Buying real estate in Tulum?

Question

Hi y’all, I am looking for anyone’s advice or input on being real estate in Tulum. More specifically, I’ve been looking at 3 bedroom townhouses versus villas (word used loosely) in small developments. I have been looking at 3 bedroom because my thought is ROI will be higher among other things. I am doing this with my brother & father. I have been trying to educate myself online but it’s definitely lacking on finding solid advice. Thank y’all.

Nicholas DuLong · Answer

Thank you to you all for a lively and extremely informative discussion(@Sebastian Papworth, @Mike Lambert, @Bruno Demarco Quiroz).  I appreciate all of the different perspectives and believe that opportunity lies somewhere between data and dreams.

My family and I just returned from a lovely week in Tulum.  Our first visit to Riviera Maya and are considering a purchase there, and I'm in the due-diligence phase of evaluating our options.As a quick example,I have a friend who is a very successful entrepreneur in the tech field, mostly in the booming(and soon to be overwhelming) field of Artificial Intelligence.  A soon to be multi-trillion dollar industry.  Thus, there is very much a "gold-rush" mentality in this sector.  Seeing this a decade ago, he had the foresight to devote his skills to developing hardware(chips) that are particularly suited to the massive amount of computing power that will be demanded by this new wave of technology.  His perspective is "The People that made the most money during the California gold rush were the guys selling shovels and pickaxes to the gold-seekers. Many people will  go bust, some will get rich.  But they will all need hardware".  I mention this only as an appreciation of hearing the perspectives of both Real Estate Investors(gold seekers) and Real Estate Agents(pickaxe and shovel providers).

Obviously, on the ground in Tulum, I saw construction everywhere. What it looked like to me was a construction bubble that was about to burst(or already burst?), especially given the city's current infrastructure and a lack of a central "place to be" like so many other cities have.  I can imagine the competition among STRs in the coming years could be brutal with a flooded market.  In fact I assume that there are probably many many property owners who are not realizing their dream of a passive income property there.

However, I'm a veterinarian not a real estate expert!

With all of the forthcoming infrastructure improvements underway, if the the rental/STR market cools, future investments will coalesce around neighborhood markets, and organically create neighborhood centers around shopping, nightlife, entertainment, etc. For all of the visitors that will continue to come.

My current thinking is to look for a resale property(not new but not old) from a seller who is motivated to move their property due to the increasing supply driving down rental prices (buy fear, sell greed - as Warren Buffet says).  We're not looking for an immediate huge ROI, but would like enough to cover costs and pay for our flights a few times per year(plus a cushion for repairs, upkeep, etc), while we ultimately wait the 10 years for Tulum to go through its growing pains, and then have a much more valuable property on our hands.

Even with this conservative plan, we would still need to locate the right property in the right location that appeals to us and renters NOW and is poised to become more desirable as Tulum blossoms. And thus my due diligence and research continues.  Does this sound crazy?

Thanks for you informative conversations,

Nick

Mike Lambert · Answer

I could be giving advice based on my years of investing in Mexico and the Riviera Maya and helping many buyers and investors do so but I won't because I have no fiduciary duty towards you and you're going to be the one to bear the consequences. Instead of giving advice, I rather share facts (there are many opinions but only one set of facts) and I'm trying to help you come to your own conclusions.

With this in mind, if I were you, I'd ask myself the following questions:

1. Are you comfortable buying anything in Tulum given the amount of building going on and planned and therefore the competition you'll face when renting? Ask yourself who is going to live or rent these properties. Think supply vs demand. Yes, you're gonna have the new airport and the upcoming Mayan Train. If you're seriously considering investing there, I assume you've already been there so you've been landing at Cancun airport and got a ride on the nice highway to Tulum. Do you think many more people will go there because of the train. The train is going to stop at one single station and then you'll have to go to your hotel or Airbnb. How much time are you going to spare, if any? The Tulum airport isn't in Tulum, it's in Felipe Carrillo Puerto, which isn't that much closer than Cancun International Airport. Also, given the size of Tulum airport compared to Cancun Airport, how much more additional visitors is this airport going to bring, also taking into account the fact that the amount of directly connected cities will be limited.

2. While Tulum and the Riviera Maya have deployed many efforts to be not about just the beach, most visitors wouldn't go if it wasn't because of the area's beautiful beaches. Are you comfortable with the sargassum issue. We haven't been able to find a solution to that problem and it's likely caused but global warming and pollution so it's difficult to see a solution anytime soon. I'm actually surprised it hasn't affected tourism more yet but that's probably because it's cheap and so it attracts price conscious tourists, especially in a period of high inflation. As a short-term rental investor, do you want to own a property where people go because it's cheap? People who go to Mexico and have money can choose where they go and they go mostly to the Pacific side. You might want to ask yourself why.

