Tenant died, need to renovate then cash out refi

[Account Closed]

Looking for some insight.. Unfortunately I got a call Wednesday night that one of my tenants had passed. I closed on the duplex last July with a vacant upstairs unit that I completely remodeled myself along with doing two roofs and a 600 sq ft wrap around porch that set me back about 20k on top of the conventional investment down payment. That unit is currently rented and covers my note. 

I knew I would eventually have to rehab the downstairs unit. The tenant had been there 30 years paying well below market rent and going into the deal I knew this would be a major project but I was not expecting it almost a year later. 

I currently have a HELOC on the property for around 40k. The building is in a great neighborhood and appraised well for the HELOC with a dump of a unit on the first floor.

I am tight on cash right now as I started investing 3 years ago and have been actively buying and updating my properties. 

I had spoken to the tenants family and cut them a deal as of now. (I am close to the cousin of the tenant who passed and he has done quite a bit of work for me since I met him about a year ago- he is in construction and does great work). 

I am thinking of using the HELOC (interest only) to renovate the unit and letting the guy stay in the mean time and trade his labor for rent (Bad idea? we have a great mutual relationship). I would then plan to cashout refi when the unit is completed (70% LTV- currently owe 58k comps are around 140ish). Does any one have recommendations for a lender on a cashout refi? Once the unit is renovated I will be able to pull 1k/month. Total of $1750 on the building.

Any advice is appreciated, thank you. 

[Marc Winter]

Nope.  Bad idea.  I mean do not let the contractor stay in the unit while they are working on the unit.  Follow this rule:  Don't hire a tenant to do work, don't rent to a contractor you hire.  Reasoning:  if you have a tenant that goes bad, you have 1 (one) problem... extrapolate that out.  You see where this is going.

On the HELOC or cash out or whatever, you'll have to do an analysis based on your qualifications and your risk tolerance.

Good luck!