Cap rate (capitalization rate) is net operating income divided by purchase price. It tells you the unleveraged return a property generates. A $300,000 property producing $18,000 NOI has a 6% cap rate. It's the most common metric for comparing rental properties because it strips out financing and gives you an apples-to-apples comparison.

What is a good cap rate for rental property?

For residential rentals, 5-8% is generally considered solid. Above 8% is excellent but often comes with higher risk (rougher neighborhoods, older buildings, declining markets). Below 5% is common in expensive metros where investors rely more on appreciation than cash flow.

How is cap rate different from cash-on-cash return?

Cap rate ignores financing — it measures the property's return as if you paid all cash. Cash-on-cash return measures your actual return on the cash you invested, factoring in your mortgage. A property with a 6% cap rate could yield a 12% cash-on-cash return with leverage.

What is the 1% rule in real estate?

The 1% rule says monthly rent should be at least 1% of the purchase price. A $200,000 property should rent for at least $2,000/month. It's a quick screening tool — many successful rentals don't pass the 1% rule, especially in higher-priced markets.

What is the BRRRR strategy?

BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. You buy a distressed property below market value, renovate it, rent it out, then do a cash-out refinance based on the new appraised value to pull out most or all of your original capital and repeat the process.

Where does CapRateCity get its data?

Our city-level data draws from publicly available sources including U.S. Census Bureau population and income figures, Zillow Home Value Index for median prices, HUD Fair Market Rents, and state/county tax assessor records. Data is updated periodically.

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Using a HELOC to Invest in Real Estate: Pros, Cons & Strategy

Tap your primary home's equity to fund rental properties. The math is simple. The risks are not. Here is when a HELOC works and when it backfires.

By NumbersLab · 9 min read

If you have owned your primary home for a few years, you probably have substantial equity sitting idle. A HELOC — Home Equity Line of Credit — turns that equity into a flexible source of capital you can use for down payments, rehabs, or full purchases of investment property. Done right, it is one of the most efficient leverage tools available. Done wrong, it puts your primary home at risk over a deal you should not have done.

This guide covers HELOC mechanics, how to use one for real estate, the real risks, and the post-2018 tax treatment that catches many investors off guard.

How a HELOC Works

A HELOC is a revolving line of credit secured by your primary residence. Unlike a home equity loan (which is a lump sum), a HELOC works like a credit card — you borrow what you need when you need it, and you only pay interest on the outstanding balance.

HELOCs have two phases:

Draw period (typically 10 years): you can borrow, repay, and re-borrow as needed. Most HELOCs are interest-only during this period — your minimum payment is just the monthly interest on the balance.

Repayment period (typically 10-20 years after the draw period): the line is closed to new draws, and you make principal-and-interest payments to amortize the balance.

HELOC limit ≈ (home value × max LTV) − existing first mortgage balance

Most lenders allow combined LTV up to 80% to 85%, sometimes higher with strong credit. On a $500,000 home with a $300,000 first mortgage, an 85% combined LTV gives you up to $125,000 in HELOC capacity.

HELOC Rates in 2026

Almost all HELOCs are variable rate, indexed to prime plus a margin. Currently prime is around 8%, so HELOC rates run 8% to 11% depending on credit and lender. That is higher than a fixed-rate cash-out refinance, but flexible — you only pay interest on what you actually use.

Some lenders offer fixed-rate "lock" features that let you convert part of the balance to a fixed-rate term loan inside the HELOC. This can be valuable when rates are climbing.

Three Ways Investors Use HELOCs

Down payment funding

Use the HELOC for the down payment on a long-term financed rental. Borrow $50,000 from the HELOC, combine with $200,000 conventional or DSCR loan, buy a $250,000 property. Refinance later or pay down the HELOC from rental cash flow.

BRRRR rehab funding

Buy a property with cash or hard money, fund the rehab with the HELOC, refinance into a long-term loan once renovated and rented. The HELOC fills the gap between purchase and refinance. Walk through the full process in our BRRRR strategy guide.

All-cash purchase + delayed financing

Use the HELOC to make an all-cash offer (which often wins competitive deals at a discount). Then refinance the property after closing using the delayed financing exception. The HELOC gets paid off from the cash-out proceeds.

