Real Estate Lines of Credit: Everything You Need to Know
Financing one or more properties with a traditional loan is great, but what if you could gain constant access to capital without constant approvals? Well, with a real estate line of credit, you can. Real estate lines of credit provide a source of funding that investors can continue to tap into once they have been originally approved. Common uses for real estate lines of credit include as-is real estate acquisitions, fix and flip deals, and even wholesaling.
In the past, real estate lines of credit only allowed borrowers to tap into the equity in one or more properties they already owned. However, things have changed, and now, some lenders allow borrowers to be approved for lines of credit based on their profile as an investor and financial strength. Amounts for real estate lines of credit often range between $1 million and $50 million, with approval in as little one to three weeks.
Unlike a traditional loan application, which is more complex and less likely to be approved, an investor with a real estate line of credit can typically draw on it with a purchase contract alone, with the funds being disbursed in as little as seven days. These lines of credit allow borrowers to buy several properties with the same credit line. Most credit lines have interest-only options, and, like a credit card, borrowers only pay interest on what they use. Origination fees, interest rates, and other approval fees are significantly lower than ordinary hard money or private money loans.
However, not all investors qualify for these more generous lines of credit, so some must rely on more traditional lines of credit. These include home equity lines of credit, equity lines of credit on a single investment property, equity lines of credit on a portfolio of properties, or commercial equity lines of credit that draw from the equity in commercial properties, such as 5+ unit multifamily properties, office properties, retail properties, industrial properties, or other forms of commercial real estate.
Types of Real Estate Lines of Credit
Acquisition Lines Of Credit: By far, acquisition lines of credit best type of credit line for real estate investors, as they don’t require borrowers to tap into the equity in their existing properties. This means that the line of credit is not secured by existing equity, only using the new properties as collateral. However, these lines of credit are generally restricted to experienced investors with a strong track record, good credit, and somewhat substantially net worth.
Home Equity Line of Credits (HELOCs): A home equity line of credit (HELOC), is perhaps the least desirable type of real estate line of credit, but it certainly has its purposes. A HELOC permits the borrower to tap into the equity in their own home. The benefit of HELOCs is that they can be used for almost anything, including personal use. This could be ideal for cash-strapped real estate investors who want working capital to pay employees or even market their real estate business to new investors. Rates are typically quite low, just above regular home mortgage rates. Despite these benefits, if you don’t pay off your HELOC, you could lose your own home, meaning that HELOCs do have substantial risks.
Single Investment Property Line Of Credit: This is similar to a HELOC, but draws funds from the equity in an investment property. Uses are generally more limited than a HELOC, and can typically only be utilized for property repairs or the acquisition of new properties.
Portfolio Line of Credit: This allows investors to draw funds from the equity in several of their investment properties since it can provide significantly more funds for investors.
Commercial Equity Line Of Credit (CELOCs): Commercial equity lines of credit (CELOCs), are similar to other types of equity lines of credit, but the equity is sourced from the borrower’s commercial properties, such as 5+ unit multifamily properties, office properties, retail properties, industrial properties, or other income-producing properties, excluding 1-4 unit residential properties. CELOCs can be used for various purposes, depending on the individual lender, with most lenders restricting usage to the purchase, repair, or construction of other commercial properties, and some lenders allowing funds to be used for general business purposes.
Real Estate Line of Credit Terms for 2022
Loan Term: Variable, may require re-certification every 6 months to year
Interest-Only Loans: Most financing is interest-only
Loan Amounts: $1 million to $50 million
LTV: Up to 80%
DSCR:
Many lenders require 1.25x DSCR for as-is purchases, DSCR may be as low as zero for fix-and-flip deals
Interest Rate: 7%+
Origination Fees:
Typically 1-2%, paid once
May be a smaller origination fee for each draw, perhaps 0.5%
Credit Score: Good credit generally required for acquisition lines of credit, fewer credit requirements for single investment property or portfolio lines of credit.
