One of the downsides of investing in real estate is that properties are illiquid. If you have your money in a savings or checking account, you can withdraw it on demand. If you have your money in stocks and bonds, you can probably sell them and gain access to the money in relatively short order. But if you need money while owning a property, it’s a bit harder to get access to your equity in the form of liquid cash. Sure, you can sell the house, but that takes time and costs a lot of money. On top of that, you’ll be forced to get rid of the asset entirely.

But what if there’s another option? Can you use a home equity line of credit (HELOC) to get quick access to cash while most of your funds are tied up in rental properties?

The Value of Rental Property

Rental properties are an investing strategy with a lot of potential. You can purchase a property, rent it out, and make a consistent amount of money each month by charging rent in excess of your total expenses. On top of that, you can benefit from property appreciation, especially if you purchase properties in high-growth areas.

There are some downsides, including the liquidity problem we already mentioned and general risks of loss in property investing. Plus, you’ll be responsible for maintaining and managing the properties themselves.

With a good property manager on your side, you can turn this into a truly passive income source, sit back, and enjoy the benefits. And with good decision-making skills and a diversified portfolio, you can mitigate the risks of property investing altogether.

That mostly leaves the liquidity problem. So can we solve that with a HELOC?

What Is a HELOC?

A home equity line of credit (HELOC) is a kind of floating loan made accessible to property owners based on the equity they have in the property. You’ll get access to a line of credit, which functions much like a credit card, with a fixed or variable interest rate, up to 85 percent of the equity you currently have in the house.

Equity is calculated based on the value of the property and the amount you currently owe on the loan for it (if applicable). For example, let’s say your property is worth $300,000 and you currently owe $100,000 on it; that gives you $200,000 of equity. With a HELOC, you could conceivably get access to $170,000 of credit, from which you can withdraw as you see fit. You’ll be responsible for making minimum payments on whatever you borrow, again, much like a credit card, and the line of credit will be available to you for a certain term, usually something like 10 years.

And yes, you can get a HELOC for your rental property.

How Do You Qualify for a HELOC?

Qualifying for this type of loan is similar to qualifying for other loans. Lenders will take a look at your financial profile, including your credit score, your debt to income (DTI) ratio, and a variety of other personal finance factors.

Most importantly, you’ll need to have positive home equity. That means you’ll need to owe less money on your home than your home is currently worth. This is the case for the majority of homeowners.

How to Use Your HELOC Funds

What can you do with your line of credit funds once they’re made accessible to you? For the most part, you can do whatever you want. You can invest in renovations or repairs. You can use the money to cover personal expenses. You can even use the money to make other investments. Just keep in mind that you’ll need to pay the money back with interest.

Tips for Getting the Most Out of Your HELOC

What steps can you take to get the most value out of your HELOC?

  • Maintain your credit score. Your credit score will play a massive role in whether you qualify for this type of loan. If you’re interested in getting one, or if you think you might want one in the future, try to increase this score.
  • Shop around. You can secure a line of credit from any number of different financial institutions, and each institution is going to have different rates, terms, and conditions. Accordingly, you should shop around to find the most appropriate option for your needs.
  • Be wary of extra terms and conditions. There may be extra terms and conditions that apply to your loan, so read the fine print carefully. For example, you may be responsible for making a balloon payment at the end of the term.
  • Consider fixed and variable interest rates. Both fixed and variable interest rates are available for HELOCs. There are strengths and weaknesses to each option, and variable interest rates are more common, so consider your options carefully.
  • Borrow wisely. When you tap into this line of credit, always borrow responsibly. Don’t borrow more than you need and avoid using the funds recklessly. Best practices for credit card use also apply here.

You may not be able to turn all of your rental properties into liquid investments, but with a HELOC, you can mitigate the liquidity problem and gain access to cash if and when you need it. Just make sure you do your due diligence before utilizing any kind of big financial product.