HELOC or not?

[Ron White]

Hi David,

We are the owners of a four-bedroom Cape Cod home with a detached garage on a 2.89-acre lot in Snellville GA. We listen to your podcast daily and we have the bug to get into real estate investing. We put 25% down on our house at the time of purchase and we have approximately $200K+ in equity.

Our home has three bedrooms on the upper level with 2.5 half baths. We have a bedroom on the lower level with its own bath and approximately 1100 square feet of living space. Also on the property is a detached two-car garage.

We are thinking about converting the lower half of the house into a separate short-term rental space. We have an estimate for approximately. $35K to install a kitchen and laundry room. We also believe the detached garage could be an excellent ADU candidate. We are wondering what loan vehicle (i.e., HELOC, Construction, Rental Purchase, or other) you would suggest using to fund the effort or would you use the funds to purchase an additional home instead? A lot of possibilities and we would like your advice on how to proceed.

Stephanie and Ron

[Chris Merchant]

Well, first off welcome to the BP community. Congratulations on deciding to get into Real Estate Investing, I personally like the idea of HELOC's but make sure you get the best one you can as far as % of equity they give you and interest rate. I am not sure what you know about the HELOC's but what makes them so appealing to me is it is like a credit card, you are generally only responsible for the interest on money you actually use. There is usually a term that the you have to pay off the principle by but it's not like a loan where you have a principle and interest payment, so it makes it a bit easier on the pocket to only have to pay back interest and anything extra goes towards the principle and than that amount is available to be used again.

Example: you say you have 200,000 in equity if a bank gives you a 75% HELOC you now have access to 150,000 whenever you need it. You go buy a rental property for say 100,000 you have 50,000 left over for any repairs and you say (just for easy math) your interest payment is 750 a month which you can swing without income from the rental so its not a big deal so until you get the unit rented you pay the 750 and then once you rent the unit for say 2000 a month you now start paying 1750 to the bank and then after that first 1750 payment your available balance is now 51,000 and so on. Me personally I love HELOC's though some people don't.

As far as what to do with the house or buy a separate property, I'd say run the numbers on all scenarios and see what makes the most sense for you. I personally would probably try to locate an additional property but again you need to run the numbers for your area and do what best fits your end goals and lifestyle. Is the STR market hot in your area now? Or are LTR prices up right now due to the lack of availability?