What’s an investment line of credit?
An Investment Line of Credit (ILOC) is an excellent funding method for real estate investors. Unlike conventional loans, this flexible account can be a convenient source of funds for real estate needs. An ILOC allows an investor to quickly finance their real estate investments without having to tie up other sources of capital. How is this possible?
An ILOC is much like a Home Equity Line of Credit (HELOC), allowing investors to draw on their investments’ equity like credit cards. The borrower can take out any amount, provided it doesn’t exceed the account’s credit limit. Investors with portfolios of all sizes can use an ILOC since it’s possible to draw equity from a single home or an entire portfolio.
- Note: This guide is a basic introduction to real estate lines of credit. For more comprehensive information, seek investment advice from lenders specializing in this financial product.
The Lesser-Known Funding Method
Most investors know about conventional loans, personal loans, home equity lines of credit, hard money lending, and even retirement accounts to fund real estate transactions.
However, drawing equity from a single investment or creating a portfolio line of credit can help investors meet immediate or long-term financial goals.
Types of Credit Lines
There are two significant kinds of investment lines of credit related to real estate investments:
- Individual investment property line of credit: This allows you to draw from one investment property. It’s similar to home equity lines of credit because it has similar interest-only periods of around ten years and a repayment period of approximately 20 years.
- Portfolio line of credit: Also known as a securities-based line of credit, it allows you to borrow against your entire portfolio’s value. To draw credit, you need to pledge your assets as collateral, which a broker-dealer holds in a separate brokerage account. Unlike HELOCs and Individual lines of credit, this is meant to be a short-term loan that should be paid off within 24 months.
Who is an ILOC suited for?
If you’re an investor with a lot of equity built up in your current investment properties, you are a good candidate for an investment line of credit. Whether you want to fix and flip new properties or improve existing investments, a line of credit can give you the financial boost you need quickly and conveniently. It’s a helpful move for an investor that wants to avoid making a dent in their savings account and accelerate their investment strategy with more purchasing power.
Pros and Cons of Investment Lines of Credit
An investment line of credit can be an excellent resource for a rapidly growing real estate business, but it should also be approached with care. It would help if you researched all of your lender’s offerings to ensure that you make the right choice for your personal finance needs. Here are the pros and cons of drawing credit from some or all of your investment portfolio.
The Pros and Cons
Acquiring a real estate line of credit may provide you with flexible capital, making it an appealing financing option for the investor with a growing business.
The Pros of ILOCs
- Portfolio lines of credit are some of the best short-term financing options for investors.
- There is no need to disburse funds fully. Take what’s needed as long as it’s within your credit limit.
- Individual lines of credit have long repayment schedules for easier budgeting.
- Borrowers can deduct the interest paid on taxes if they meet IRS guidelines.
- Credit investment lines typically have lower interest rates than other financing options.
- Lines of credit can be used to fund multiple projects: from home improvement to paying down debt.
- They are an excellent option not to trigger capital gains tax because you’re borrowing from, not selling, an asset.
The Cons of ILOCs
- Risk of owing in volatile markets: The amount of credit available fluctuates according to your portfolio value. When the value dips lower than a certain amount, you must sell an asset or put more funds in the line of credit.
- Use of funds is restricted. Check the line of credit restrictions before applying to ensure you can use it to meet your goals.
- There is a higher risk as you draw more of your portfolio’s worth. Therefore, it’s advised not to exceed 50-60% of your portfolio’s value. 40% is often mentioned as an ideal cap to minimize risk.
- Portfolio-based LOCs are more challenging to qualify for than individual LOCs, requiring a high credit score and a history of successful past performances.
- Though most lines of credit have a low interest rate, these are often variable interest rates. Check with your lender before signing to know what you can expect to pay.
Invest in Your Future with Lines of Credit
An Investment Line of Credit is an excellent option for real estate investors who want quick and flexible access to capital. Using an ILOC, real estate investors can ensure they are always prepared for any real estate investment opportunity.
If you want more investment advice, speak with a trusted lender. Then, when you’re ready to find more investment properties, contact the real estate professionals at Marketplace Homes!