Appraisal: Generally, but not always, required before funding.
Closing Timeline: Loans generally close in 7 days or less
Foreign National Loans: Available from some lenders.
Pros and Cons of Real Estate Lines of Credit
Pros:
Faster closings than loans
No prepayment penalties
Only pay interest on used funds
Lower interest rate than hard money loans (including for construction loans, when available)
Typically have
Most lines of credit are interest-only
Longer repayment term than many loans
One-time origination fee (in many cases)
Cons:
Real estate investing experience required
Higher credit score requirements (for acquisition lines)
Some lines do not allow 5+ unit multifamily or commercial properties
May provide lower leverage than typical hard money loans
Funds restricted to property purchase and improvement (for acquisition lines)
Hard Money Loans vs. Real Estate Lines of Credit
As we’ve discussed above, there are a few main differences between a hard money loan and real estate acquisition line of credit. For one, an investor must get approved for a new hard money loan each time they want to purchase a new property, whereas if they have a real estate line of credit, they are already pre-approved for funding based on their strength as a borrower.
Real Estate Lines of Credit Offer Lower Origination Fees
This means that they typically do not have to pay a new origination fee, or if they do, the origination fee may be much smaller, such as 0.5% or 0.25%, compared to the 2-6% fees that are common with most hard money loans. As we detail in the example in the next section, this can easily save an investor tens of thousands of dollars over the course of few deals.
Real Estate Lines of Credit Offer Lower Interest Rates
In addition, due to the strength of the borrower, real estate lines of credit often have lower interest rates than hard money loans, often between 5-8%. In contrast, traditional hard money financing rates often range between 7-13%, with some lenders charging up to 20% for high-risk borrowers, highly distressed deals, or 100% financing.
Real Estate Lines of Credit Allow The Purchase of Multiple Properties, Faster Approval, and Transactional Funding Opportunities
Another benefit is that, since credit lines usually start at $1 million and above, investors can quickly use the same lender to purchase multiple properties simultaneously. Without a line of credit, a hard money lender may not be willing to re-lend to a borrower quickly until they have paid down a certain portion of their initial loan. Going to a new hard money lender may not work either, since the new lender may see the initial hard money loan while doing an asset search on the borrower.
In addition, a real estate line of credit allows borrowers to get larger loans approved faster. While it’s true that some hard money loans close within 24-48 hours, some lenders can take up to a month to close. Real estate acquisition lines of credit typically close in under a week, giving a borrower a better chance of closing. In many cases, lines of credit can be used for transactional funding for wholesalers, which gives an investor far more flexibility than a traditional hard money loan, which may or may not be able to be used for transactional funding.
Real Estate Acquisition Lines of Credit vs. Portfolio Lines of Credit
Real estate portfolio lines of credit work much in the same way but tap into the equity of existing properties, which significantly limits the amount of funding aborrower can receive from the deal. Portfolio equity lines of credit, instead of replacing a regular hard money loan, are more of a replacement for a cash-out refinance, except that that the funds are limited to investing in and improving new investment properties. However, these lines of credit still carry some of the benefits of acquisition lines of credit, such as lower origination fees and, in some cases (but not always) lower interest rates. In many cases, they function as a second mortgage on the portfolio of properties and are cross-collateralized.
Real Estate Lines of Credit May Not Offer as Much Leverage and May Restrict Investors to Certain Property Types
The main potential downside of real estate lines of credit is that they often don’t offer as much leverage as traditional hard money loans, often capping out at 80%. This can be attributed to the lower interest rates offered, and the risky nature of lending funds for a portfolio of properties, rather than a single property. Plus, many acquisition lines of credit limit the borrower to certain property types, often single-family homes, 2-4 unit residential, townhomes, and condos. To purchase commercial real estate (including 5+ unit multifamily assets), an investor would typically need a commercial equity line of credit (if they already own and have substantial equity in existing commercial properties, or, more commonly, a traditional commercial real estate loan.
