Updated 9 days ago on . Most recent reply
Using personal property as first STR
I do have an appointment set up with my personal finance consultant, but wanted to get input here as I’m sure this is something that may be kind of niche.
So my son and I are working on starting up a Real Estate portfolio, with our focus on STR at this point. I currently live in a cabin in a mountain tourist destination. There is no mortgage currently, but I am starting a renovation to get it ready to list as a short term rental. I will use a home equity line to finance the renovation. I will move into the guest house on the property and will rent out the newly renovated 4 bed/4bath riverfront cabin. We would like to use this as our first rental but am not sure how to set it up. Currently the cabin is in my will to be left equally to my son and daughter. We are trying to figure out how to have the business take over the property while maintaining it as my personal asset to will to my children. I want the rental income to cover the expenses including the home equity line I am going to use to renovate. As a hypothetical, the cabin will appraise at about 1 million when completed and the home equity loan will be about 500k, if that matters(so the value of the cabin will be about double the outstanding loan).
Would the company just take over as property manager or would this be a situation that arbitrage could work? We are obviously not experienced yet, so this will be a learning property all the way around. We are currently researching the purchase of a beach property as well. That will be purchased by the business.
Most Popular Reply
Annette,
Home Equity Line or HELOC is usually a bad investment tool for a few reasons. One, a Heloc is usually at a higher rate versus a cash out refinance. Second its usually over a 10YR or 15YR term/amortization versus a 30 Year mortgage meaning HELOC Higher payment. You also have to realize it sits in second Lien position or if no mortgage its an installment or LOC versus a mortgage.
A heloc versus a mortgage will set you up with a higher DTI model in most cases due to higher rate, shorter term and (2) loans versus one against the equity/home. If your credit score should ever drop or you miss a payment the bank/lender will close the Heloc or reduce it downt to balance which can ruin credit and leaves you with zero funds versus a cash out refinance liquid sitting in reserves or savings to offset interest.
A Heloc can "Never" be used as an asset or PITI reserves if you decide to buy another property instead it is a debt and raises DTI burden and risk. If you are looking to buy another property and its a beach home or STR I would advise doing a cash out refinance not using a Heloc. It will help your approval and offer you additional reserves in cash (Liquid reserves) versus a Heloc debt lien.
Any questions feel free to and check out my profile I have seen many times a Heloc becomes a nightmare for an investor down the road. Also feel free to send me an email I can offer some additonal Pro's and Con's and what to ask or how to avoid certain features.