Investing in Mexico

[Amy Gonzalez]

Hello everyone, I'm curious to know, if banks will loan for foreign investment or what route should I take if I am looking to invest in Rental Property and Apartments in Mexico. Any help? Thank you!

[Mike Lambert]

Banks from one country will never give a mortgage loan in another country, even international banks. This is because they can't take a foreign property as collateral. You might hear from time to time that someone got a loan from their US bank to buy a property in Mexico. This is misleading. What happened is that the bank gave them a loan based on equity they have in a US home so the mortgage loan is on a US property and not on the Mexican property. As far as the bank is concerned, they can use the proceeds of the loan for whatever purpose because they have US collateral. They couldn't care less that you buy a property in Mexico with the money; you could as well us it to go on holidays or for whatever other purpose.

For a real estate investor, taking such loan completely defeats the purpose of the savvy investor willing to get leverage on the property he's buying. Indeed, there's a huge opportunity cost as you have to encumber a US asset and you won't be able to tap the equity in your US property for another purpose in the future, while you won't be able to use your Mexican property as collateral.

Even though it's not very common, you can, as a foreigner, get a mortgage from a bank in Mexico. While it is difficult and time-consuming to get approved, the main issue is that the interest rate will run well into double digits and, to add insult to injury, you get taxed on the interest you're paying and you're forced to take a life insurance. There are a couple mortgage brokers that cater to international clients and will either work with banks or private lenders but it'll be even more expensive.

For foreigners, buying property in Mexico is therefore mostly a cash affair. Mind you, because of the high returns that can be achieved even without using leverage, plenty of foreigners still buy property in Mexico in spite of that. However, many people don't have the money to pay 100% cash and the savvy investors don't want to pay 100% in cash even if they have the money because they want to use at least some leverage to make returns that are even higher.

There is therefore a huge gap in the market and I'm trying to do my best to fill it, even though it's a drop in the ocean at this stage. I'm lucky to be personally connected with some of the best developers in the country, whereby I get the opportunity to buy condos or villas in their projects at a large discount to the retail pre-construction price before the projects are launched. This is theoretically risky business because I give money to the developer against a piece of paper in a foreign jurisdiction and I might never get anything in return, as the project isn't even officially launched. Of course, I can do that since I'm personally connected to the developer.

I buy a few condos for my own use and some extra ones to resell later. Indeed, once the construction is well advanced, I'll put my extra condos for sale as the risk is lower and the developer has already raised the retail price. My price will be lower than that of the developer and I will offer financing to the buyer at a great interest rate, much lower than the interest rate in Mexico. This is a win-win for both parties:

The buyer will be able to buy at a price below market and below the developer price. Moreover, he'll be able to use leverage. If he does an average to good job with his rentals, he should be cash flow positive during the short repayment period. His return on investment will be much higher because he'll use leverage and the price he paid was under market value. Because the construction is well advanced, the main of the buyer risk (construction) will be much reduced. Yet, he'll pay a price lower than the pre-construction price! Since I personally know the developer, I know that he will deliver the condos so I might even keep the construction risk until the condo is delivered to my buyer. He'd make all his payments into an escrow account and I'd only get the money when I deliver the condo to him. If I don't he'd get all hi money back.

Clearly I won't make a huge profit on the sales price if I sell below the developer price but I'll make some additional profit on the financing. Most importantly, my risk is very low because obviously I can take the property back if the buyer doesn't pay. Therefore I'm happy to get less than a sky-high return.

This is an illustration of the not-so-secret secret in real estate: create win-win outcomes and you'll do well.

Finally, @Amy Gonzalez, feel free to message me if you want to tap more into my experience when it comes to investing in Mexico.