Switching from one single-family rental into several STRs

[Porf Fenton]

Hi, BP!

Need your advise, please. I will provide as many details as I can so you can get a full picture of where I stand and where I think I may get if I go through with this plan.

(1 USD = 20 MXN for a quick conversion.)

I own a studio in a very hot residential market in Mexico City. I purchased it eight years ago for MXN 2.25M and it is currently listed for MXN 5.75M, so appreciation-wise it has been a good investment. On the cashflow side, however, it has stalled. It nets just MXN 7,500 a month.

After paying taxes, the agent's commission, and the outstanding mortgage, I estimate I can clear around MXN 4.8M and I truly believe that I can use that capital to create a far more profitable portfolio investing in short-term vacation rentals.

A few tid-bits of information:

1. In Mexico there is no such thing as a 2% -or even close- rule. 0.5%/month is closer to reality.

2. Regular mortgages are over 9.5% at best and the longest is 20 years; government-backed mortgages are 12%; cash-out loans are over 12% for up to 15 years. So getting to a breakeven point requires leaving money in the deal.

3. Foreclosures suck. You have to pay upfront and wait anywhere from 12 to 18 months to receive the property.

This means BRRRRing is just not possible.

Crunching some numbers and running some comps I think I can put those MXN 4.8M to work by acquiring three or even four short-term vacation rentals with 40% down and 60% financed to hit that breakeven point even under the current conditions.

With part of what´s left I would bump the equity on a single-family home owned by my wife to make it cashflow positive.

And still there would be a comfortable sum left in my bank account to cover several months of mortgage payments in case the rentals take longer than expected to gain traction.

What is really bothering me with this plan is that all the closing costs may add up to about MXN 1M. That is a direct hit to my current net worth.

Any piece of advise is very welcome.