When it comes to buying investment property in Mexico, there are plenty of reasons to take action, but there are just as many reasons to hit the pause button. Below we’ll cover some reasons you may want to invest in a rental property to try and offer some clarity and direction before you make a decision.
Reasons to Buy a Rental Property in Mexico
There are a number of reasons why people decide to purchase an investment property in Mexico, and here are a few factors you should definitely consider:
- Property values and appreciation trends in the area you’re interested in.
- Property maintenance & upkeep costs.
- The surrounding infrastructure & amenities; e.g. airport proximity, public transport, grocery stores, etc.
- Rental income potential & local taxes.
- Local tourism data & trends.
- General cost of living.
- The current strength of the Mexican Peso versus your currency; e.g. USD or CAD.
Appreciation and Resale Value
Many people bank on the idea of reselling their investment rental property in Mexico at a higher value a few years down the road, especially in popular tourist destinations such as Cancun, Cabo, Playa del Carmen, or Puerto Vallarta. Annual expected appreciation should definitely be included in every investor’s calculation. Factoring in an expected increase in the value of real estate over a period of time can make a serious difference when deciding whether or not to make the leap!
Rental Income
Many people decide to purchase an investment rental property in Mexico with the intention of renting it out full time (or at least during the months when they are not using it themselves).
Revenue is easy to calculate, but not always easy to predict. Investors can come up with an average price per night and multiply it by the number of nights and an assumed occupancy rate, but all their numbers should be chosen conservatively. Also, take into account that the nightly rates vary very much depending on the season. During the winter months, prices can almost double!
To calculate an estimated yearly return on your rental property, investors will have to come up with their approximate costs which should include:
- Management fees (15 – 30%)
- Maintenance costs
- Cleaning services
- Annual property taxes
- HOA fees
- Utilities (electricity costs can get very high, especially with AC units)
- Rental income taxes (ISR)
The Value of Ownership
This reason to purchase an investment is entirely subjective, but should definitely be considered. Knowing that you have a vacation property that you can go to at any time (or for retirement) has a very real value, but it is challenging to put a number to.
It’s the thought that all it costs is a plane ticket to travel back to your other home. It’s something to look forward to on a regular basis as the long winter months seem to drag on (especially for those who live farther up north).
Working from home has also exploded over the past few years, especially after the pandemic that had us all on lockdown for more than a year. These days the trend is to not work out of an office and more folks are becoming “digital nomads”. If you could do your job from your investment property in Mexico for a month or more out of the year… well that’s definitely an attractive alternative!
Other Local Factors
There are many different factors to consider before buying an investment property in Mexico, but it varies greatly by region. We live in Puerto Vallarta, so below are a few local examples of factors that should be considered if you were looking to buy real estate in Puerto Vallarta:
- A new highway from Guadalajara to Puerto Vallarta has dramatically cut travel times, which will lead to more and more domestic tourists coming to the area.
- Unlike most beach destinations, there is no need to worry about hurricanes in Puerto Vallarta. The city has only been struck 2 times in the past 50 years. They are a rare occurrence due to the protection from the Sierra Madre mountain range that surrounds the bay.
- Contrary to what most people believe, purchasing real estate as a foreigner in Mexico is not difficult. Yes, there are additional costs and paperwork, but other than that it is very straightforward.
- Some new developments and pre-construction sales offer good introductory rates but they’re not all good opportunities. Knowing the reputation of the developer and comparing details in relation to the price is going to be key.
Reasons to NOT Invest in Rental Real Estate in Mexico
STRs have 3 main problems:
- The hassle factor: There is a ton of work involved in managing guests, keeping the property constantly cleaned, and maintenance. Gordon Ramsey said, “An Airbnb property is 25x the amount of work compared to a traditional rental property.”
- Extra maintenance: Since people are constantly in and out, there is more wear & tear. Also, it is not their property, so they’ll never treat it like they would their own home.
- Laws & Taxes: Short-Term Rental laws and taxes are constantly changing, with many cites starting to restrict or ban them!
One of the most common pieces of financial advice people hear from friends and family is to invest their excess cash into rental properties. Unfortunately, this may be terrible advice for all but a lucky few. There are definitely risks of buying real estate in Mexico. A couple of examples include:
- Vacation rentals are NOT passive income. They require a lot of work, unless you plan on paying for a rental property manager.
- A lack of diversification can hurt you in the long run.
- Real estate is illiquid, so you can’t necessarily sell it whenever you feel like it.
- You think it is an easy way to get rich quick.
It is NOT Passive Income
We all dream of having multiple sources of passive income, but do vacation rentals qualify as a passive source of income? Vacation rentals can be a passive source of income, but you will have to pay a hefty commission (15-30% on average) for all the work that needs to be done by others. In general, you will have to pay for 3 things:
- Advertising and securing reservations
- Taking care of the guests
- Maintenance of your vacation rental
Property Maintenance & Upkeep Costs
Properties take a beating from the burning sun during the dry season, the torrential rain during the wet season, and the salt carried onshore by the coastal winds during the windy season. These unexpected maintenance costs are one of the main risks of buying real estate in Mexico. A rule of thumb is to set aside 2%-4% of your property’s value for a home maintenance fund.
Most homeowners that do not live full-time at their property in Mexico also have to hire a year-round property manager. Property upkeep & taking care of unexpected repairs is a tall order. They will usually take care of preventative property care, routine maintenance, unexpected repairs, emergency fixes, pool care, gardener, cleaning services, & payment of your monthly utility bills.
Lack of Diversification
Investing in risky asset classes (like buying real estate in Mexico) requires diversification to generate a higher long-term return. You also need to diversify across different types of investments, or asset classes, to maximize your long-term, risk-adjusted return. Real estate is a great component to have in a portfolio because it can act as a hedge against inflation (real estate tends to be more correlated to inflation than other asset classes), but it generally is not very attractive on its own.
It is Illiquid
Another one of the main risks of buying real estate in Mexico is that it can be hard to predict how long it will take for a residential property to sell (and it often feels like the more eager you are to sell, the longer it takes).
Are you thinking about purchasing your rental property in Mexico as soon as possible because you’re disappointed you’ve missed the property price growth over the last decade?
Have you heard of FOMO? The Fear Of Missing Out. It’s an understandable emotion, but investing with emotion leads to bad judgment.
It usually happens at the end stage of every property cycle when people read of the windfalls made by those who bought a rental property a few years ago. For this exact reason, that is the time investors need to be most cautious. This type of emotion is what makes investors easy prey for the property marketers who will offer you a way to get rich quickly. Make sure to be strategic and not emotional about your purchase.
You Want to Get Rich Quick
Many new investors think they can purchase a rental property in Mexico to get rich quickly. However, property investing is a long-term endeavor.
Property investment is a game of finance with some real estate thrown in the middle. To get into real estate investing, you should have a stable income and a financial buffer to see you through the inevitable rainy days ahead.
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