HELOCs for funding new build abroad?

Question

My husband and I purchased land in an area of Mexico we've been coming too for a long time. His parents have a home next door, so we are super familiar with the area and the potential of the area. The area is booming and already our land has doubled in value since we purchase two years ago. Goal is to build a home here that we live in half the year and airbnb half the year. Mexican construction loans are not a good option as they have insanely high interest rates so to build the home we have been saving cash. Land was also bought in cash. Original goal was to build 100% in cash and have zero debt at the end of the project. A

However, we spend the OTHER half of our year in Seattle, WA. One of the most expensive places to buy real estate in the country. This is our home that we have been in for 25+ years. Instead of renting and paying into someone else pocket while we are gone for six  months a year we want to buy/own (not our dream home but just a "first" home). Goal is to be able to rent that place while we are in Mexico, rent Mexico while in Seattle.

OK SO HERES MY QUESTION:

We are considering using the cash we have saved for Mexico to instead put 20% down on the right type of house in Seattle (good location that will airbnb) and then once we get ready to break ground on our project abroad (very earliest would be Fall 2022) take a HELOC out against the house we purchased to act as a line of cash.

Are there drawbacks or words of caution around HELOCs? Something I am missing or might not know about why this might be a BAD idea? Why its a good idea? Agents/lenders have you seen customers do this in the past with abroad projects? Do you have any words of caution for taking this approach? Trying to see how/what debt we can leverage in a smart way to help us do both without savings pennies and dollars for the build in Mexico, then starting all over to try for 20% in Seattle down the line. Or vice Versa.

Andrew Postell · Answer

@Tara Cooke why do you want to put 20% down on a house in Seattle?  Why not put less?

Mike Lambert · Answer

@Tara Cooke

If you want to be invested in Seattle for the long term and don't need any HELOC money (should that not be available) for Mexico, then I guess you're fine. As to the specifics of your question, the main danger with a HELOC is that you can't service the loan. Plenty of Americans have been buying in Mexico using a HELOC on a US property. It's a path well traveled.

On another note, I don't know if you or your parents were planning to be there during construction. My policy is to only build in Mexico if I'm there most if not all of the time and that, in spite of the fact that I have people on the ground that I trust. In this respect, having your parents' house next door is a huge advantage.

Tara Cooke · Answer

@Mike Lambert Not hoping to to appreciate enough to build the whole house, we're still making and saving money at a good pace as we go. The idea was more that then we could invest in the states, while simultaneously building in Mexico. slowly building equity as we go. You pay as you go here in mexico in small installments so there's no situation where we would need hundreds of thousands all at once.

@Andrew Postell 5% down is where we started when we first considered investing in seattle. still open to that route. Just want to look at it from all angles.

@Zeona McIntyre I see where you're coming from but that's not the case in the area we are. It's growing rapidly and our potential for rental income for the half the year we aren't here is huge.

Andrew Postell · Answer

@Tara Cooke If you don't have to get approval on a loan, then that's always an easier route.  A HELOC is a variable rate too.  So what will your payment be next year? The year after?  Hard to say with rates increasing.  What if you can't get approved for it?  Or not get approved for the full amount?  Just work 5% down on your primary and use the remaining cash to do what you want with it.

Mike Lambert · Answer

@Tara Cooke

So basically, you're hoping that the Seattle property will appreciate enough so that you can already refinance by the fall and take out enough additional equity to build in Mexico? This, at a time when, as you acknowledged, property prices are already sky high and interest rates might go up significantly? Isn't that hopium to bet your future plans on something like this? It's possible in theory but what's the likelihood of that to work out?

@Zeona McIntyre

I have good news for you. I have been investing in Mexico for years now (and shared my experience and knowledge in the forums here) and your assessment that Mexican properties are lifestyle and not investment properties is wrong. In fact, even in the worst-case scenario you have to pay 100% in cash in Mexico, your return can be (much) higher than on a property in the US on which you'd have a mortgage. In some cases, you could even pay less for the entire property in Mexico than for your downpayment on an investment property in the US for a like-for-like property. However, you have to know what you're doing and buying. Many Mexican properties are indeed just lifestyle but so are many US properties too.

Zeona McIntyre · Answer

The bet here is on appreciation which is not guaranteed. Banks usually require 70-85% equity in the home and you can only access the rest. HELOCs are also on adjustable rates so as rates in the US trend upwards -- they are predicted to go up multiple times this year -- your rate will too. They can change fast, so that's the major downside. They are best for short-term use.

If Mexican construction loans are less than a private loan ( 8-12%), it's probably viable but you would need to plan to dump all profits in it. I have been wanting to buy in Mex too but its definitely a lifestyle buy and not an investment as it ties up so much cash.

HELOCs for funding new build abroad?

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