Should I use HELOC to invest in STR?

Question

Hello,

I'm trying to invest in some STRs in the Gulf Shores market. Pretty much my only option (unless I want to seek outside investors) to be able to afford a down payment is to use the equity in my home. I've been working with a couple lenders and I could get about a $40k line of credit which would be enough to cover the initial down payment/closing costs investment of getting a property. BUT I would pretty much have to use the entire line, and if not all of it definitely most of it.

All that to say, is it unwise to use the entire line of credit to invest in the STR? Can anyone help me with calculating what type of monthly payments I would potentially be up against? Not sure how to determine that. I was given an interest rate of about 3.5% but obviously that's variable, but just a general idea is what I'm looking for. I've done market research and the properties I'm looking at could generate about $50K annually. I'm willing to make the monthly payments on the HELOC if they're not crazy. Just want some perspective because without being able to immediately refinance the property to pay off the HELOC, I'm not sure if it's a wise move. Anyone else use a HELOC for STRs?

Luke Siecinski · Answer

Wow thanks all! I think we're gonna go for it. In addition to the $40k available in the HELOC, by the end of the year we should have about $15k-$20k in personal reserves to help support incase revenue is not as expected.

@Luke Carl I joined one of the Short Term Shops Getting Started group calls a few months back and finally have the funds available to get started. I had a conversation way back then with the real estate agent on your team in Gulf Shores but need to get in contact with him again. There seems to be a lot of properties on the market since it's the slow season, so not sure if now is a good time to actually pull the trigger since it may not be until March or so when tourism picks back up.

Lisa Graesser · Answer

Yes, but make sure you have enough to not only cover the down payment and mortgage costs. But also all the furnishings and supplies to equip a short term furnished rental. It will probably cost you $20,000 to furnish and supply a 2-3 bedroom place.

Eric Hencley · Answer

I think the best advice was to think about your position in life. I work in the financial industry and I see a lot more over-leveraged people fail than succeed. When they fail it is because they did not do their due diligence and they did not have a backup plan if revenue isn't what they thought it would be. If you can make all the payments on your own - I'd say go for it. If you depend on the income from the STR, I would not leverage my primary residence on it.

Luke Carl · Answer

For me it would depend on position in life. Young no kids heck yah go for it. Have kids but have some cash beck yah go for it.

Bud Gaffney · Answer

@Luke Siecinski yes. Dead $ should be used to invest in more real estate.

Gerald Pitts · Answer

I used a HELOC to get started. About 60k. Payments just south of 200 a month.

Joseph Bafia · Answer

We just used a HELOC for the first time on our most recent purchase and think its a good idea if the deal makes sense. In addition to what @Lisa Graesser states, I'd add to make sure you have some reserves and the HELOC is not your last of all funds. You want to make sure you can carry a load for a period of time if things slow, but overall I'm all for the HELOC.

Best of luck

John Underwood · Answer

Yes absolutely. Do what you need to get started.

Collin Hays · Answer

I used home equity to purchase my first STR back in 2005. Once you have a few STRs and build equity, you will likely be using your equity in these properties to buy more. So yes, absolutely, you are on the right track!

Should I use HELOC to invest in STR?

Should I use HELOC to invest in STR?

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