3. Ask yourself what your strategy is and whether it makes sense. It seems that you're considering buy, hold and rent. If your renting activity ends up being unprofitable or less profitable than you thought, what would you do? If you decide do sell to reinvest the money in something better, are you comfortable taking a loss given the amount of new construction condos selling at a discount you'll have to compete against (and buyers typically prefer a new property unless they urgently want to buy).

4. Assuming that you're still comfortable investing in Tulum given the above, it makes sense to ask yourself what kind of property to buy because, in order to limit the impact of competition, choosing the right kind of property might make a difference. Because man more condos have been built, investors started to snap villas to have something different to offer to renters but then the developers started building a large amounts of villas. Also, if condos rents for half the price of a villa so villas has joined condos in the commodity category. The conclusion could be that, while you might get a higher (or less low) return depending on the kind of property, your return will likely mainly be determined by what the market does as a whole. Think of a stock market analogy. You'll make more money if you invest in the stocks of the best companies but, when the market goes down, you'll generally still lose money because the stocks of the best companies will go down too.

I could write a book about this but hopefully I already gave you enough food for thought. Hope this helps!

Bruno Demarco Quiroz · Answer

Hi Joaquin,

I agree with some of the points Mike mentioned.

I am a licensed and independent real estate broker who actually lives in Tulum, so I have firsthand experience with some of these aspects.

There has been an increase in the supply, which is making the rental market more competitive. However, this increase in supply is also leading to some price reductions. It can be challenging to find these reduced prices as many industry professionals are primarily focused on selling pre-sales due to higher commissions and less work involved. But if you search for available homes, you'll find many properties where owners are offering great prices.

Regarding ROI, have you established your expected return on investment? While there are some properties offering returns over 10%, they might not be currently available for sale. Additionally, achieving a good ROI requires a great property manager, so it's not solely about having the right property in a good location. If you're aiming for a double-digit return, Tulum might not be the ideal market for your investment. However, if you're comfortable with a lower ROI, then yes, Tulum could be suitable.

The airport is located 40km (25 miles) south of downtown Tulum, while Cancun Airport is 120km (75 miles) to the north. I've traveled to both airports multiple times. From my home, which is located between La Veleta and Downtown, it has taken me between 27 to 40 minutes to reach Tulum Airport, whereas it has taken me between 90 minutes to 3 hours to reach Cancun Airport.

I believe the opening of Tulum Airport will attract more tourists, but we may not see a significant difference for a couple of years. Additionally, we're uncertain about the impact on the supply. I hope the growth will slow down, and indeed, I've noticed a reduction in the launch of new projects. However, I agree that there is currently an oversupply relative to the existing demand.

I hope this information is helpful!

Alex F. · Answer

Hi @Mike Lambert - Great recap.

Mike Lambert · Answer

@Nicholas DuLong

You could be right about motivated sellers but how good is it to buy at a discount if prices continue to fall? Also, bear in mind that, overall, properties have been paid for in cash so there are no mortgages on them and the maintenance expenses are low so, while owners might be disappointed by the lack of rental income, they generally won't be in a distressed situation.

Ultimately it all comes down to supply and demand. Even things like sargassum or $100 taxi rides are only a problem as long as they affect demand (aside from the important environmental issues for the sargassum of course). I was talking to a friend developer in PDC the other day. According to him, there would already be 4,000 too many units in Tulum. I'm not sure where that figure is coming from but if you want to get a scientific estimate, you could try to make a calculation using the following:

1. The number of properties currently on the rental market and the occupancy rate will give you an idea of the current demand (Airdna).

2. Find out how many units are in the process of being built and  what permits have been granted to estimate further building activity and monitor land sales for more projects in the future. Add all of this to the number of existing properties and that'll give you an estimate for the number of future properties. Apply the kind of occupancy you'd like to see in the overall market to have a good investment (a too low figure will be bad for your occupancy but, the worst effect will be its depressing effect on the average daily rate). So that'll give you the future demand you'd like to see.

3. Compare the future demand (say in 10 years) you'd need vs the current demand and you'll get the needed tourism growth rate and you'll know whether it's realistic.

Yes, they're improving the infrastructure. I don't know if it'll be enough or quickly enough. According to my friend, it's a total disaster.

