How to pay off HELOC used on investment property

Question

Hello everyone, I am getting a HELOC for my first investment property. I want to hold on the property and make it short term rental, no intention of selling it in probably at least 10 years. However, after all the expenses, it’s enough to cover the interest of the HELOC but not principle. Is there a strategy to pay off the home equity loan? Please advise.

Kapono Kobylanski · Answer

Hi again,

I will ask my friend the numbers on that property and the Ilikai. I shopped around for HELOCs in Feb 22 and I was surprised to find the BOH was actually the best for us. We are already banking /w BOH and our first HELOC was BOH long ago and that was a good experience. You can move money back and forth from your checking to the HELOC. Or at least pay off the Heloc /w online banking.

We compared BOH /w Aloha Pacific CU, HI state CU, and HI cental PCU. We tried to get a 250k HELOC but we got much less than that. The rate is 1.75% for 36 months. My understanding is that in less than 36 months I can just get another HELOC to keep the rate low? Or maybe that was the option when the balance was mostly zero like it was /w my first HELOC. I used all of this HELOC as a down payment for my investment property so I'm not sure if I can do it with this Heloc. My hope is I can refi the new property in 36 months and that will take care of this issue before the HELOC rate becomes variable. In any case, the new property cashflows pretty well and the home I have the HELOC on is in town in Hawaii so there are slim chances it will go down in value ever. I refinanced that one when rates were crazy low and with no points got a 2.9% rate.  I house hack that property and the rent on the little side studio pay for most of that mortgage. I'm a novice so what do I know, BUT, I think I'll be ok even if I hit variable rate and can't get out of it. If all else fails I could pick up a few more hours at work but I really don't see that happening. Please let me know if I am very wrong :)

Kapono Kobylanski · Answer

Which building is this? I heard that the Ilikai always cash flows but I haven't gone as far as checking the numbers yet. I do have access to them from a STR property manager I know on island. Can't you just get another HELOC in 2 years when it's close to the deadline? I'm a novice so I have no idea. I just used my Heloc for the down payment on a STR in Oregon this year. My first official investment property. So far it's cash flowing well but I don't see any bookings for two months from now. It's not like Hawaii STRs. I have a 30-day STR until April 2024 and then I need to find mid-term renters. That is a cash cow. My Oregon PM keeps telling me it will do well and its her job to worry about it booking so I'm trying to keep my cool. I do trust her well enough but I do have some reserves and I can always long-term rent the house for minimal returns as a backup strategy.

I'm sure your property will be well worth it in ten years or much less. Honolulu legal STR options are rare.

Greg Scott · Answer

Having a negative carry on a rent property is a  precarious situation, particularly on floating debt in a rising interest rate market.  I hope you have sizeable reserves.

Sounds like you have to wait for rents to increase to get positive cash flow or you have to hope interest rates go back down so you can refinance.

How to pay off HELOC used on investment property

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