New Investor Need Advice on Credit Card Debt

[Matt Thornton]

Good afternoon and happy President's Day!  I am a new investor and I've gotten myself stuck in the mud, so I am looking for advice from some of you wonderful folks.  

Context of my story/situation (please forgive the length).
I purchased my first beach house (which I intended to use as my primary residence) with an FHS loan in August 2022 in Pensacola, FL. I purchased for $420k and the house needed quite a bit of updating/fixing and furniture, so I spent another $64,000 in repairs using my savings along with credit cards...yeah...ouch...I know... Unfortunately, in April of 2023 my aging parents' health went in a rough direction (father Alzheimer's/dementia, mom immobility) so I had to "move" back to Dallas, to care for them and also help them with their own bills. However, I thought what a great opportunity to utilize my beach house as a Short Term Rental, and I listed it on Vrbo and tapped into the greatness of BiggerPockets. Last year's summer bookings were specatcular (offseason/winter/fall) have been cold as ice with almost no bookings. So, I am now living in Dallas again in one of my parent's bedrooms (ugh...), helping them with their bills, while also paying for a beach house STR that is not covering it's own expenses (thank God summer is on the way), and I am carrying $64k in credit card debt with interest that is eating my lunch. Prior to purchasing the beach house my credit rating was 720 and of course after buying the house and running up credit card debt my credit is now below 600, which is preventing me from refinancing the house. On a positive note, the Pensacola beach house ended up being a great investment and according to Zillow/etc. it's now worth over $500k in value. Note also, the beach house is my "primary residence" as I never intended to use it as a STR until I had to move back to Dallas to help my parents.

So...with all of that being said, my gut tells me that perhaps I can tap into the equity of the beach house (after a new appraisal) and utilize that to both pay off credit cards and put a down on my second investment property (probably Dallas).  However, I am struggling to figure out how to raise my credit rating to find a lender that would allow me to refinance the beach house so that I can pull out money to pay off credit card debt.  It feels like one requires the other...refi requires good credit...good credit requires the refi...

Does someone have some insights as to how to do a home equity line of credit based on an appraisal and with a low credit score?  I realize I may be asking for a miracle here, but I hoped perhaps some of you great professionals could provide some wisdom.  Thank you for reading my story and wishing you all continued success!

Kind regards,

Matt

[Matt Thornton]

Quote from @Matt Jones:

Hey Matt,

Sorry to hear about your parents and the forced move.  I have a couple of questions and thoughts:

1) What is the interest rate on your mortgage? If your mortgage rate is lower than what you could get today then completing a refi where you borrow more money at a higher interest rate and incur closing costs on the refi could cause the beach house to be even more negative as an investment. Additionally, since you do not live there any more the loan terms you can get for this property as an investment property are almost certainly worse than what you could get as a primary residence. A home equity loan would be better than a full out refi if today's rates are higher(and they probably are) but HELOC's are hard to get on properties that are not your primary residence. They'll want to loan on a lower loan to value ratio as well which makes pulling cash out to pay off your CC debt hard if not impossible. I would be willing to do a free market analysis to tell you what the property is worth if that would be helpful just shoot me a DM.

2) Are you able to make the minimum payments on the debt now?  If so, then it probably makes sense to do so until spring/summer bookings start hitting your bank account.  It's likely that your credit plummeted due to using a large percentage of your available credit.  If you can throw some of the excess income from the high season months at paying down your balances and lowering your credit usage you will very likely raise your credit score.  

3) With a higher credit score and lower balance you could probably consolidate the credit card debt into a lower interest personal loan.  

4) You need to analyze your listing and your pricing to make sure that you get more off season bookings. Maybe look for a snowbird renter? We are a seasonal market and I make most of my money on my STR in the spring/summer/fall but it's not totally dead in the winter so if you weren't getting any bookings or occupancy fell below 50% you need to work to optimize your off season booking strategy.

5) It sucks but if you can't meet the minimum payments and/or your credit doesn't start to recover then you may want to seriously consider selling the property to get everything paid off. 

I wish you the best of luck.  If I can help with anything(other than the payments lol) feel free to reach out. 

Greetings Matt,

Thanks so much for your insightful response.  Yes, the rate on beach house is lower, to your point, so it’s not ideal times to refi at all.  1) Yes, I’m able to cover all expenses now. Your offer for analysis is very kind and much appreciated.  2) Your point of throwing summer revenue at debt is absolutely what I had planned.  Obviously that’s the best “cure all” that I have a phenomenal summer and I can knock out a big chunk, but I wanted to see if there was another way to mitigate using equity. 3) Agreed, personal loan is a route but the rates unfortunately aren’t that much better than the cards. 4) Absolutely need more snowbirds…anything to pick up bookings.  This is my first full year with seasons owning the house…so I’m learning a lot of lessons.  5) I think to your point I simply need to fight through the summer with hopefully great bookings and knock out more of the debt.  

Thank you for spending your valuable reading about my situation and offering advice.  Really appreciate you!

Best regards,
Matt