First House Hack - Home Equity Loan or HELOC to Finance Updates
Hello BP community! I've been following the BP podcast and forums since January and have learned so much so quickly thanks to the support of this awesome community. This is my first post, and I was wondering if I could get some advice on my first house hack.
After an intense house hunt for the past few months, I got under contract on a property in North Denver for well under market value that I plan to house hack. The basement and the upstairs are easily separable so my girlfriend and I are going to live in the basement while we STR the top. The upstairs is fully renovated and is pretty turnkey while the downstairs needs a little bit of work.
I am using a 3% down conventional loan to finance the property. Based on my purchase price, I should have 13-20% equity in the home once it appraises. Immediately, the property needs a new water heater, an oven + stove (basement), a refrigerator (basement), a sink (basement), and washer and dryer units both upstairs and downstairs (need to run new lines upstairs for them). Other updates that are eventually needed in the basement are new floors, egress windows in 2 bedrooms, and possibly some landscaping updates.
I have two options for how I can proceed:
1. I can use the cash I have on hand to furnish the upstairs and go the cheapest route possible in the basement to make it livable, wait 6months to a year to save up enough money to knock out the rest of the renovations (egress windows, floors, upgrade appliances) and end up buying a few things twice. Not only would I probably end up spending more money in the long run, but it puts me in a very uncomfortable situation with the amount of reserves I would have for the first few months. I also would have to run a pretty bare bones STR in the beginning which is less than ideal.
2. I maybe could use a HELOC or home equity loan right off the bat since I am purchasing the property with some equity to knock out all of the updates at once in the beginning so I don't have to slow the Air BnB down. This would leave me with a healthy amount of reserves to start my journey and would improve my girlfriend and I's quality of life while we live in the basement. Especially since we would have the peace of mind of having egress windows.
I'm leaning towards option number 2 because it would take a LOT of stress off of me and my girlfriend, but I would like to know if I am missing anything before I pursue this route. Thank you guys so much for your time!
Hey @Tyler Edens! Congrats on getting under contract on your first house hack! I just had a client close in the same area and they are planning to do the same thing you are - live in the basement and STR the upstairs unit.
It sounds to me like you've answered your own question. If I were in your shoes, I'd want to make my STR as good as I possibly can to start out (get those good reviews!) and also take the stress off of my partner and me by making our living space more comfortable. If it's something you'll have to do in the future anyway, I'd say go for it. Also, AFTER you close, you might look into getting a 0% interest credit card or some sort of loan that you could use to take care of expenses.
@Tyler Edens, awesome situation! My wife and I are doing basically the same as you are planning to do, and it's working out really well! @Kayla Givens gave all the advise I was about to give! I used a 0% interest credit card on mine to do some repairs and furnishing purchases and it was paid off after 2 months of launching our airbnb. I would also add the advice of just doing everything you can on your own if you are up for it and have the time. The sweat equity will pay off! And for the HELOC, you can definitely see how much you could get once you close, but with only 3% down, you may not be able to pull any or very much money out as most primary HELOCs will only let you go up to 90% Loan to Value on the credit line, and a lender/bank would probably require their own appraisal or use their own appraisal software (That has been my experience at least). Regardless you are doing it right and are going to get ahead going for this route!
Awesome responses! Thank you both!
I didn't even think of the 0% interest credit cards! I'll have to give that some thought too!