The Math on a HELOC-Funded Down Payment

You have $50,000 of HELOC capacity at 9.5%. You use it for a down payment on a $200,000 rental ($150,000 long-term mortgage). The rental cash flows $300/month after the long-term mortgage payment but before the HELOC interest.

HELOC interest only payment: $50,000 × 9.5% / 12 = $396/month.

Net cash flow: $300 − $396 = negative $96/month. The deal loses money on cash flow until you pay down the HELOC.

This is the trap. A deal that "cash flows" at standard analysis becomes negative once you account for the HELOC interest. You can compensate by paying down the HELOC aggressively from your W-2 income, or by buying deals with stronger cash flow. Run real numbers using the cash-on-cash calculator.

Variable rate risk: Your HELOC payment in the example above assumes 9.5%. If prime rises 1%, your payment jumps to $437/month — and your cash flow goes from negative $96 to negative $137. HELOCs amplify rate risk because you have two loans floating against the same property's income.

Tax Deductibility After TCJA

This is where many investors get tripped up. Before the 2017 Tax Cuts and Jobs Act, HELOC interest was generally deductible up to $100,000 of HELOC balance regardless of how the funds were used. Post-TCJA (through 2025 and likely beyond), HELOC interest is only deductible if the proceeds are used to "buy, build, or substantially improve" the home that secures the HELOC.

If you use HELOC proceeds for an investment property, you cannot deduct the interest as mortgage interest on your primary home. However, you may be able to deduct it as investment interest expense on the rental property itself by tracing the funds. This requires careful documentation — wire the HELOC funds directly to the closing or rehab vendor, never to your personal account first. The deduction strategy is covered in detail at takehometax.com.

BRRRR with a HELOC

This is one of the cleanest applications. Total deal: $200,000 all-in (purchase + rehab). You use $80,000 from your HELOC and $120,000 from a hard money loan. After 6 months of seasoning, the property appraises at $280,000. You refinance into a 75% LTV DSCR loan, pulling out $210,000. Use the proceeds to pay off the HELOC and the hard money loan.

Net result: HELOC back to zero, hard money paid off, you own a rental that cash flows. Repeat. Compare the long-term mortgage payment scenarios at mortgagemathlab.com.

The Real Risks

Your primary home is collateral. If you default, you lose the house you live in. Not the rental — the house. This is the single most important thing to internalize.

Variable rate exposure. Rates that rise during the draw period can turn a cash-flowing deal into a money loser fast.

Bank can freeze the line. During market downturns, lenders sometimes freeze HELOCs — especially if home values drop. You may lose access to capital exactly when you need it most.

Repayment shock. When the draw period ends, your interest-only payment becomes a fully amortizing payment. On a $80,000 balance, that can be the difference between $600/month interest-only and $1,000/month amortizing.

HELOC vs Cash-Out Refinance

Both tap home equity. HELOCs are more flexible (only pay interest on what you draw) but variable rate. Cash-out refis are fixed-rate but lump sum. Compare them in detail in our cash-out refinance guide.

Rule of thumb: if you need flexible, ongoing access to capital (BRRRR pipeline), HELOC wins. If you need a one-time chunk and want rate certainty, cash-out refi wins.

Run a BRRRR funded with a HELOC →

Best Practices

Get the HELOC before you need it. Open it during a calm financial period when underwriting is easiest. The line costs nothing if you don't draw.

Pay it down with rental cash flow. Treat the HELOC as a revolving facility — draw it, deploy it, pay it down, repeat.

Keep utilization moderate. Maxing out the HELOC eliminates the financial flexibility that made it valuable in the first place.

Have an exit plan. Always know how the HELOC balance gets paid off. From a refinance? From cash flow? From a sale?

Insurance matters. Make sure your homeowner's policy and any landlord policies on rentals are adequate. Quote at insurancecostcity.com.

Bottom line: A HELOC is a powerful, flexible source of investment capital — and your primary home is the collateral. Treat it as a precision tool, not a piggy bank. Investors who deploy it conservatively grow faster. Investors who max it out on marginal deals lose their houses.

See how HELOC interest hits cash-on-cash →

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