DSCR loan (or other loan) for vacation rental in Mexico?

Question

Does anyone know of lenders out there that will loan for a vacation rental in Mexico? My wife and I are looking to purchase a condo in Puerto Vallarta. I wonder if there are DSCR loans for STRs/Airbnbs in Mexico? Or some kind of conventional loan for rentals in Mexico?

Thanks for any help and suggestions.

James Carlson · Answer

Thanks @Jonathan Taylor. Appreciate the help and the phone call earlier.

@Robin Simon Thanks for the clarification on the DSCR route. Didn't know they were a US-specific loan product.

Marcus R. · Answer

@James Carlson If you don't mind let us know what you find out.  My wife and I got married in PV and travel there often so this has come up as an idea.  There's a lot of construction happening along the beach from what we saw two months ago.

James Carlson · Answer

@Marcus R. (and anyone else who cares about mortgages/lending options for Mexico or other foreign countries) ...

I talked to Moxi today. They do cross-border lending. Seemed good, not great. It's likely good to know our exact situation, because while Moxi might work for our goals, it might not be for everyone.

We're likely buying a new build ("pre-construction" in Puerto Vallarta terms). We will have to pay cash for it. Moxi offers a product where they essentially give you a mortgage-like product at closing. I'll use some actual numbers from an example condo:

-- $500,000 purchase price with a 65% LTV mortgage, or a $325,000 loan

-- Most condos require you put down a down payment, then pay monthly installments and then pay a chunk at delivery. For example sake, let's say the down payment is 30% ($150k), the monthly installments add to 50% ($250k), and then you pay the final 20% ($100k) at closing.

-- Moxi will only give you the mortgage at closing, so ...

-- we pay the initial down payment on the condo -- $150,000

-- we pay the monthly installments until closing -- $250,000

-- at closing, Moxi takes the $325,000 loan and pays the remaining $100,000 to the developer and the remaining $225,000 of the loan goes back to us.

It's definitely a different way of doing things. Any thoughts?

The rates are between 7-10%, depending on loan amount and FICO, so not wonderful, but not loan-sharkey if you can get that 7%.

For us, we're considering living there for a good portion of the year, so while the returns matter a little, they're not our top priority. Plus, we're interested in staying somewhat liquid with the potential of volatility ahead. So I'm interested in not locking up a big chunk of change in one asset.

Anyway, that's what I know right now. What are others' thoughts?

Jonathan Taylor · Answer

@James Carlson There are second home lenders that lend to US citizens buying in tourist zones (PV being one of them) that qualify you based on conventional second home standards. Max LTV is 60-65% on 15-25 yr terms. As far as DSCR based lending doing cross boarder lending, I dont know any US based companies who do so. Mx lending is not favorable and unless you are a Mx citizen, US based lending is a way better option.

Robin Simon · Answer

Yeah "DSCR Loans" are part of non-QM domestic mortgages, they wouldn't be an option for a foreign property

Mike Lambert · Answer

@Marcus R., you're not biased at all and you're rather spot on. I'm not sure about the influencers but what is great about Mexico is that, yes, there's a 3rd and even 4th market on top of tourism and remote working: the snowbirds and the retirees and Puerto Vallarta and other places in Mexico are great for that. That would be a necessary condition to make a high interest loan work. Is it a sufficient condition? Most of the money you make if you do is gonna go to pay for the mortgage for 25 years so you'd need a very profitable deal to make that work. Do your calculations. The good news is you still have the option to not refinance.

Speaking of which, @James Carlson, you're in a great spot since you don't have to refinance if it doesn't make sense so you have the choice so you could win either way if you buy. Moreover, given that your purchase would also be a lifestyle buy, you don't need to get a crazy high return to make this work for you! So, yes, let us know how you're doing, maybe in the form of an invitation to a house-warming party? Just kidding! :-)

James Carlson · Answer

@Marcus R.

Thanks for all your thoughts on this. Yes, we are strongly considering a part-time move there -- 6 months in Puerto Vallarta, 6 months off type of thing. The rental market in the neighborhood we're considering looks pretty good. (We're actually in PV right now looking at condos and think we might pull the trigger on a new build.) Not sure if we'll do the mortgage/cash-out with Moxi or not. The condo we're considering requires 40% down, 50% in installments over the next 12-18 months and then 10% down at closing. We can swing the cash for the whole thing even if it's tight and definitely for the 40% down up front. We can see over the next year how our business goes, and if it goes well enough, maybe we're fine not pulling that cash out to stay liquid. I'll let you know how it goes for us.

Cheers!

Marcus R. · Answer

@James Carlson Thanks for the details.  Agree with your thoughts that it's rough but not loan sharkey either.  Based off the examples above I think the numbers could work and especially if this is a nicer/lifestyle property.  We're obviously moving toward a more remote work environment so on top of normal vactioners there's a new market looking to rent a PV property.  In addition, I think there's a 3rd group in the mix as well with the influencers.  For some, the largest part of their brand and business to shoot content in different locations.

