How a Real Estate Line of Credit Can Help You Scale Your Portfolio

What is a real estate line of credit?

A real estate line of credit is a revolving line secured by real estate, which you can pull from as needed. Once you're approved for your line, you can draw from it as needed, up to your credit limit. You'll then repay what you've used, and as you pay down your balance, the available credit line resets and you can borrow again.

What makes a real estate line of credit different from a typical business line of credit (or a HELOC on a primary residence) is the collateral and its purpose. A real estate line of credit is typically secured by investment property or commercial property (either a single property or a portfolio of properties you own), and it's designed for investors who need fast, flexible access to capital.

The funds from a real estate line of credit can be used for a variety of expenses. You can borrow to fund another business acquisition, pay for renovations, support cash flow needs through slow seasons, or take care of any number of other portfolio expenses.

Most real estate lines of credit have a draw period, typically between one and five years. During the draw period, you can pull out funds and make interest-only payments on the borrowed amount. After that is a repayment period, during which you can no longer borrow but will need to pay down the remaining debt. Knowing when your draw period ends and what happens after it is important before you build your acquisition strategy around the line.

How a real estate line of credit works

A real estate line of credit works very similar to home equity line of credit (HELOC) on a primary home or a typical business line of credit: you generally open this credit line before you need it but then have it available to be tapped when an opportunity arises. While some lines of credit charge annual fees, you won't have to pay interest on your credit line until you borrow... so it's just potential cash waiting for you to need it.

Say you're a real estate investor and come across a new deal on a rental property, but the seller wants to close in 30 days or less. A traditional mortgage might not be able to close in time for you to snag this deal, but you might not have enough cash on-hand (or using cash would drain all of your reserves).

Instead, if you had a real estate line of credit already in place, you could draw what you need for the down payment or even the full purchase, speeding up the purchase process and allowing you to lock in your deal. Afterward, you could always take out a standard mortgage loan to "refinance" the property and restore your available credit for the next deal.

Outside of quick access, the biggest benefit to a real estate line of credit is its cyclical nature: drawing as needed (especially when exciting opportunities arise), refinancing the property on your timeline, repaying your credit line, and repeating with the next deal. This keeps your capital working instead of sitting tied up in one property while you wait on the next one.

Why to use a real estate line of credit over traditional financing

Speed is one of the biggest benefits of a real estate line of credit, especially for real estate investors and when compared to traditional financing options.

An existing revolving line is already approved, so you don't have to go through the underwriting process every time you need to borrow. Instead, when an exciting deal comes up, you can just draw what you need and close on the property in days. In competitive markets or on great deals, being the fastest to finance matters a lot.

Flexibility is another big benefit. Traditional rental property loans and commercial real estate loans are requested and approved for a specific property and a specific purpose; a real estate line of credit isn't. You can use the cash from a real estate line of credit to acquire a new property, cover renovation costs on a fixer-upper, bridge a cash flow gap, or handle unexpected costs the pop up... whatever you need, when you need it. Instalment loans can't really compare with this type of flexibility.

Then there's the liquidity benefit. Buying investment properties with cash is fast and makes you a more enticing buyer, but it depletes your reserves. Using a line of credit to fund deals (or at least part of a deal) means you're keeping more cash available for emergencies, reserves, and the next big opportunity. Investors focused on scaling their portfolios tend to be deliberate about when they use cash versus credit, and having a real estate line of credit available makes that possible.

The one real downside is cost uncertainty. Real estate lines of credit are generally offered with variable interest rates tied to the prime rate. This means your borrowing costs can fluctuate over time with the market, and you're subject to whatever rates are at the time you borrow. You'll only pay interest on what you've drawn, which helps keep costs low when you're drawing and repaying funds quickly. But for longer-term debt or a slower repayment, variable rates are more unpredictable than fixed-rate debt.

Rental property loans vs. real estate lines of credit

While real estate investors often use rental property loans and real estate lines of credit, they don't really compete with one another. Both serve an important but different role, making them each valuable to investors in their own ways.

• Rental property loans are instalment loans designed to be held long-term, just like a private mortgage loan on a primary residence. They usually have fixed interest rates, longer repayment terms, and predictable monthly payments that are easy to budget for. These loans are usually cheaper in the long run.

• A real estate line of credit is more of an acquisition and bridge tool. It lets you move quickly on deals and opportunities, figuring out permanent financing later.

What you'll need for a real estate line of credit

In order to qualify for a real estate line of credit, lenders will look at your overall financial profile as well as your available collateral. They'll want to assess things like your:

• Equity. You'll need to have equity in other real estate assets before a lender will approve you for a real estate line of credit.

• Credit score. Most lenders require a credit score of at least 680 for investment property lines, and better rates are generally offered to borrowers with excellent credit.

• Debt-to-income ratio (DTI). Your existing debt matters, especially relative to your income matter.

• Property income. For commercial equity lines, lenders will want to see the property performance metrics like occupancy rates, lease terms, and rent rolls.

• Experience. some lenders, especially for commercial lines, will factor in your track record as an investor. More experience (and successful deals) tends to result in more flexibility.

Final thoughts

A real estate line of credit is one of the more practical tools for investors who are actively growing a portfolio, but it works best when you have a clear plan for how you'll use it and pay it down. Investors who successfully use these lines tend to treat them as a tool for moving quickly on deals, but not as a substitute for long-term financing.

For investors with existing asset equity, a solid credit score, and access to exciting deals, a real estate line of credit (or a commercial equity line for larger portfolios) is definitely worth exploring. The ability to close quickly and keep liquidity intact can change the pace at which you're able to grow.