing. By using a HELOC to fund the down payment on a hard money loan, investors can potentially reduce their interest payments and extend their repayment terms, making it easier to finance their fix-and-flip project over the long term.

Disadvantages

High Origination Fees

While a HELOC can offer lower interest rates than other forms of financing, it's important to keep in mind that HELOCs typically come with loan origination fees. These fees can range up to 5% of the total loan amount, which can add up to a significant amount of money for larger loans. This is an important factor to consider when weighing the potential cost savings of a HELOC against other forms of financing.

Requires Significant Equity in the Property

In order to qualify for a HELOC, homeowners typically need to have at least 30% equity in their property. This means that if your home is worth $300,000, you would need to have at least $90,000 in equity to qualify for a HELOC. This requirement can be a barrier for some investors, especially those who are just starting out and may not have built up as much equity in their primary residence. Additionally, the equity requirement can limit the amount of funds available for a fix-and-flip project, which may make it more difficult to take on larger projects.

Limited by Property Equity

Another potential disadvantage of using a HELOC to fund a fix-and-flip project is that the amount of funds available is limited by the amount of equity in the property. This means that if you have a relatively small amount of equity in your primary residence, you may not be able to access enough funds to fully finance your fix-and-flip project. Additionally, because HELOCs are secured by the equity in your property, defaulting on the loan can put your home at risk of foreclosure. This is an important consideration for investors, especially those who are just starting out and may not have a lot of financial cushion to fall back on in case of default.