I will say I'm a bit biased since I'm a big believer in that market but I truly think it could work and the downside risk is that you end up with a sweet spot in an amazing beach town that would make great for retirement.  Ever since I read the book "Quit Like a Millionaire" I've been researching ways to leverage what she calls travel arbitrage and living in nice but more affordable parts of the world to fund or accelrate your retirement.  Maybe run the numbers with this view in mind too...How much money could you save if annually you lived there for 6 months vs living in Denver for 6 months? Or does it work as a recession play, meaning if you need to lower your cost by 25% until the market picks up could you live there for a year?  It just might be enough to swing things in favor of moving forward with the Moxi loan.

Mike Lambert · Answer

@James Carlson

Great analysis! However, you forgot some very important points, which make those mortgages very unattractive for most people and this has mainly to do with their interest rates. This, notwithstanding the fact that one of the main purposes of a mortgage is to allow you to buy when you don't have the cash, which isn't the case here.

Let me first say that it's not a different way of doing things. No financial institution in any country will ever give you a mortgage on a pre-construction property because you don't have the title, as the property doesn't exist yet. The difference has to do with the way you have to pay the developer. In the US, you just pay 5% up to the delivery. In Mexico and many other countries in the world, you have to pay from 70% to 100%. So, for all intents and purposes, these loans are more akin to refinancings than to US mortgages, which you found out by yourself. So you need to pay cash first. The only way you can really finance a pre-construction property in Mexico is by taking advantage of developer financing when it's offered, which is very uncommon and is even less so know given that many buyers are flush with cash so developers want to sell too those buyers.

Your interest rate will be way higher than 7%. I very recently had a long chat with Moxi about their interest rates and the fact that I used to be an international banker/lender helped me get to the substance of it. Basically, I asked the question that you probably didn't think of asking and this is what came out of the conversation.

1. If the property was delivered today, today's interest rates would apply. Their interest rates today range from 7.5% to 10.5%, depending on the 3-year USD swap rate (more on that later), the LTV and your FICO score.

2. You'll only pay today's minimum of 7.5%  only if you have the highest FICO score and the LTV is 40%. They mentioned to me that the actual rates people are currently paying are between 8.5% and 9.5%, so 9% on average.

From an investment point of view, you'd have to get yourself a heck of a good deal to make it worthwhile paying a 9% interest rate for 25% years! And, if you're a lifestyle buyer, calculate how much that property is gonna end up costing you.

Mind you, this isn't the worst problem here. What you'd be doing is basically pay cash in the hope that you can refinance in the future and you have no idea what you're interest rate is going to be. Let's look at these two points in more detail.

1. Apart from Moxi, nobody else does refinancings in Mexico. So, even if you're willing to accept any interest rate they'll offer you, you'll need to be approved by them and, most importantly, they'll need to be in business. Otherwise, forget the mortgage; your capital will be stuck in the property. And there's a serious risk they could go out of business. Let me explain. They depend on private capital. Their business model was to get cheap funding in the US by promising them much higher returns investing in high-interest mortgage in Mexico rather than low-interest mortgages in Mexico. The problem is, cheap funding is a thing of the past, as the ultra loose monetary policy from the FED is over. Now that the interest rates are much higher in the US, the appeal of that proposition has pretty much disappeared. Indeed, they cannot get the cheap funding they used to get and, for the investors, they can get much higher lending rates in the US today so the extra risks of lending in Mexico are not worth it for them anymore, unless Moxi starts to charge significantly higher interest rates, which they're currently doing by introducing the 3-year swap rate in their funding structure.

2. Let's now look at what the interest rate could be when your property is delivered. As I mentioned before, the interest rate they offer at any given point in time depends on the 3-year swap rate. A year ago, that rate was at 0.54%. Today, it's at 2.91% so it's gone up by 2.47%. Why is that? During the same period, the FED funds rate went up 2.50%. What's important to understand here is that Moxi's interest rates are going to up in an automatic fashion by the same amount as the 3-year swap rate. Now, the FED has make it abundantly clear that they'll keep raising interest rates aggressively until they can bring back inflation below their 2% target. Inflation today runs at almost 9% and has shown little signs of even starting to decelerate so Moxi could end up charging very high double digit interest rates by the time your property gets delivered and it's time to take the loan.

To conclude, what it comes down to is that, for all intents and purposes, you'll have to pay cash for the property in the hope that you can refinance and at a decent interest rate and the facts today seem to indicate that it's very unlikely to happen. That's kinda gambling.

I hate to be a party pooper or the bearer of negative news but, thankfully, there's a silver lining, whereby I can end up on a positive note. As I've written before, in the US and Canada, we're addicted to low interest rates because most real estate would never been profitable at anything close to current prices without them. What many people ignore is that you can get deals in Mexico whereby you can get a higher return on investment if you pay cash for the property then if you were buying a property in the US with a mortgage. a nice by-product of that is that it's much less risky.

That might not be your case if you buy a lifestyle property but then, you get an additional ROI in terms of your enjoyment of the property and, as icing on the cake, you get the capital gain whether you rent or not. Of course, you'd have to buy the right property for that too.

Hope this helps!

Jonathan Taylor · Answer

@James Carlson Of the cross border lending I have spoken with, Moxi seems to be the better options out there. They will be higher than conventional and on par with non QM lending due to the associated risks. That purchase structure is not uncommon albeit not the way things are done in USA. Thank you for the update and let us know how it progresses if you choose to go that route

DSCR loan (or other loan) for vacation rental in Mexico?

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