Board Topic: High-end Vacation Rental Mortgage
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High-end Vacation Rental Mortgage

Posted by: Hal Willack Jun 22 2003, 12:08 AM
My wife and I are considering purchasing a $1.5 million Villa in Mexico (listed for $1.9 million officially). This would be mostly for rental income ($7,000-$12,000 per week handled by the finest luxury properties management group in the world; giving them an available 40 weeks to rent-out after family and friends usage). Demand for such villas at the moment and high-end rentals are weathering the global economic downturn well thus far.

Although we currently own a nearly $1 million home with nearly half equity and little other debt (with over $150,000 annual income documented), we don't have significant additional cash reserves/equities other than (penalty for with-drawl) retirement investments with which to purchase/leverage this property. With drastically reduced closing costs, no association fees for a year, golf club membership included and fully furnished/decoration package, it's a solid value. Basically, there's little upfront or ongoing investment cost (no real property taxes to speak of) outside of the cost of the villa itself. Naturally, Mexico property used to concern banks/investors because of ownership questions, but now special Trusts for international investors seems to keep attorneys on both sides quite happy and assured and the developer is using the finest Title company for the transactions. My question is this:

1) Given that rental income can be "documented" though not "proven" yet and given that value can be "shown" but not definitively "proven" obviously, are there financing products that would allow the following scenario?

10% down ($150,000), the Mexico property itself as $1.350 million collateral as well as our limited net worth ($550,000 including home equity--yes I'm willing to sell the Porsche should that become critical), with a minimum/very conservative (apocalyptic actually) estimate of 20 weeks rental per year at $6,000 per week (junior suites at the Four Seasons go for $7,000 per week) after all Four Seasons fees meaning $120,000 investment income is generated; after taxes this naturally more than covers a $1.35 million 30 year jumbo mortgage at 6% (interest only perhaps?) at $80,000 annually. For what it's worth, Mexico has also just passed laws ensuring no capital gains taxes on sales (when showing residency with phone bills for six months--basically send your nephew to house-sit in the guest quarters). I imagine we also get tax breaks on a total of $1 million dollar in mortgage interest and domestic real estate taxes. We could also set up a LLC should that prove to be helpful. Any thoughts you have would be appreciated.


Posted by: loanuniverse Jun 22 2003, 01:43 AM
Hal:

I read your post twice and my answer might sound a bit discouraging. I see a lot of unanswered questions and concerns. First, I have to be honest and say that this type of loan would not be something any of my employers {I have worked for three Banks ranging in size from $100 million in assets to over $6,000 million in assets} would have contemplated as the type of loan they would like to do. Let me try to express my questions and concerns as follows:

1- The fact that the Villa is listed for $1.9 million officially, does not mean much.

2- Rental income- You estimate it to be $7,000-$12,000 per week with an available 40 weeks to rent-out and the expect demand for such villas to be high. I would do some independent research. By this, I mean actually speaking to several Villa owners. Request a list from the managing company, ask them about vacancies, other expenses, overall experience. It is one thing to hear the salesman talk about how this type of property is not suffering as badly as other hotels, it is a completely different experience to go over the financial statements of Hotels like I had to do a couple of weeks and see how horrible the situation is for some of them. Trust me, be careful when dealing with tourism related business. The value of some properties is down 50% in the last three years with income down as much as 50% also.

3- Your net worth is nice, but most of it will be factored out by anyone doing a credit analysis on a request. The equity in your home is usually protected {depends on the state} and so are retirement funds. It is standard operating procedure to remove those from adjusted net worth. Do not be surprised to find out that your adjusted net worth is negative.

4- ?With drastically reduced closing costs, no association fees for a year, golf club membership included and fully furnished/decoration package, it's a solid value.? I am sorry it is only a solid value if you can get a good return. You just mentioned perks that are most are only worth $100,000 to $150,000. You are buying something for $1.5 million?

5- I heard about the ownership questions on an NPR story, good thing it has been resolved.

6- ?the developer is using the finest Title company for the transactions.? If this is a new Villa, that brings into consideration a whole new set of questions? This is turning more speculative. There is no ?proven? revenue stream.

7- You said: ?Given that rental income can be "documented" though not "proven" yet.? I am confused, how can rental income be documented in a new property? I guess it could be forecasted or expected. documented is a bit strong.

8- Let me reiterate my concern about vacancies. I suggest you pick a couple of Villas similar to yours managed by this company and call them up saying that you are interested on renting one of them for a 1 week period, but that you have not decided exactly when. Give them a 2 month period and request to know what weeks are available. This might give you a better feel as to the real vacancy rate.

9- You said: ?are there financing products that would allow the following scenario?? The products are out there, you just will be hard pressed to get a bank that has them. I see several hurdles on obtaining financing:
a- collateral out of the country.
b- Limited and probably negative adjusted net worth.
c- Unproven revenues. Source of repayment must be adequate.
d- Even if it were a doable deal, I doubt you could get interest only.
e- I almost forgot. High loan to value. The Bank would like to see no more than 75% or 80% LTV.

10- You said: ?We could also set up a LLC should that prove to be helpful.? The type of entity is more a question of tax and liability in this case. It would be underwritten the same, the only difference is that with a Corp. or LLC the bank would request personal guaranty.

In conclusion, I think getting financing from a US based bank would be difficult at best. How about a Bank in Mexico that is more familiar with the market.
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