Real Estate Line of Credit Deal Example
An experienced investor gets approved for a real estate line of credit for $2 million, providing them interest-only financing for rental properties at a 7% interest rate. They pay a 1% origination fee upfront, and must go through a credit check and income verification, as well as a review of their investment experience.
They use their line of credit to purchase a $300,000 property, and do not have to pay another origination fee after submitting the property purchase contract and getting an appraisal. The loan closes in 7 days and saves them $9,000 by allowing them to avoid the usual 3% hard money loan origination fee.
They then go on to use the credit line to purchase three $400,000 properties, and $200,000 property, maxing out their line of credit. They then fix and flip each of the $400,000 properties, using $100,000 each for repairs. They have now maxed out their real estate line of credit. Overall, they have saved $60,000 in loan origination fees, which really ends up to be $40,000 in savings when we subtract the initial 1%, $20,000 line of credit origination fee.
At this point, they sell both $400,000 properties for $700,000, profiting $100,000 each, and paying back their loans. At this point, they have paid back around $800,000 of their line of credit and can use this to purchase even more properties to either buy and hold or fix and flip at a profit. In general, this line of credit also allows them to close faster and with less hassle than a traditional loan.
The Top Lenders for Real Estate Lines of Credit (2022)
Hard money lenders, private money lenders, and even traditional banks offer real estate investor lines of credit. Some of the top lenders offering real estate lines of credit include:
Colony American Finance (CoreVest)
Colony American Finance is a real estate financing company recently purchased by the well-known hard money lender CoreVest. Their real estate line of credit program has terms including:
Loan Size: $1 million to $50 million
Interest Rates: Fixed, varies based on borrower strength
Closing Timeline: 2-4 weeks
Loan Uses: Purchases and refinances
Foreign Nationals: Eligible
Property Types: Single-family, 2-4 unit residential, condos, townhomes
2. Lima One Capital
Lima One Capital is a popular hard money lender based in Greenville, North Carolina. Their real estate line of credit is designed for experienced real estate investors with good credit and verifiable income. These lines of credit must be re-certified every six months, and allow investors to close on fix-and-flip deals in as little as 8 days and as little as 12 days for new construction loans, providing some of the fastest construction loan closing times in the entire industry.
3. Zions Bank
Zions Bank offers commercial real estate equity lines of credit, which allows investors to tap into the equity in commercial properties they already own. Like a HELOC, their program allows the borrower to use the money for many purposes, but in this case, the purposes must be business-related.
Loan Amount: Varies based on collateral
Loan Types:
Commercial equity line of credit
Improvement loan
Construction loan
Commercial real estate loan
LTV: Up to 75%
Loan Term: 12-180 months
Loan Origination Fee: Varies
Permitted Uses:
Take trade discounts
Finance receivables, investments or inventory
Improve liquidity
Meet short-term cash needs
Increase working capital
Expand business
Finance property improvements
Finance construction of owner-occupied commercial buildings
Acquire or refinance real estate
4. First Rehab Lending
First Rehab Lending is a Farmingdale, New York-based fix-and-flip lender offering real estate lines of credit, fix-and-flip loans, buy-and-hold loans, new construction loans, and mixed-use/multifamily financing. Their real estate line of credit program offers financing up to $2.25 million, has interest-only payments, and offers incredibly fast, 24-48 hour approvals.
5. Firsttrust Bank
Firsttrust Bank is a major Philadelphia-based bank that provides a wide variety of retail, business, and investor-focused lending programs. Terms for their real estate line of credit program include:
Loan Size: Starting at $100,000
LTV: Up to 65%
DSCR: 1.25x minimum
Interest Rates: Based on prime rate
Re-Certification: Yearly review required
Credit Requirement: 650 minimum
Eligible Properties/Purposes:
Fix-and-flip deals
Newly built property aquisitions
Multifamily acquisitions
Purchasing buildings for business use
New construction projects