How to finance first STR deal?

Question

Hi, we are newbies and hope to get pre-approved soon for our first STR deal.  Trying to wrap our heads around the best way to approach financing.   Should we pull cash from our current stock/mutual funds (based on current market prices we're estimating we'd pull out ~10-15% of our current investments) or would it be better to do a cash out refi or HELOC on our primary residence?  We've been in our primary residence (current mortgage rate 4.25%) for 6 years and will likely be looking for a new primary in the next 3.  Thanks so much for helping us understand.

Alex Roter · Answer

@Christina P. Hey Christina, it sounds like you've done a lot of research thus far, great job. In my opinion, go with the cash-out refinance on the primary residence because HELOC's are typically variable-rates that adjust according to the market. In today's market, we're seeing constant rate hikes. At least with the cash-out refi, you get a fixed-rate. Also, there are tax benefits when paying points to buydown your interest rate (talk to a tax preparer about this). On the flipside, if you cash out of your stocks/mutual funds, there will be a tax event where you'll have to pay capital gains tax on it (talk to a tax specialist about this).

Hope this helps!

Christina P. · Answer

@Alex Roter That's very helpful, thank you! I think I am understanding the HELOC much better now.

We live in NY.

Zeona McIntyre · Answer

I would check the interest rate on the cash out refi as it is higher than a regular refi. If it will be a higher rate than you currently have I would go HELOC. You can't always get 100% out but I would shop around different banks and see what you can find.

If you are intending to buy a high cash flowing STR than I suggest paying the HELOC down quickly.

Alex Roter · Answer

@Christina P. Okay, no worries most lenders would allow a transfer of stocks/mutual funds into a checking account to cover closing costs. Guidelines vary from lender-to-lender.

HELOC's work great if you need to borrower money for a short-period of time (due to the higher, variable rates). Also, If you intend on paying off the HELOC within a few years, it might make sense to go that route.

However, based on your scenario, it seems like you would probably hold onto the loan for longer than a few years. Furthermore, you wouldn't be spending portions of the balance periodically (and only paying interest on the money used). On the contrary, you'd be using most (if not all) of it at one time to cover the closing costs of the new purchase.

Rates are still low, but they're on the rise. I'm curious what rate you would qualify for on your primary home and what the actual payment difference is per month. What state do you live in?

Christina P. · Answer

@Alex Roter thank you! I should also add that if I'm understanding the Cash-out refi correctly, we won't have enough to cover the new down payment, so it would have to be a combination of cash-out refi and stocks/mutual funds.  I'm not sure that's even an option and if it would be even be worth it in this case to do both.

Christina P. · Answer

Hi @Mitch Davidson for the down payment, closing and set up costs as needed.

Mitch Davidson · Answer

Hi @Christina P., are you talking about taking cash from stocks or your current home for sake of the down payment, or for sake of the entire purchase?

How to finance first STR deal?

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