Rental Property Investor · Mexico City, D.F. · Member since 2020 · 12 posts · 3 votes
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.
1. You don't have to pay a 30% capital gains when you sell a property in Mexico
2. There are two real estate markets in Mexico. On the one hand, most Mexicans buy and sell their properties in the peso market. Their income and expenses are in pesos. They don't travel much to the US. They therefore can't care less about the value of the peso against the USD. On the other hand, the foreigners (and wealthy Mexicans) buy and sell their properties in USD and rent them in USD. Therefore, it's actually a good thing if the peso drops against the dollar as it causes the expenses to drop, when expressed in USD.
3. As to the expropriation law, can you find many people to whom this happened? I don't think so. In any country, including the US, property can be expropriated by the government in exceptional circumstances.
4. The Mexican economy is following the same trajectory as the US economy. It went into a deep recession due to Covid and it's now recovering. Mind you, the economy wasn't doing that well right before Covid and yet real estate prices were going gangbusters. Of course, they're not at the moment but the Covid-induced recession hasn't had a bad effect on prices as one could have feared.
So there's no need to sell in a hurry. And, if one decides to sell, there's no need to take a hit either.
Interesting questions and comments, Mike.
Not only have I ever invested in Mexico, but I still own several properties in Mexico City including one apartment building with 13 units in Colonia Roma. I am 52 years old and lived in Mexico most of my life, so my opinions are based on reality and direct experience of over 30 years.
To set the record straight:
1. You must pay "Impuesto Sobre la Renta" of approx. 30% on the appreciation of the property from the day that you bought it to the day that you sell it. So if you paid $10 and sold it for $20 you owe $3. Furthermore, the government requires an "avaluo" (official appraisal) which will determine how much the property is worth for taxing regardless of how much said property sold for. In fact, I was fortunate enough to unload a 9-unit apartment building in Colonia Condesa back in February, 2020.
2. You are right to an extent. Every transaction must to be in MXN, contracts may include clauses stating that the price is subject to the value of the USD/MXN. The changes in the value of the Mexican Peso Vs. USD, immediately affects all prices and costs of living. It is not a matter of or if how often they travel abroad.
3. Can I find many people with expropriated properties? Sadly, yes. All you have to do is walk around Mexico City to find properties with a huge sticker stating: "Asegurado por la FGR". This means that the property was confiscated by the government for whatever crime someone supposedly committed. Every time your rent to someone, the government is expecting the landlord to become some kind of police agency assigning you, the landlord to make sure that your tenant is not a criminal. They confiscate first and ask questions later, which usually translates into litigation that can last for years. While I love Mexico, it is not a country of law and order. Period.
4. Here is where you are absolutely wrong. Mexico's economy took a huge dive when President Lopez Obrador won the election. There is no such recovery and the government's poor handling of the Covid crisis has made things even worst. The market is flooded with properties for sale. Sellers, developers and construction companies are selling for less due to lack of sales of units that are worth over $4 million MXN ($190,000 USD roughly) are NOT selling. But on top of this, experts forecast that things will get a lot worst before they get better.
Unloading properties in Mexico is urgent. If you disagree, you are welcome to purchase any of the ones I own at a great discounted price. I have a single family home in Polanco, a couple in the Satelite area, and three apartment buildings that I have not been able to sell.
I am simply trying to help someone who asked for an opinion, not to see who is right and who is wrong.
Rental Property Investor · Brownsville, TX · Member since 2019 · 60 posts · 33 votes
5y
Sell all your properties in Mexico ASAP! NOW! Take a hit if necessary!
Are you taking into account the ISR (Income tax)? That is almost 30% of the "appreciation". I also noticed that you are taking about MXN. How much was a USD worth when you purchased the property? You forgot to mention the pro-tenant laws of Mexico that will allow a non-paying deadbeat to live rent-free for two years!
The market is extremely slow for anything over $3.5 to $4 million MXN at the moment because everything is for sale and most buyers can only afford this kind of money.
More bad news? Just two: Ley de Extincion de Dominio = the government can take your property at any time if they feel that your tenant is committing crimes such as money laundering, dealing drugs, and around 65 other "reasons" without a trial!
Sell now because the economy is getting worst every day. Invest in a good market in the US and save yourself headaches.
