Home reno financing for creative house hack

[Brianna Lopez]

Looking for information regarding funding a home renovation project in order to start house hacking. Here are the details:
I recently purchased my first STR property. It's going well but I'm house poor and I don't want to touch my reserves. I have balances on my personal credit cards while I recoup cost of furnishing, so my credit is in the high 600s now (it's usually high 700s). The rental property was purchased through LLC which has a loan but does not have access yet to line of credit or credit card.

My primary residence is an end unit townhome in a desirable neighborhood outside DC. I'd like to turn my basement into a separate unit by adding an exterior door. I have two kids so I do not want strangers in my actual living space, but I would feel very comfortable with renting out my basement as a separate unit.

I feel like I am in a loop where I should pay down my credit cards before looking for funding... but using my basement as STR would help me pay down my credit cards faster and save up for the next project sooner.

What is the best way to get funding for this project? Should I look into loans that are specific to home renovation? Or a line of credit or home equity loan? Thanks for the input!

[Edward Stephens]

@Brianna Lopez here’s an idea:

1) scrape a few hundred bucks together to hire a credit specialist who can help you  get your credit back up into the 700’s.  (It’ll be tough to do the next step if your credit isn’t in the 700’s.)  If you need someone, let me know.

2) If you have a significant amount of equity in your primary residence, get a home equity line of credit on your primary residence (not the STR). You can find a bank that will do a HELOC at 6.75% interest on an adjustable rate. Should be a farrrrr lower interest rate than your credit cards. Ideally you can borrow enough on your HELOC to cover the balance of your basement renovation and pay off your credit cards.

3) Use the home equity line of credit to pay down all of your credit cards (leave maybe a 3-5% balance on each just to keep your credit in good standing).  

4) Finish your basement

5) Find a tenant and let them pay off your HELOC over time.

6) Leave your credit alone for a few months so it can heal. Pay everything on time. Now you have a new line reporting (your HELOC) so that should be helpful to your credit score also. Your cash flow situation should be a lot better. And you're all set up with solid credit to go buy your next property someday.

7) Talk to your CPA about writing off your HELOC interest

Hope this helps!