Leveraging Equity to Finance STR/House hack ADU

[John Catlett]

Hello BP,

My name is John and my wife and I currently have one long term rental and our primary residence. As we have just moved into our primary, we are ready to take the next steps on acquiring our next rental. We are looking to add an ADU to our primary in the form of a short term rental as it is in a desirable location (A market for STR according to AirDNA) and make this a house hack. Depending on seasonality, we could potentially offset our entire mortgage. (~$2,500)

We currently have ~$100,000+ of equity in our rental and are looking to leverage that to make our next move. Here is my question: How should we best utilize this equity in order to add the ADU/acquire our next property?

Some notes:

-Our rental property has gained a lot of equity since we purchased it (~$100k)

-It also has very strong cashflow (~$700 after expenses)

-Our interest rate is very low (<3%)

-It is in a desirable location and we want to keep it

-We are hesitant to do a cash out refinance since out current rate is so low

We are looking at utilizing a HELOC as we know it is difficult to find traditional financing for an ADU. However, we also recognize that HELOCs are better utilized for short term purposes. What are some considerations we maybe aren't thinking about and how would you go about adding a 1bed/1 bath ADU knowing the information above? We are projecting the cost of adding the ADU at roughly ~$100k, but have not yet gotten bids/priced it out officially.

(Additionally, is there a different strategy we should consider that is different than the ADU/house hack method?)

Thank you so much!