Real Estate Investing in Mexico - Best way to get loans/financing?

[Account Closed]

Hi guys, I asked this question on general investing forum but think this is more suited to my specific query.

RE: I am a Canadian citizen with permanent residence in Mexico.

I've been investing in real estate in the state of Yucatan (the safest state in Mexico) for the last 1.5 years and have learned alot.. so far I've invested exclusively in presales and a land purchase, one property was an oceanside condo that will be delivered in June, it's currently up around 35% in value (great!), the 2nd was a private 3bdr family home in a gated community that just broke even (merp), and the 3rd is a piece of land that has increased 400% in value since a public announcement that a busy tourist train will be built along the highway 4km away from the property (nice!).

Currently the large part of my liquidity is locked up in the oceanside condo, and the property I am keeping with the intention of developing into a 150-unit community once the train gets built. I have found a great opportunity to purchase about an acre of land strategically placed on a main road in a beach town called Progreso that is exploding in popularity among Canadian, USA and European expats. As a Canadian in Mexico it's proving hard to get loans from either Canadian or Mexican traditional lenders, and since the oceanside condo is a presale and the title isn't in my name yet its difficult to use that as collateral for a loan or financing, any advice on securing loans/financing through non-traditional sources is greatly appreciated!!

For reference, land in the area I'm considering purchasing increases roughly 17% yearly without touching a brick, the land I want to purchase is roughly $80k USD. My plan is to use income from my Scooter Rental company here to build a café and rental units as the ROI for both business models is high and in 3-5 years planning to sell the land with businesses attached.

[Mike Lambert]

I saw that you wrote a similar post on another thread as well so I'm going to answer here and copy/paste in that other threads for the benefit of everyone. I have seen too many Canadian and US investors going to Mexico during the pandemic, buying land, trying to invest in a development, not be able to get financing and having to resell the land at a huge loss. With the rise in value and the increasing popularity of Mexican real estate, they thought they could easily strike gold. They went to Mexico thinking that they can apply the same strategies the've learnt in the US and Canada only to find out that nothing could be further from the truth. So, if I can help anybody not to fall into that trap, spending the time writing this reply will have been time well spent.

Finally, before I start, those who follow me know that I hate to be a party pooper and be negative and that I've been trying to help BP members investing in Mexico the smart way for years now. So I'm going to make suggestions to you towards the end of my reply so don't be too discouraged as you read on.

Starting with the land, land prices over there don't normally rise at 17% a year. I'm not sure where that figures come from because 1) there's no MLS and 2) nobody has a crystal bowl when it comes to the future. Yet, I wouldn't be surprised that, over the last few years, land has increase by that percentage or more because of the hype surrounding that train. More on that and the banks' opinion on Progresso further in my reply.

Generally speaking, the right piece of land in the right place in Mexico can appreciate handsomely. However, many of these people, not having much money (you can only buy cash), they bought pieces of cheap(er) land. Having to resell in an illiquid market with plenty of other cheap land is a surefire way to have to take a huge haircut.

You already own the land anyway so you need financing for the construction. The bad news is that you will most likely have to use your own money for that. Indeed, no Mexican bank will normally finance a foreigner's development project like that unless you're a big multinational and can offer loan guarantees. And for good reason because it's very risky for a bank to do that.

And even for Mexicans, it's very hard to get such loan and it's extremely onerous. This is why most Mexican developers are wealthy families using their own money. Case in point, I've been staying at a condo in Cabo in my friend's building. He's a successful Mexican executive and he has a lot of money by Mexican standards. He's completing a large condo development he's been financing with his own money. The building is on a large plot overlooking Cabo San Lucas, Mexico's # 2 tourist destination. He's planning a second building on the same plot of land and has been looking for bank financing. Even though he's a wealthy Mexican with a large successful project under his belt in of Mexico's best and less risky markets, could offer a large building as collateral, he can't get a loan that makes sense from a Mexican bank. More of what my friend is doing further below.

Mind you, there are exceptional situations linked to relationships like mine. I've been involved with Mexico over the last 25 years. I used to be an international banker and, as part of my last job, I was lending tens of millions of dollars to Mexican banks on a regular basis. Needless to say, that made me a lot of friends within the Mexican banking community. As a result of that, I could get financing but only if I meet their very strict criteria.

One of these criteria is the location. I'll be strictly limited to the more established tourist areas of the country. I checked for Progresso and the answer was a resounding no. And that's what I was expecting, given my own opinion on the place. Indeed, while there are indeed more foreigners buying property there as they're getting priced out of other places in the peninsula and/or they're being sold a nice story, Progresso is essentially the beach town of Merida's elite who flees there during the summer as the temperature and humidity within the city becomes unbearable. This is basically an essentially Mexican affair. Mind you, Merida itself has been doing pretty well and, as it further develops, Progresso will benefit and there is by the way a large condo and marina development project going on there. Yet, I think the potential is limited given the , in my opinion, much better places.

You mention the train. It's not supposed to go through Progresso so I'm not sure how Progresso would benefit. If anything, it might actually make it at a more competitive disadvantage compared to the places where the train will stop. Of course, the train could provide a boost to the whole region. However, after examining that project from closer lately, my idea and that of all my contacts on the ground is that it's a lot of hype and a huge waste of money. The current main road network is already good enough and plenty of visitors want to rent a car at the airport anyway. I still have to meet one single person that would decide to travel to the Yucatan because of the train and wouldn't otherwise. I wish the had spent the money on better secondary roads and cell coverage infrastructure instead.

I saw you mentioning private lending in another post. You'd have two options: a foreign lender (most likely US or Canadian) and a Mexican lender. The problem with a non-Mexican lender is that private lending is based on getting a property as security and no private lender has the necessary infrastructure to take a mortgage in Mexico and go try to seize your property in a Mexican court of law should push comes to shove. Also, if they can get high interest rate by lending in the US or Canada, think about how much more they'd have to charge you in interest rates to justify the additional risk. When it comes to a Mexican lender, you'd have to find one and then make sure he's legit. And then, you'd probably have to pay a sky-high interest rate (I've heard of 40%).

Before looking at what your options are, let's see what my friend is doing. I'm helping him finding other options but this is his plan at the moment. Originally, he was going to keep the condos in his first project as a passive income source. His plan is to actually selling (some of) them a condos to finance his new project. He'll do it bit by bit with his own money, as the majority of the people do in Mexico.

Finally, to finish on a positive note, this is what I would do if I was in your position, considering the limited amount of information I have about your situation:

1. I'd ask myself if Progresso is the right place for your project. Of course both the bank and me could be wrong about how risky it is and the potential there. So, don't take my word for it and make your own informed decisions.

2. Do you really need to build 150 units as a first project? I love people who think big and I do too but, at the end of the day, being realistic is important here. Even though I've been investing in the area for the last 6 years and have a large amount of knowledge and connections, it wouldn't cross my mind to do something that big at this stage. With whomever you'll have to deal with, make sure you don't come across as a dreamer as they have seen too many of those.

3. What about you're a bit patient and wait for your oceanside condo to get built and try to get financing on it. Although, while you could get a mortgage on it, it isn't that easy to qualify and the conditions could be very onerous.

4. Have you thought about friends & family financing? People who love you, want to support and trust you and will be happy to invest and help you regardless of the merits of the projects?

5. Any financing you can get in Canada from a HELOC or an RRSP of yours?

Hope this helps, even though it mightn't be what you were looking for. I'm the kind of guy to say things as they are and I thing that will better serve you on your way towards a solution that works.