Using a HELOC as a Down Payment for Rental Property

A home equity line of credit (HELOC) can be a powerful tool for real estate investors looking to purchase rental properties. By tapping into your primary residence's equity, you can access cash for a down payment without selling investments or draining savings. But this strategy isn't right for everyone—it comes with risks that can hurt your finances if the rental market turns or you overextend yourself.

Here's what you need to know before using a HELOC to buy rental property.

How It Works

When you use a HELOC for a rental property down payment, you're essentially borrowing against your primary home to fund another property purchase. Here's the typical flow:

1. Open a HELOC on your primary residence (usually 80-90% combined loan-to-value)
2. Draw funds during your rental property purchase (at closing or for earnest money)
3. Secure rental property financing with 15-25% down payment (lenders typically require more for investment properties)
4. Pay back the HELOC using rental income, personal income, or refinancing

The appeal is obvious: you can buy rental property without saving for years or liquidating retirement accounts. The risk is equally clear: you now have two mortgages to service, and if the rental sits vacant or your primary home value drops, you're exposed.

Real Numbers: What It Actually Costs

Let's run through a realistic example in a mid-tier market.

Scenario: You want to buy a $400,000 rental property. You need $80,000 for a 20% down payment plus $8,000 for closing costs (total: $88,000).

HELOC Terms (Typical)

• Amount borrowed: $90,000
• Interest rate: 8.5% variable (current market rates as of 2026)
• Draw period: 10 years (interest-only payments)
• Monthly payment during draw period: $637.50 (interest only)

Rental Property Financing

• Purchase price: $400,000
• Down payment: $80,000 (from HELOC)
• Loan amount: $320,000
• Interest rate: 7.25% (investment properties get higher rates)
• Monthly mortgage payment: $2,183
• Property taxes: $400/month
• Insurance: $150/month
• HOA (if applicable): $0
• Total monthly cost: $2,733

Your Monthly Obligations

• HELOC payment: $638
• Rental property PITI: $2,733
• Total new monthly debt: $3,371

To break even, you need rental income of at least $3,371/month. Most lenders use the 1% rule (monthly rent should be 1% of purchase price), which would be $4,000/month for this property. That gives you $629/month in cash flow before maintenance and vacancies.

Reality check: Set aside 10% for vacancies and 10% for maintenance. Your true cash flow is closer to $200-$300/month after reserves.

When This Strategy Makes Sense

Using a HELOC for rental property works best when:

1. You Have Strong Cash Flow

You need enough personal income to cover both mortgages during vacancies. A good rule: have 6 months of PITI (for both properties) in cash reserves. For our example above, that's $20,226 in the bank before you buy.

2. The Property Cash Flows From Day One

Don't count on appreciation. Buy in markets where rent exceeds your total carrying costs (including HELOC payment). If you're hoping the property "breaks even eventually," you're speculating, not investing.

3. You Can Pay Down the HELOC Within 3-5 Years

Interest-only HELOC payments feel cheap, but once the draw period ends (usually 10 years), you enter repayment and your payment can double or triple. Have a plan to pay it off using:

• Rental cash flow
• Bonuses or side income
• Cash-out refinance on the rental property (after 12+ months of ownership and if the property appreciates)

4. You're in a Strong Housing Market

If your primary residence is in an appreciating market with stable employment, the risk is lower. Avoid this strategy if you're in a declining market or your job is unstable.

5. Interest Rates Favor This Approach

Compare the HELOC rate to other options (401k loan, personal loan, hard money). In 2026, HELOC rates around 8-9% are competitive with investment property financing. If HELOCs spike to 12%+, reconsider.

When to Avoid This Strategy

1. You Don't Have Cash Reserves

If using the HELOC drains your emergency fund, don't do it. Real estate investing requires liquidity. Expect at least one major repair ($3,000-$10,000) in the first year.

2. The Property Doesn't Cash Flow

Never buy a rental property that loses money every month hoping for appreciation. That's gambling. If rent is $3,200 but your total obligations are $3,371, you're bleeding $171/month before repairs and vacancies. Over a year, that's $2,052 in negative cash flow—and that's the best-case scenario.

3. Your Primary Residence Has Little Equity

If you're borrowing 90% combined LTV and home values drop 10%, you're underwater on your primary residence. That limits your options if you need to sell or refinance.

