Rental Investment Analysis in Mexico

[Carlos Ancona]

Hello BiggerPockets community.

Let me first introduce myself. 

My name is Carlos, im a 30 y/o architect from México, from the city of Mérida in the Yucatán Peninsula. 

Ive been passionate about real estate, investing, development, architecture and cities all my life. Since young my family invested in rental properties because the good "fame" it has in our culture. Although they never really analyzed property, they have around 40 units as of now.

A few years back I found biggerPockets and got really interested in investment analysis. Since then Ive been trying to analyze different properties here to see if the investment is feseable or not.

Since we dont have a culture for investment analysis in SFR Homes, there is not much precendet on the matter.

The problem.

When starting to analyze property, i realized some major discrepancies on how the market dynamics are different:

• 1. Mortage interest rates: Mortage interest rates in México are about 9% on average. Drastically more than the 2.5% / 3% average in the US.
• 2.Rental prices to property prices ratio: Ive found that in the US, this ratio is usually about 1-2% the property price annually. In Mexico the average percentage comes to about 0.7% to 1%.

Now, if I run a property on a basic SFR Analysis calculator, I will always get negative cashflow, firstly because monthly debt service is always way above rent price.

Here is an Example:

A property priced at $1,500,000.00 mexican pesos.

A rent equal to 0.8% of the property price would come out at $10,000.00 (I verified this analyzing existing similar properties on the market)

If I purchase the property with a 20% down payment on a 15 year term (Average term for mortages) number will go:

$300,000 down payment.

$1,200,000 financed loan at 9% which comes to a 12,171.20 monthly payment. 

So Im -$2171 in negative cashflow. (Supposing no other expenses are needed for the sake of being practical).

Here I attach a analysis spreadsheet:

This numbers would get worst even if vacancy, maintenance and management is added.

Finally my question Are:

Im I doing anything wrong? or Why is this happening? Are interest rates too high?

Are rental properties in Mexico bad investment? Or do they just take longer to generate return?

If this results are the case for MOST PROPERTIES should I run analyses on my purchases or doesn't even matter?

[Mike Lambert]

@Carlos Ancona

@Thomas Stevens

Real estate is different all around the world. You're trying to apply North American strategies to Mexican properties and that will never work. As you rightly pointed out, it doesn't work with local mortgages so you'd have to pay pretty much 100% in cash, which doesn't give you a very profitable investment.

What works in Mexico is short-term rentals, especially in the places popular with tourists. If you buy the right property in the right place, the cash flow can be so high to either compensate for the high mortgage rate or to have a very profitable investment even if you invest 100% in cash.