HELOC on a Nashville NOO Short Term Rental property?

Question

Hey guys,

I've been digging through the articles, listening to the podcast, and I hope to glean from the collective knowledge of the group about next steps in our property investing.

My wife bought a home before the Nashville boom that we now rent short term (100% legal, permitted, etc.) through Airbnb and HomeAway and have been operating since April 2018.  Depending on the month, we can expect $2,300 - $4,000 in profit.  On the low end, we have about $120,000 in equity on the rental.  We have at least $50,000 in equity on our primary residence.  Since I'm in pharmacy school (lots of student loan debt), our yearly income outside of the rental is at about $60,000.  We have a little credit card debt which will be paid off in a few months with a credit score just under 800.

We really want to buy another property to rent through Airbnb that will probably approach a solid $500,000 that is closer to the city and will probably fetch $5,000 - $7500 in monthly profit.  We approached one lender who doesn't do HELOCs on investments and could only offer $70,000 through a cash out refinance.  I've seen here that some local lenders and banks can do HELOCs on investment properties.  We're hoping to go that route.

Based on the above info, do you guys have any general advice about pursuing HELOCs or whether my plan is wise given our current situation?  Thanks in advance!

Neill

Kevin Romines · Answer

HELOC on a rentals, hands down the best is Pen Fed Credit Union. Up to 80% max. so long as you have 4 financed properties or less.

I hope this helps?

Jon Mason · Answer

@Steve Frye - I'd be interested in the name of your lender as well!

Matt P. · Answer

@Robert Brown when I do a refinance after a BRRRR the bank wants to see that I have 6 months of mortgage payments held in reserves for each mortgage i have in my name. I'm sure any requirements you come across will be similar. Good luck.

Andrew Postell · Answer

@Robert Brown you have it correct.  $62,500 is what I show as well.  Thanks!

Robert Brown · Answer

Thanks for the detailed response @Andrew Postell!  So, am I correct in thinking that you meant 25% of the home's value, which would work out to about $62,500?

Yes, @Axel Meierhoefer, we do need to work on our reserves.  How much do you typically set aside for reserves?

Axel Meierhoefer · Answer

@Robert Brown I agree with Andrew. The one thing you should keep in mind to make this work well and keep growing in the future is the reserve-aspect. I ran into this recently and, though I was aware of it, I had not really calculated it. When you start having several properties, even if it is under 5, the lenders will also look at the reserves you have put aside in case something more than a minor repair happens to your property. I have created dedicated reserve accounts with American Express high yield Savings for each of my properties to make sure I always have a sufficient level of reserves. If I were you I would also combine that with a good plan, following Andrews general point, to pay back the LOC's. I recommend a percentage of the income from the short term rental activities. If you see that income purely as disposable you will potentially run out of options.

Andrew Postell · Answer

@Robert Brown ok, that does help.  So the Line of Credit (LOC) route is a pretty good one if you are an investor.  Don't be surprised if many places want to be in the 1st position with their Lines of Credit so know all the rules to their loans.  Post in the Tennessee forum to see if you can have some good locals provide some help on who they use.  I see you have a couple of recommendations already but post there too just to get more suggestions.  Receiving 75% to 80% for a LOC is pretty normal.  So if you owe 50% already with your first loan, then you would receive the difference (essentially, 25%) on your LOC.  Don't forget that a LOC will have a variable interest rate and it could modify at about year 10.  They aren't designed to be permanent loans.  Use it, pay it back, use it again type of thing.  Don't get me wrong, they are GREAT products to have...but make sure you have a plan to pay it back.

Having a Home Equity Line of Credit (HELOC) on your primary home is also a pretty good idea too.  You won't get as large of a line as you do on the investment property but I think it's worth exploring.  Both of these products will have very low costs (comparing to a traditional mortgage) so maybe get both just in case.  You're not paying interest on either on unless you use them....unlike a traditional mortgage which would give you the cash out right away....so if you don't have a use for it for several months, you're paying interest on it. Hope that makes sense how I am describing this.

Hope this helps!

Robert Brown · Answer

@Kevin Romines - Thanks for the info!

@Andrew Postell - Our rental is worth about $250,000 and we owe $108,267 on it.  Our primary residence is worth about $205,000 and we owe $140,000.

Thanks again, guys!

Neill

Andrew Postell · Answer

@Robert Brown I see you mention the dollar figure of the equity but it's more important to know the percentage more than the dollar figure.  Would you mind sharing how much you owe currently on the property and how much it is worth?

Robert Brown · Answer

Sounds interesting!  Thanks, Steve!

HELOC on a Nashville NOO Short Term Rental property?

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