How do I strategically finance this house hack?

Question

I am currently analyzing a potential house hack on a historic home. The property has 2 apartments that bring in $1200 /mo. total. I have $100k+ in equity in my current primary residence (value aro. $325k) and I want to use that equity to buy the house hack at around $475k - 500k. Then I will Airbnb my original home ($30k - 50k revenue potential).

My concern is I am unsure of my strategy for financing.

I am thinking I will cash-out refi my current residence, then use that as a down payment on the new property. I want to hold onto some of the cash for prepping/furnishing the Airbnb and for reserves (probably aro. $25k).

Will I run into issues if I cash-out refi my home and then try to get a loan immediately after to move into this property? What do I need to disclose to lenders, etc.?

Does anyone have any other creative ideas on how to do this deal? And any words of caution? Thanks!

-John Windsor

P.S. This is my first post, but I hope to be a regular contributor as I continue to learn and grow my investing abilities.

John Windsor · Answer

Daniel,

Thank you for your response.

I realize that the information I provided is not well organized and so here is a second attempt:

Potential property cost: $500k

Potential property use: primary residence with 2 apartments and a daycare facility (house hack)

Potential property income: $1200 per month total with potential for more from the daycare. I will pay the rest out of pocket to live in the main house.

My home value: $325k

My equity: $100k

My home on Airbnb: $30k+ (AirDNA says $43k, so should cash flow easily)

Why would the HELOC be better than a cash-out refi when I can lock I  interest rates as low as they are now? Especially since most of the money will be used immediately for down payment and for starting the Airbnb in my current home?

Dan Weber · Answer

Hi John,Firstly, I would run your numbers very carefully. Personally, I wouldn't purchase a duplex for $475k-$500k that only brings in a total of $1,200/month per unit ($2,400 total). I can't imagine the numbers working out after PITI and capex. Secondly, you could use a HELOC instead of a cash out refi so that you only pay for interest as you use the funds, rather then refinancing, sitting on a pile of money and making higher monthly payments as you wait to put it to work. Make sure you take the time to run all of your numbers thoroughly.

John Windsor · Answer

I should have mentioned that the 2 600 sqft apartments are in addition to the large historic home that I hope to live in. There is also a daycare running out of the home that could be additional income. The home has been updated with modern wiring, plumbing, brick and roofing.

John Windsor · Answer

The daycare could be converted to another unit. Unfortunately it is attached to the main house, but that would likely be the highest grossing unit based on size. It is also in better shape than the other apartments. I am estimating that would bring another $800 per month.

Randall Weatherall · Answer

Could the daycare just be converted to more units?  I don't think I would want a daycare in a $500k historic home that I've levered my other house against in hopes that that succeeds as an Airbnb to pay for both.  It's a very high-risk play and the reward doesn't seem there.  I'm not sure about your area, but is there a standard triplex/quad in the area that is nice enough to want to live in and rent out the other units?  Surely it would around the same price/cheaper as well.