The home has 6 bedrooms and comfortably sleeps 16.

A HELOC or cash-out refinance is definitely worth exploring if you want to free up capital for more investments, but make sure it fits your goals and comfort level.

Then you'll need to find land, acquire it, find a spec home buyer and set up meetings to design plans or buy a set online with mods.

I'd recommend searching by zip and interviewing an agent or two to see who you're most comfortable with.

Are you comfortable with roommates?

We will then, as the units turn over, get rents up a good bit further with additional design improvement renovations and hopefully reno into lower interest rates when they drop or at the very least in 5 years on our 20 year we'll have paid off enough to refi into a smaller loan.That is the only kind of smaller deal we can find in neighborhoods where we want to buy now. 

I designed a little U-shaped kitchen to fit right in the space.

Get out of your comfort zone.

Since I'm taking such a cash hit, I asked the sellers agent if they would be able to designate some portion of the sale price ($200k?)

A major part of the success or failure of an STR investment is the design, furnishing and management plan.