On another note, you wrote "There are no direct flights from Boston to Cabo, but Boston to Cancun is easy." That seems to suggest that you think Cabo would be a better investment but Cancun/Tulum is easier for lifestyle. If that's the case, why don't you buy in Cabo and rent in Tulum. We're kind of in the same boat in that I'm from Montreal so we're kinda neighbors. There's a little difference in that we have direct flights to Cabo since December but it's just one airline and it's indeed easier, quicker and cheaper to get to Cancun, PDC or Tulum. So much so that, even though Tulum isn't necessarily my favorite place in Mexico to spend time, I'm thinking of going on a regular basis with a group of friends and renting a luxury villa for very little money rather than spending time in one of my properties.

Nicholas DuLong · Answer

Thank you @Mike Lambert for your thoughts.  I appreciate them all.

"why don't you wait for the bust to happen to buy? You'll get a better price and you'll take less risks".  Definitely true.  We are in the "due diligence" phase of our evaluation and as business owners ourselves, we make decisions slowly and deliberately(over months/years).  What I was suggesting is that there is likely already many owners who are fearing what's coming for their rental property and may be very motivated to move their property at a highly discounted price.  Of course these prices may come down considerably as time goes on. (buy fear, sell greed).You are 100% correct in that we would not base our decision solely on one week of vacation there.  Our plan would be to return in the future and spend time in PDC, Tulum and other areas before we make any decisions.  There are no direct flights from Boston to Cabo, but Boston to Cancun is easy.  This is why we are focused in that region.

My thought was that if, after construction cools and prices stabilize and if the infrastructure improvements deliver on their promise, then property values/ADR could likely again begin to steadily increase over time.  The big "IF" here is that demand for Tulum as a vacation destination continues to be strong or grow. And as you mentioned - overcrowded beaches(and possibly sargassum) could be a deterrent to that.

I know that @Sebastian Papworth mentioned the improvement to(addition of?) beach access roads as part of the infrastructure plan.

Interesting conversation.

Thank you.

Nick

Mike Lambert · Answer

@Nicholas DuLong you're very welcome. As you and I mentioned, it's normal for investors and agents to have different perspectives given our very different "roles" and objectives. Also, nobody has a crystal bowl.

When it comes to Tulum real estate, there's the bust camp and then there's the "other camp". I'm calling it the "other"camp because I don't know if we should call it the "boom camp" or merely the "no bust" camp or maybe the "neither bust nor boom camp".

In think that both cases have already been laid out in this thread so I'm going to focus on your reasoning and question, as well as a more qualitative perspective.

You start in the bust camp and then you're talking about buying there because you seem to think the bust is going to be followed by a boom I was stunned by the reversal. Two questions to ask yourself:

1. If you're right about that, why don't you wait for the bust to happen to buy? You'll get a better price and you'll take less risks.

2. Why would that sequence happen? It makes no sense to me. If the bust is caused by a huge oversupply of properties, that oversupply has to disappear to solve the bust. How's that going to happen is the question.

What you need to do is figure out how big the oversupply is and how much increase in tourism will be needed overt the next 10 years to absorb it. I have figured that out for myself but you it's not going to have the same effect on you unless you do your own calculation. That's just to absorb the supply and you'll need even more growth to create a boom!

You also have to ask yourself why would all those people go to Tulum, when what made Tulum special and attractive has disappeared. The early Tulum lovers have moved on to other places, where the municipality doesn't deliver building permits to anyone and their mother. When I was traveling through Mexico last year the expression I heard most from the mouth of real estate professionals is "We don't want to become another Tulum". As a result, permitting is being restricted so that's where the supply/demand imbalance is going to increase in values. Do you really think people will go to Mexico to find themselves into another condo jungle?

Do you think there's gonna be enough beach space for all these people if there's gonna be enough of them to fill all these properties? How much more do you gonna have to pay to get into a beach club after hopefully getting a parking space? Traffic jams, overcrowded areas. Do you think it'd look like anything you saw? Also, do you know how much sargassum is going to cover the beach in 10 years? We've hardly had a winter here in Canada so I'm not sure that the culprits, believed to be global warming and pollution, are receding any time soon.

If you buy for lifestyle, it's another story in that you could cover your costs. I'm not sure about your travel, as it'd depend on the frequency and price of it. The question though is whether you'll like the lifestyle there, in relation to my comments above. Be careful what you wish for. Also, I'm not sure staying one week for the first time would let you determine that but you know better.

