Should I pull some equity to purchase an STR?

Question

I’m going to consult a local financial planner but thought I’d ask the brilliant minds at BP as well. My wife and I own 3 properties in Colorado and are considering pulling some equity to purchase an STR in the Tampa Bay Area. Currently speaking with a local realtor about the STR zoning issues, insurance issues, and current/future market in Florida. 2025 should be a good time to look for a property there.

1. Is an LTR with a paid off mortgage. Appraises for $325k. Has a $100k Heloc on it that’s being paid down. Rent is $2k/month.

2. Is an LTR with a $290k mortgage ($1900 payment). Appraised for $525k and is rented for $2800 month. It carries a $50k Heloc that’s being paid down.

3. Is our primary residence and is a long term live in flip. $490k mortgage. The $50k Heloc on house 2 was used to begin renovation here. We plan to live here for 2-3 years and sell. Should appraise for $660-700 when completed.

I’ve been told I still have a lot of equity in #1&2 just “sitting around” and it should be put to use rather than just sit there.

My concern is that I might be over leveraging myself if I try pull out a 20% down payment for a DSCR loan.

Any thoughts is you were in this situation?

TIA

Jason Wray · Answer

Ben,

First from a Bankers point of view you are over extended from an LOC perspective and its hurting your DTI and future approvals.  Having (3) Helocs makes very little sense when the best way to use cash is to pull it our through a refinance.  I am sure you have a low first rate and that is more than likely why you went with Helocs.

Problem with Helocs is they are not mortgages they are open end which means same as a credit card which is a debt burden. A heloc can "never" be used as an "Asset" or Liquid reserve both required when you purchase additional rental properties.  A heloc is also calculated at it's Max amount usage even if not used during underwriting for a new mortgage.

Cash out is tax free and it can be used as an "Asset or Liquid reserve" on new approvals.  You calso never have to worry about "Money in the bank' versus a credit risk HELOC.  Meaning any of your Helocs can be closed or reduced at any point if any of your banks feel you are over leveraged, miss a payment, credit score drops, even by mistake it happens all the time.

I would get rid of the Helocs and put some cash in your bank so you can use that versus a Heloc.  If you ever want to talk strategies or options feel free to reach out I can go over some loopholes and tips.

Ashish Acharya · Answer

@Ben Cochran I hope you have factored STR tax savings into your cashflow and ROI as it can be significant.

Leveraging equity to purchase a short-term rental (STR) in Tampa Bay can diversify your portfolio and potentially generate strong cash flow, but it also increases your financial risk.

While your properties hold significant equity, adding debt from HELOCs or a DSCR loan could strain your finances if STR performance fluctuates or costs rise. Ensure the STR’s projected income comfortably covers new debt, even with conservative occupancy rates, and maintain reserves for market changes or vacancies.

Work with a financial planner to evaluate cash flow projections and confirm this move aligns with your long-term financial goals. If risks feel too high, consider waiting until your live-in flip is complete and your position is stronger.This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

John Morgan · Answer

@Ben Cochran

My first two investments 8 years ago were paid off. I did everything I could to get them paid off and was proud of myself at the time. I was also a Dave Ramsey guy at the time and thought debt was bad. Lol. Then I read Rich Dad, poor dad which completely changed my mindset. I learned that good debt will make me wealthy MUCH faster. And the power of leverage will bring me generational wealth in about 10 years. So I took my two paid off rentals and harvested the equity to scale up and increase my cash flow. Since then I’ve bought 14 houses from doing 4 cash out refis. I basically got these homes for free without using any out of pocket cash to scale up. I’ve used all the rental cashflow since I started investing to buy more and more houses, or to pay off 401k loans and 0% interest for a year credit card loans to scale up. I’m a fan of using that equity built up just sitting there doing nothing. My cash flow with those two paid off properties was only around $1500/month combined. Now it’s 19k/month and I haven’t used much of my own money out of pocket to scale up since I learned to leverage and tap into equity to scale up. I owe 2 million with all these mortgages, but the properties are worth 5.1 million and rising. And my tenants are paying off my mortgages while paying me good monthly cashflow. I currently have 29 SFR now and glad I decided to use the equity sitting there doing nothing for me 7 or 8 years ago vs having only two paid off homes cash flowing me much less.

Todd Anderson · Answer

Ben,

As others have said you are in a good position to start using that equity to make it easer to expand your portfolio and increase your wealth.  The stodgy that most of the investors that I work with use is to make sure that every 1-2 years they look at their portfolio and capture the equity to help grow their wealth.

As a benefit for the investors that I work with we have partnered with a company that we met at BPCON that looks at this exact thing. Property Llama has a software that looks at how your current portfolio is preforming.  https://share.propertyllama.com/WFQ5e

@John Morgan I love the mind change shift.  This is how wealth has been grown for years for many people.

Connect if you have any further question.

Jorge Vazquez · Answer

Hi Ben, doing this for 20 years, I’d say if you move forward, refinance your two rentals to the max they can handle under a stress test for mortgage payments. Then, run a rental stress test on the new STR assuming a worst-case scenario—like converting it to a long-term rental with a 30% cut in future rents. If the numbers still work, you’ll be in a solid position to proceed.

Should I pull some equity to purchase an STR?

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