About Home Equity Loans & Rental Property
Home equity loans can be taken out on rental properties, but the rates tend to be higher and the risks greater. Any home equity loan taken out on such a property has to be considered carefully, as anything that eats into the equity on a rental property eats into long-term profits.
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Significance
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For a landlord, a home is more than just a place for people to live--it's an income stream that needs to be protected, managed and regularly invested in. Taking on such a loan has additional costs for a rental home owner. Not only are the interest rates on home equity loans for rentals higher, they also increase monthly mortgage payments, as the homeowner's equity decreases. This eats directly into rental income.
Benefits
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Despite this, a home equity loan on a rental can end up being a sensible financial choice. So long as the capital from the loan is used on either improvements to the property or is sensibly invested elsewhere, it can be a good source for financing--particularly if the rental income is well above the mortgage payments. The financing can be used to improve the housing conditions and thereby provide opportunities to increase the rent.
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Considerations
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Some lenders, such as State Farm, do not allow home equity loans on rental properties unless the owner lives in one of the units as a primary residence. This is because of the additional risk that comes with using home equity as security for a loan. In the case of non-payment, the lender would need to begin foreclosure proceedings on the rental. When foreclosure starts on a rental property, the tenants must be evicted--adding greatly to the costs.
Warning
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Putting your home equity at risk in a rental property could potentially open you up to legal action from your tenants should you fail to honor the terms of the loan. This could have any number of negative consequences that could take years to clear up. Ensure that you will be able to pay back the loan in a timely fashion even with the maximum interest rate allowable by the agreement.
Potential
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So long as the interest on the loan and on the mortgage can be paid on time, a home equity loan on a rental can end up being a sensible decision. Make sure that you have enough money saved for several months of payments before taking it on, so that you will have plenty of warning in case of trouble--like tenant issues or job loss.
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Resources
- Photo Credit Eschipul, Flickr