But then, as you suggest yourself, there's gonna be plenty of empty properties generating little rental income. In that kind of a scenario, Wouldn't you want to be the guest, not the host or the renter, not the owner? Your holidays would be much cheaper,  you'd stay in different places (more variety) and you could stay in much nicer places for the same budget.

I understand the reason you'd want to buy is to be able to capture a potential capital gain. But where is the increase in value going to come from? It's a beach town market. There are so many second homes and then, when it comes to rental properties, no occupancy = no value.

An investment is about numbers. Make sure that your judgement isn't clouded by "My family and I just returned from a lovely week in Tulum." I'm not sure you want to be one of the many who went there, bought impulsively and regretted it after and can't sell without taking a loss. Maybe you should let time pass a bit and the fever retreat and the right decision might become obvious to you.

If you do decide to buy, yes, you'd need to be as competition proof as possible (which will probably mean paying and rising more). Bear in mind though that inferior properties renting for close to nothing because they're empty will still be competition.

Hope this helps!

Mike Lambert · Answer

@Sebastian Papworth It's good to get your perspective as somebody who lives and invests in Tulum and is a realtor too. In your comments, you focused on opportunities and, in mine, I focused on risks. This is a difference in perspective that makes total sense, given our different situations.

You live, work and invest in Tulum so you (have to) try to make the best for it. You started investing there years ago, when it was much cheaper and there was much less competition. As in any competitive market, you need to find deals and find ways to distinguish yourself from the competition. And you need to look for the positives. After all, if you don't, who will.

I'm an international investor and I look primarily at those risks because I can get a better return somewhere else in Mexico or in other countries without taking those risks. If the market involves in a way I don't like, I can go and invest elsewhere.

The results you mentioned are great but it's the percentage return that matters, not the amount of dollars. 5 properties with double digit returns are great but again, people need to be cautious when looking at this.

Let me illustrate what I mean with one of my own examples, a recent acquisition in Spain, because it perfectly illustrates the point I'm trying to make here. We launched a new short-term rental in the Costa del Sol in December. The professionals, who tend look at their market with rose-tinted glasses told us to expect an occupancy rate between 51% and 55%. With that occupancy, we should have been deep in the double digit returns. Why not a higher occupancy though? Because it's a seasonal market, whereby we should expect full occupancy during summer, some occupancy during both shoulder seasons and we should have been happy if we get any occupancy in the winter. We put our secret sauce to work and, so far, we've gotten 70% occupancy in December, 94% in January and 86% in February. While I'd encourage anybody to invest in the Costa del Sol, I'd never suggest they could get the returns we're going to have, as that's simply not realistic. They certainly won't get those supercharged returns if they don't find the right property and doing the hard work that we're doing with our properties.

There's nothing wrong in showing what's possible but I think we should all be cautious managing people's expectations. I'm not sure whether your double digit return is calculated on your past lower purchase prices or today's actual prices but, even if it's the latter, you're going to work very hard to keep getting those kind of returns given the tidal wave of competition that's coming at you. I'm sure that, as @Bruno Demarco Quiroz mentioned, you'll be the first to agree that getting a double-digit return today or in the future will likely be the exception rather than the rule, at least until the municipality stops giving building permits to anyone and their mother like and decide to reign in supply like they've done in other parts of Mexico like Cabo for example.

Not long ago, I met with a real estate agent on the ground who mentioned that, given the changing market, Tulum had become a lifestyle market rather than an investment market. That made sense to me because, given the low operating costs in Mexico, you could buy a property, use it part of the year and rent it the rest of the time to cover your costs, which you could do even if competition brings the nightly rates much lower. My main concern about a lifestyle purchase is the sargassum. For all of us on the East Coast of either Canada or the US, it's easier, quicker and cheaper to go to the Riviera Maya than to competing places like Cabo or Puerto Vallarta but we might care less about that if it means not having sargassum on the beach. Also, places like Cabo and Puerto Vallarta have become aggressive at competing with the Riviera Maya by expanding their airports and bringing in more direct flights, who'll end up making a big difference for someone like me and others.

To conclude, it's good to get both sides of the argument and do one's own individual SWOT analysis, as you suggest.

Sebastian Papworth · Answer

Mike's perspective as an experienced investor in Mexico holds significant value.

As an investor in Tulum, it's crucial to conduct a comprehensive SWOT analysis (Strengths, Weaknesses, Opportunities, Threats) to gain a holistic understanding. I aim to offer a more balanced viewpoint.

