I wasn’t able to get a HELOC to renovate my rental home, so I took out a personal loan — and I’m glad I took the plunge
The author, Jennifer Sisson.
People’s eyes bulge when I tell them my husband and I bought two rental houses in West Texas for $35,000 a piece, but it’s true. We purchased both homes in 2022.
This sounds like every investor’s dream, but the tiny price tags on these houses made a cash-out refinance to make needed repairs nearly impossible. The second home had previously been owned by a hoarder, and it badly needed several fixes and upgrades to get it in rentable condition.
We planned to do most of the renovations ourselves, but the home needed a complete overhaul that would cost nearly as much as the house itself. Luckily, we were able to take out a personal loan to cover the costs.
A HELOC was off the table
Our plan was to use a home equity loan or a HELOC on the first property (which we paid for in cash) to fund the repairs on the second. We were nervous about tying the fate of one home to another with a loan, but we didn’t see another way to make the second house rentable. If we could get 80% of the first home’s value, that would give us $28,000 to work with.
After a few calls to national chains like Rocket Mortgage, I quickly realized that it would be hard to get equity for a home with such a low value. So I turned my efforts to local banks and credit unions who were aware of the prices of real estate in the area. However, I kept running into the same issue: The cost of fees in relation to the amount borrowed would be too high to underwrite a loan.
To protect borrowers from excessive fees, the Consumer Finance Protection Bureau sets rules for the fees lenders can charge. According to these rules, a $28,000 loan could only have $1,400 in fees — which doesn’t leave much meat on the bone for the lender. Despite our 800+ credit scores and plenty of equity in our first rental, the options of a HELOC or home equity loan were off the table.
A personal loan was the perfect solution
Once we learned we couldn’t use our home equity for a secured loan, our only remaining option was an unsecured personal loan. We expected the interest rate would be higher on this form of debt because it had no collateral to back it — and we were right. A home equity loan would have cost us around 8% interest, but our personal loan came in at 10%.
The personal loan came with several unanticipated benefits, however. For one, the fate of our first house was no longer tied to the second. This gave us peace of mind. If the worst should happen and the second house had to be condemned, we wouldn’t lose the first house too.
We’re also glad that the loan for repairs isn’t tied to the house at all. Even if we were to default on the personal loan, that wouldn’t threaten our ownership of the home.
A personal loan was also much easier to get. The application took me about 10 minutes online, and we received the funds the next day. We didn’t have to pay for a home appraisal or any origination fees.
The downside to using a personal loan for real estate
Aside from the higher interest rate, the main drawback of taking out a $30,000 personal loan for our rental renovation was the drag it has had on our credit scores. Our sparkling 800+ credit scores sank quite a bit after that hefty personal loan. Both rentals are cash-flowing nicely and paying back that loan without issue, but knowing that our recent purchase of a primary residence was made more expensive by our rental has been a tough pill to swallow.
That said, we don’t regret our decision to use personal loan funds to renovate our rental. It made the beginnings of our rental portfolio possible, and the renovated house has appreciated substantially thanks to market and sweat equity gains.
