What would you do? HELOC, sell, or other??

Question

Hey everyone!

I want to purchase one or two STR’s as soon as possible (Possibly in Sevierville, Pigeon Forge, Gatlinburg areas). I’ve researched the area and have a good understanding of the overall market.

I have 450k equity in my primary residence and about 60k in cash reserves. I am unable to STR due to neighborhood restrictions and long term rental doesn’t make sense.

Here are the two options I’m considering (I’m open to other ideas):

Option 1: Take out a HELOC on my primary home. Note - I am unfamiliar with HELOC’s and how it affects DTI ratio when purchasing an investment property.

Option 2: Sell my primary home and move into a family owned home for free (think 1940’s, no insulation, heated by a wood stove). This option would allow me more cash to deploy but my family would be “uncomfortable” with the living arrangements, but definitely doable.

I currently have two LTR mortgages and my primary mortgage. Thanks in advance for any advice.

Nick Thomas · Answer

@Wade Cecil Option 2 would be the obvious choice for a bachelor. But you aren’t a bachelor and even though it’s a great financial move I know my wife would kill me if I moved her into a place like that unless it’s very temporary.

It really depends how comfortable your family is with being uncomfortable. No financial win is worth a family loss in my opinion.

John Underwood · Answer

Option 2 will set you up to grow faster now. It is a sacrifice that will pay off.

Mitch Davidson · Answer

@Wade Cecil. If you open a new HELOC and then apply for a conventional mortgage with the intention of using the HELOC for the down payment, the lender will look at the HELOC note and calculate what the minimum monthly payment will be once you pull the money from the HELOC. Thus, it's best to take the interest only option for the HELOC, meaning interest only for the first 10 years. If you decide to keep the house, and if you don't instead do a cashout refi of it, I would recommend getting a HELOC just to have it available. It's far superior to private or hard money should you need short-term money for a flip, for outfitting a new STR, etc. Regarding the decision to sell or not, that's super personal. I wouldn't consult us on that. We may tell you to go for it when your home means too much to your kids and their stability.

Michael Baum · Answer

Hey @Wade Cecil, I like option 2. Kids are tougher than most people give them credit for. There are plenty of families living in older homes with low insulation with mediocre heating. I grew up in a home heated by a wood stove and it was just fine for us.

My 2 cents.

William Joel Idleman · Answer

I'm not a fan of variable interest rates in a rising interest rate environment.  So, a HELOC would not be my choice.  Way too high risk.  A HELOC puts the government in more control of your property.

Option 3: Talk with your spouse about what comforts are necessary.  If your spouse isn't happy at home, then your level of success won't matter.  It won't be fun.  It'll be miserable.  Sell your home and spend a little money updating the family-owned home to bring the living standard to a more comfortable level for your spouse.  Yes, it's a loss but consider it the rent you aren't having to pay.  Also, if you update it enough maybe you can talk your spouse into staying there longer and really ramping up your strategy.  Comfort vs. sacrifice is a sliding scale and everyone's tipping point is different.  Take the rest of the cash and put it into your real estate strategy.  It's also extremely important that you set a goal as to when your family will go back to the previous comfort level.  A spouse may be willing to make the sacrifice but will need to know that there is a time it will be over.

Brian G. · Answer

@Wade Cecil I heard the area West of Asheville is a viable STR market. Thoughts?

Sergey A. Petrov · Answer

I see a kid in your profile picture. As much fun as it would be for a kid to heat the house with fire it is not a permanent (even if temporary homestead). HELOC / cash out refi (your option 1) all the way. That $450k is doing nothing for you right now… option 3 could be a combination of a HELOC, renting your primary residence, moving to a smaller/ cheaper new primary (with proper heat and insulation) and another smaller investment property

Kellie Powell · Answer

I agree with Nick.  You have a family.  Unless the adults 100% agree to make that uncomfortable sacrifice, I would go with a HELOC.  We recently took a Heloc out on our primary residence, purchased a fixer uppper, used the remaining heloc funds to fix and flip.  Closing on Tuesday.  You could to the same with purchasing a STR, use your rents to pay the Heloc payment.  In a year, you could possible cash-out refi your new STR, pay back the Heloc and do it again.

Christian Ehlers · Answer

@Wade Cecil Option 2 will definitely be the better option financially as @John Underwood mentioned. Have you considered another option of a cash out refinance on the primary home? You'd likely pull a bit less equity out but will still have plenty for a couple down payments plus furniture on several Short Term Rental properties. Might be the best of both worlds?

What would you do? HELOC, sell, or other??

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