Having resided in Tulum for over a decade, as a licensed broker/owner, real estate developer, and investor I have firsthand insights into the real estate and tourism markets. While Mike highlights legitimate risks, such as market saturation and seasonal challenges like sargassum, conducting a full SWOT analysis allows investors to evaluate the broader landscape and make informed decisions.

**Supply and Demand Dynamics:**

When I invested in my first STR, Tulum boasted around 2000 properties in 2017, ensuring high occupancy rates and lucrative rental returns on Airbnb. However, the market got saturated with the influx of investors and developers, particularly in the sub-$100,000 segment. Now, standing out on Airbnb requires creativity and a higher investment. Yet, Tulum's ongoing infrastructure projects, demand, and anticipated growth suggest long-term potential, especially with the influx of families and the upcoming projects.

**Infrastructure Development and Transportation:**

Tulum's infrastructure is evolving, with plans for shopping malls, cinemas, and major retailers. The Mayan Train project, featuring two stations in Tulum, promises to enhance connectivity and attract more tourists. Moreover, with the imminent opening of the Mayan Train stations this year, travelers will find themselves approximately 20 minutes away from downtown Tulum on the Mayan train. What's more, an increasing number of routes and airlines, including Delta, Spirit, American Airlines, United, Air Canada, apart from the ones currently operating, have announced their plans to fly into Tulum's new international airport. Often overlooked is the fact that the new airport includes an FBO with multiple private hangars for private jets. This amenity has attracted numerous buyers investing in million-dollar-plus villas arriving in private jets. Such luxury market clientele highly value every single minute they can save. Additionally, it's worth noting that this year alone, 130,000 people from 180 countries attended music festivals in the area in January alone.

**Tourism Trends and Market Expansion:**

Tulum's appeal extends beyond its beaches, with attractions like archeological sites, cenotes,  and the multicolored lagoons of Nopalitos, Kan Lum, and Bacalar gaining attention as well as good food, good year-round weather, and kind & polite people. Despite seasonal challenges like sargassum, alternative destinations such as Holbox and Cozumel offer clean beaches during the sargassum season, mitigating the impact on the overall Riviera Maya tourism sector. While sargassum may influence occupancy rates and average daily rates (ADRs), it's unlikely to overshadow Tulum's overall appeal, all the Caribbean destinations including Florida are impacted and working to find a solution or workaround to this environmental situation.

**Investment Potential and Property Performance:**

Despite the increasing supply of properties, well-designed investments can still yield significant returns in Tulum. For instance, one of our properties generated $34,130 USD in December and $29,021 in January, showcasing the earning potential with strategic management and investment in property enhancement. We have more than 5 properties yielding double-digit returns. I am happy to share my numbers with any interested investor.

In summary, while acknowledging the risks highlighted by Mike, conducting a comprehensive SWOT analysis is important, Tulum is a massive tourist destination. Investors can staill capitalize on Tulum's growth trajectory by leveraging market insights and strategic investment approaches while mitigating associated risks. Some interesting emerging markets are starting to grow here in the Yucatan peninsula and we are also investing there.

Mike Lambert · Answer

@Bruno Demarco Quiroz thank you for "correcting" me somewhat over my comments on the airport, thereby allowing me to clarify my thoughts regarding that topic. You are correct that Tulum airport is closer + you're likely gonna get out of the airport quicker in Tulum. It normally takes 1 h 30 from Cancun airport to Tulum and that's what it's taken me on average - it can be less with low traffic and if your driver speeds because you could miss your plane ;-). It's essentially 74 miles of nice highway. However, there have been at times nasty traffic jams due to works on the road, heavy traffic or some traffic light and controls, hence it could take up to 3 hours if you're unlucky. I'd choose a Tulum flight over Cancun if both are available at similar prices.

Let's be clear. An additional airport is a positive. But, unlike Bruno, many locals tend to overhype it for obvious reasons (whether they believe in it or not). To clarify my comments on the topic, what I meant to say about that point is that I've never met anyone who wouldn't go to Tulum because of its distance from Cancun Airport or complained about it. That's corroborated by one of my friends who's an experienced market manager at Airbnb, who told me that the overall majority of travellers don't have any issue commuting for up to 2 hours between the airport and their accommodation. This makes me wonder about the additional number of visitors that airport will bring, irrespective of its capacity.

To be clear, I don't have a crystal bowl to predict the future so it's all about risk taking and managing, assuming you can get the return you're looking for of course. You might just want to make sure that whatever you invest in fits within your acceptable risk/return profile.

Buying real estate in Tulum?

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