4. You Can't Handle Variable Rate Risk

HELOCs have variable rates tied to the prime rate. If the Fed raises rates, your HELOC payment increases. In our example, a 2% rate increase adds $150/month to your payment. Make sure your budget can absorb swings.

5. You're a First-Time Landlord

Being a landlord is work. Tenant screening, maintenance coordination, evictions—these take time and money. If you've never managed rental property, start with something smaller or partner with an experienced investor before leveraging your primary home.

Alternative Strategies to Consider

Before using a HELOC, consider:

1. Save for the Down Payment

Boring but safe. If you can save $1,500/month, you'll have $90,000 in 5 years without taking on debt. This also gives you time to learn about real estate investing.

2. Partner With Another Investor

Pool resources with a trusted partner. You contribute the HELOC funds, they contribute property management expertise or additional capital. Structure it legally with an LLC and operating agreement.

3. House Hacking

Buy a 2-4 unit property, live in one unit, rent the others. You can use conventional financing with just 3.5-5% down (FHA or conventional loan) and let tenants pay your mortgage. Once you move out, you have a rental property without using a HELOC.

4. Cash-Out Refinance Instead of HELOC

If you have significant equity and can get a low fixed rate, a cash-out refinance gives you a lump sum at a fixed rate. The downside: higher monthly payment on your primary residence and you'll pay closing costs (2-5% of loan amount).

Tax Implications

This gets complicated fast, so talk to a CPA. Here's the overview:

• HELOC interest deduction: As of 2026, HELOC interest is only deductible if you use the funds to buy, build, or substantially improve your primary residence. Using it for rental property down payment means the interest is not deductible on your personal return.
• Rental property deductions: You can deduct mortgage interest, property taxes, insurance, maintenance, and depreciation on the rental property.
• Passive loss limitations: If you actively manage the rental and make under $100,000 AGI, you can deduct up to $25,000 in rental losses. Above that, losses are suspended until you sell or your income drops.

Bottom line: The HELOC interest (likely $7,650/year in our example) is not deductible. Factor that into your cash flow calculations.

Step-by-Step: How to Execute This Strategy

If you've decided this makes sense, here's how to do it:

1. Get Your HELOC Approved First

Don't wait until you find a property. Get pre-approved so you know exactly how much you can access. Shop at least 3 lenders (local credit unions often have better rates than big banks).

2. Run the Numbers on Every Property

Use a rental property calculator that includes:

• Mortgage payment (use investment property rates)
• Property taxes and insurance
• HELOC payment
• 10% vacancy reserve
• 10% maintenance reserve
• Property management (8-10% of rent if you're using a PM)

Only make offers on properties that cash flow after all expenses.

3. Use a Real Estate Agent Who Understands Investors

You need someone who can pull rent comps, identify problem tenants, and close quickly. Tell them upfront you're using a HELOC and need fast access to funds.

4. Draw HELOC Funds at Closing

Don't draw early and let the money sit in your bank account accumulating interest. Most HELOCs let you draw via check or wire transfer. Coordinate with your title company.

5. Build a Repayment Plan

Set up automatic payments from your rental income account to the HELOC. Every dollar of rental profit should go toward paying down the HELOC until it's gone.

6. Track Everything

Keep separate bank accounts for the rental property. This makes accounting easier and helps you see true cash flow. Use software like Stessa or Baselane (both free).

Final Thoughts

Using a HELOC to buy rental property can accelerate your real estate portfolio, but it's not a shortcut to wealth. You're taking on leverage, which magnifies both gains and losses.

The investors who succeed with this strategy:

• Buy properties that cash flow from day one
• Keep substantial cash reserves
• Pay down the HELOC aggressively
• Understand landlording before they scale
• Have stable W-2 income to backstop the investment

The investors who fail:

• Overextend on properties that don't cash flow
• Underestimate repair costs and vacancies
• Have no reserves when the AC dies or a tenant stops paying
• Panic when rates rise and payments increase

If you've run the numbers, have reserves, and found a property that genuinely cash flows, a HELOC can be a smart tool. If you're stretching to make the deal work or hoping for appreciation to bail you out, walk away.

Real estate investing is a long game. Don't risk your primary residence on a property that barely pencils out.