Real Estate Agent · Pasadena, CA · Member since 2015 · 477 posts · 263 votes
5y
sell: keep most of the money and sub-lease to Air b and b: it will be a lot cheaper and you can do very well from a cash flow perspective.
I would start with one: and once you have the systems in place to get more and you know what you are doing and how to run them: get 2 more and then 4 more etc
Why the need to go that fast... enjoy the process.
so what if you lose 1 M MXN: you will make it back up in less than 1 year assuming you work at it. Its the cost of doing business.
(plus you won't lose that amount from your net-worth bc you never had it :) )
What I mean is:
When you buy a property for 100k for example: you have to assume that you will spend about $12k in fees when you sell in the future for $200k right... the only problem is that when you bought the properties you did not account for this...
so you are not losing $1 M MXN : instead you are gaining about $4 M and the opportunity for more! (shift your mind set)
1. You don't have to pay a 30% capital gains when you sell a property in Mexico
2. There are two real estate markets in Mexico. On the one hand, most Mexicans buy and sell their properties in the peso market. Their income and expenses are in pesos. They don't travel much to the US. They therefore can't care less about the value of the peso against the USD. On the other hand, the foreigners (and wealthy Mexicans) buy and sell their properties in USD and rent them in USD. Therefore, it's actually a good thing if the peso drops against the dollar as it causes the expenses to drop, when expressed in USD.
3. As to the expropriation law, can you find many people to whom this happened? I don't think so. In any country, including the US, property can be expropriated by the government in exceptional circumstances.
4. The Mexican economy is following the same trajectory as the US economy. It went into a deep recession due to Covid and it's now recovering. Mind you, the economy wasn't doing that well right before Covid and yet real estate prices were going gangbusters. Of course, they're not at the moment but the Covid-induced recession hasn't had a bad effect on prices as one could have feared.
So there's no need to sell in a hurry. And, if one decides to sell, there's no need to take a hit either.
Rental Property Investor · Mexico City, D.F. · Member since 2020 · 12 posts · 3 votes
5y
Thanks for the reply, @Charles Large
I would pay minimum taxes on the sale because I lived there for a few years and all utilities are under my name, so no issue there.
I do track the USD and know that most of the appreciation comes from it. It has become more stable now and is not something I see changing wildly in the near future.
I will take a deeper look at the legislation regarding extinción de dominio but I really haven’t heard of it actually applying to someone who conducts an honest business.
Rental Property Investor · Mexico City, D.F. · Member since 2020 · 12 posts · 3 votes
5y
Thanks, @Sebastian Marroquin
I actually started thinking about master lease-options this past weekend before I received your reply. A couple of agents have told me it will be very difficult to find a lessor who accepts a sub-lease clause, but I will be chasing this to the end because I now see it as my best option to expand and also hold on to my current asset.
I also appreciate your comment on changing my mind set very much.
Rental Property Investor · Mexico City, D.F. · Member since 2020 · 12 posts · 3 votes
5y
Thanks, @Mike Lambert
I agree with you an everything.
For what I’ve heard from a couple of agents Acapulco is making a real comeback BECAUSE of COVID. Many people are renting there for extended periods of time to ride the lockdown.
Real Estate Agent · Pasadena, CA · Member since 2015 · 477 posts · 263 votes
5y
when it comes to finding someone that would accept you doing air b and b on their property.
*A lot of people would: you have to find the problem - their pain point and give them a solution.
I work with a lot of conventional (your average rental) investors:
what do they fear?
1. Rent being on time
2. Having to evict someone
3. Maintenance and repairs
how do you fix that for them;
1. You could take the risk: and pay 6 months or 12 months of rents in advance (big risk for you but big reward also). This means that you already did your home work and are diving in head first right? : so they will love that they get their money up-front
*maybe even do 6 months in advance as a cushion and still pay your monthly rent to them: so that in january they get the rent (but have also 6 months upfront), in Feb. they get the rent... and still have the cushion : this way its not as expensive for you up-front but they feel safe (and do a lease for 2 years) this way you don't spend all the time and money getting it ready for them to take it away from you once they see you are achieving success... (have an exit clause for both parties). :)
2. eviction: well... there will be no evictions bc with air b and b: people stay for 1, or 2, or 3, 4 weeks at a time... (figure out if that's the case in your market... what's the rules and laws and give them a solution): for example : what if an attorney said: in a worst case scenario, it would cost $5k to evict someone... so you say to the owner: it costs 5k to evict someone , so i would put $5k into an escrow account or a mutual account just as emergency money incase we have to go that route...
