Emma bought her first home ten years ago. She was proud of it, not just because she owned it, but because of how she managed it. She split her mortgage into two payments a month, paying it down faster. She budgeted carefully, always setting money aside for repairs. Her cousin, a medical student studying to become a nurse, even rented a room from her, which helped lower her monthly costs. Emma was intentional, smart, and steady.
One evening, while walking around her old neighborhood, Emma noticed something unusual. A duplex stood there with chipped paint, broken shutters, and graffiti on the walls. It was, without question, the ugliest house on the block. Yet it had a For Sale sign posted out front.
Curious, Emma called the realtor. What she learned made her heart race. The property was priced far below market value, and with three bedrooms and one and a half baths in each unit, it could bring in at least 1,700 a month per side once fixed up. Emma could see past the damage. She pictured fresh paint, new windows, and tenants filling the units. This was an opportunity, but how would she fund it?
Emma had been saving, but she did not want to drain her emergency fund. She needed a way to tap into resources she already had, without putting her family at risk. That is when she began researching financing options.
When you are buying a rental, there are four common ways to cover the costs. Each has pros, trade offs, and risks. Match the loan to your plan so the property can support itself with room to breathe.
A familiar choice. You will likely need a 20 to 25% down payment. With a fixed rate, your payment stays predictable. It works well because payments are steady and reliable for long term holds. Watch out for stricter underwriting and higher down payments than a primary residence.
A Home Equity Loan is a second mortgage that gives you a lump sum with a fixed rate and fixed monthly payment. It works because the payment is predictable and easy to budget against rental income. The tradeoff is you pay interest on the full amount from day one, even if costs arrive later.
A Home Equity Line of Credit is a revolving line secured by your home. Draw what you need during the draw period, repay, and reuse the line. It works because it is flexible for down payments, repairs, and surprise costs, and you pay interest only on what you borrow. The risk is that rates are usually variable, so payments can rise when rates rise.
You replace your current mortgage with a larger one and take the difference in cash. It works because you have one loan, often fixed, and you can free up substantial funds. The downside is that extending the term can increase total interest over time.
Emma sat at her kitchen table that night, notebook in hand, running through scenarios. If she went with a conventional mortgage, she would need a big down payment upfront, more than she had ready. A home equity loan could give her a lump sum with steady payments, but what if repair costs kept adding up. That is when she realized the flexibility of a HELOC might fit best. She could borrow for the down payment and later draw again for renovations, only paying interest on what she used.
Every rental purchase is different, which means your financing strategy should fit your situation, not the other way around. The best way to decide is to run the numbers for each scenario and see which leaves you with a comfortable cushion after expenses.
For Emma, the HELOC became her bridge. She saw how it would let her move quickly, secure the property, and cover the repairs in stages. She pictured drawing just enough to replace the roof and repaint the exterior, then later using more for the kitchens and bathrooms. Once the duplex was rented and stable, she planned to refinance into a long term mortgage and pay the HELOC back.
A HELOC can be a powerful tool when you need flexible, staged access to your equity. It is ideal for opportunities where speed matters and repair costs may not all come at once.
For other buyers, a home equity loan might feel safer. With a fixed rate and steady payment, you know exactly what will leave your bank account each month. This can make budgeting easier and take away the stress of rising rates. It is best when you know the exact amount you need, like a set down payment or a single renovation project.
Emma considered this option too but realized her fixer upper would need more flexible funding. For someone else, though, it might be the perfect match.
Emma also understood the risks. Her own home was the collateral, so she knew she had to keep her finances steady. HELOC rates could climb, making payments more expensive. And what if the duplex sat empty longer than expected. That is why she committed to keeping a solid emergency reserve, even while using her equity.
Using home equity can accelerate your plan, but it also raises the stakes. You must plan for collateral risk, rate risk, and cash flow strain. The safest approach is to keep at least three months of housing costs for both properties plus a repair fund before taking on new debt.
Say your home is worth $300,000 and your mortgage balance is $180,000. Your equity is $120,000. If your lender allows an 80% combined loan to value, your total allowable debt is $240,000. Subtract the $180,000 balance and you might access up to $60,000.
That $60,000 could cover a 20% down payment on a $250,000 rental and most closing costs. If expected rent is $1,900 and your total monthly expenses are $1,500, you have $400 left before any HELOC or home equity loan payment. If a HELOC interest only payment is $220, your cushion is $180. If that feels thin, consider a smaller draw, a lower purchase price, or a home equity loan with a fixed payment that still fits your numbers.
Press play for Andrea’s quick tips on Home Equity Loans.
Before you apply for a home equity loan or HELOC, it helps to be organized. Having the right paperwork ready can speed up approval and keep your financing stress-free.
Bring these documents and details:
Mortgage statement for your current home
Recent property tax records
Homeowner’s insurance policy
Recent pay stubs or proof of income
Last year’s W-2s or full tax returns if self-employed
A list of current debts or monthly loan payments
Basic rent and expense worksheet for the property you plan to buy
Estimated repair or renovation costs
Bank statements showing your reserve funds for repairs or vacancies
Taking time to prepare this information shows you are serious and helps your lender guide you to the best financing option for your investment property.
Emma did not let the graffiti or broken shutters scare her away. She had a plan, she understood her options, and she had the right partner. With the help of First Alliance Credit Union, Emma tapped her home equity through a HELOC, secured the property, and started transforming the ugliest house on the block into a welcoming home for new tenants.
You can take the same careful approach Emma did. Financing an investment property can be within reach if you borrow wisely, keep strong reserves, and pick the loan that matches your goals. Visit First Alliance Credit Union to explore your best financing path for a first or next rental property.