3. maintenance and repairs: You need the place to look and function in a great way: so you could make the necessary cosmetic fixes and make sure that everything is working properly: so the pressure and financial burden is on you not on them as the owners.
A lot of my regular investors : would love to get someone in the states that proposed this to them... Easy money for them and exactly what they expect.
For you: there is some cost of doing business up-front but you would be making a profit with the bookings.
You have to be up-front with people and find the "right" client (home owner) for you! They are out there (and a lot of them too!)
1. You don't have to pay a 30% capital gains when you sell a property in Mexico
2. There are two real estate markets in Mexico. On the one hand, most Mexicans buy and sell their properties in the peso market. Their income and expenses are in pesos. They don't travel much to the US. They therefore can't care less about the value of the peso against the USD. On the other hand, the foreigners (and wealthy Mexicans) buy and sell their properties in USD and rent them in USD. Therefore, it's actually a good thing if the peso drops against the dollar as it causes the expenses to drop, when expressed in USD.
3. As to the expropriation law, can you find many people to whom this happened? I don't think so. In any country, including the US, property can be expropriated by the government in exceptional circumstances.
4. The Mexican economy is following the same trajectory as the US economy. It went into a deep recession due to Covid and it's now recovering. Mind you, the economy wasn't doing that well right before Covid and yet real estate prices were going gangbusters. Of course, they're not at the moment but the Covid-induced recession hasn't had a bad effect on prices as one could have feared.
So there's no need to sell in a hurry. And, if one decides to sell, there's no need to take a hit either.
Interesting questions and comments, Mike.
Not only have I ever invested in Mexico, but I still own several properties in Mexico City including one apartment building with 13 units in Colonia Roma. I am 52 years old and lived in Mexico most of my life, so my opinions are based on reality and direct experience of over 30 years.
To set the record straight:
1. You must pay "Impuesto Sobre la Renta" of approx. 30% on the appreciation of the property from the day that you bought it to the day that you sell it. So if you paid $10 and sold it for $20 you owe $3. Furthermore, the government requires an "avaluo" (official appraisal) which will determine how much the property is worth for taxing regardless of how much said property sold for. In fact, I was fortunate enough to unload a 9-unit apartment building in Colonia Condesa back in February, 2020.
2. You are right to an extent. Every transaction must to be in MXN, contracts may include clauses stating that the price is subject to the value of the USD/MXN. The changes in the value of the Mexican Peso Vs. USD, immediately affects all prices and costs of living. It is not a matter of or if how often they travel abroad.
3. Can I find many people with expropriated properties? Sadly, yes. All you have to do is walk around Mexico City to find properties with a huge sticker stating: "Asegurado por la FGR". This means that the property was confiscated by the government for whatever crime someone supposedly committed. Every time your rent to someone, the government is expecting the landlord to become some kind of police agency assigning you, the landlord to make sure that your tenant is not a criminal. They confiscate first and ask questions later, which usually translates into litigation that can last for years. While I love Mexico, it is not a country of law and order. Period.
4. Here is where you are absolutely wrong. Mexico's economy took a huge dive when President Lopez Obrador won the election. There is no such recovery and the government's poor handling of the Covid crisis has made things even worst. The market is flooded with properties for sale. Sellers, developers and construction companies are selling for less due to lack of sales of units that are worth over $4 million MXN ($190,000 USD roughly) are NOT selling. But on top of this, experts forecast that things will get a lot worst before they get better.
Unloading properties in Mexico is urgent. If you disagree, you are welcome to purchase any of the ones I own at a great discounted price. I have a single family home in Polanco, a couple in the Satelite area, and three apartment buildings that I have not been able to sell.
I am simply trying to help someone who asked for an opinion, not to see who is right and who is wrong.
I would pay minimum taxes on the sale because I lived there for a few years and all utilities are under my name, so no issue there.
I do track the USD and know that most of the appreciation comes from it. It has become more stable now and is not something I see changing wildly in the near future.
I will take a deeper look at the legislation regarding extinción de dominio but I really haven’t heard of it actually applying to someone who conducts an honest business.
Best,
-pf-
You are right about taxes. You can deduct up to a certain amount if it was your residence and can prove it. The USD/MXN is uncertain, you just never know for sure. Do learn more about extincion de dominio. The Arbnb is a good idea. Good luck!
Interesting comments from you too. Let me first start by saying that the forum is about helping others my or your ego or about being right but I'll have to set the record straight again, in a friendly manner. Mind you, our differences of opinion are mainly due to the fact that we're not doing the same kind of real estate investment. I only invest in tourist areas by the coasts and only do short-term rentals. I'd never invest in Mexico City and I'd never invest in long term rentals anywhere in Mexico. And I assume that the BiggerPockets readers, being almost exclusively Americans and Canadians would only be doing the same kind of investment as I do. So, indeed, I have no interest in buying your properties and, if I was inheriting them, I agree with you that I'd get rid of them as quick as I can.
Regarding the points we discussed:
1. Yes the impuesto sobre la renta is 30% but you end up paying much less because of all the allowable deductions. Maybe you pay 30%. I don't know anybody who does but maybe some people do.
2. You are in theory right that Mexicans get affected by the exchange rate because it affects the price of goods imported from the US. However, this is probably minor and I imagine that the Mexican working class mainly buys Mexican goods anyway. And it affects your kind of renters, not mine. If I buy, rent and sell a property in USD to foreigners or well-to-do Mexicans, I'm hardly affected by the exchange rate of the peso. As I mentioned above, Mexico has two real estate markets and, like pretty much all foreigners, I'm only active in the USD market. As a result, I've never seen the MXN/USD clause you mentioned in any contract and I've never done anything in MXN.
3. Before investing in a new market, I literally take a few days to walk along the city on every single street to have a comprehensive view of the local housing stock and market. For example, I did it in downtown Playa del Carmen and Puerto Vallarta, to the point that I was regularly crossing the same police cars and I was always afraid that they'd arrest me thinking that I was acting strangely. ;-). And I've never seen any of these stickers, which is why I didn't even know they existed. Again, we're not taking about the same kind of market here.
4. You are right in that Mexico had already entered a slight recession pre-Covid, as I mentioned too by the way. Yet, prices were still going up. Don't take my word for it and look at the government statistics. It's probably changed recently because of Covid though. Mind you, when the Covid crisis started, many feared real estate prices in tourist-dependent areas like the Riviera Maya or Puerto Vallarta would crash but that didn't happen at all. Developers started by offering rebates to boost sales by sharing a part of their benefit resulting from the drop of the peso (which makes a difference to them because their costs are in peso while their sales are in USD). To my surprise, they started withdrawing these rebates because the drop in demand didn't happen. A friend realtor of mine has had an extremely busy summer. Indeed, many Americans have been buying in the Riviera Maya to have a property to spend the winter there in case of a new lockdown. Again, totally different market. In the markets in which I'm active, there is a lot of activity. I visited a few projects in Tulum when I was there a few weeks ago and I was just advised today that some are about to sell out.
To conclude, we're generally not disagreeing but we're talking about two very different Mexican markets. I reacted to your post because you were talking about investing in Mexico in general from your limited perspective. To be fair, I did exactly then same by generalizing my own experience of investing in Mexico and ignoring yours. Mind you, I did it knowing that pretty thinking that pretty much anybody on BiggerPockets interested in investing in Mexico would want to do the same investing as me.
Reading your interesting comments confirmed to me that I'd never invest in Mexico City or in any long-term rentals in Mexico and I'd never advise anybody (and especially any foreigner) to do it either. However, as many North Americans, I invest in condos in the USD market in Mexico's main beach destinations and Mexico is a great market for that.
When reading your initial comments, I'd never thought that you, being from the US, would invest in long-term rentals in Mexico and hence I wrongly imagined that you were commenting about Mexican real estate without having experience there, like a few people do. Thanks to you, I was reminded something one of my mentors taught me a long time ago: never assume anything.
Indeed, properties similar to what you can buy in the US cost much less in Mexico, can generate a much higher rental income and unlike the US and Canada, Mexico doesn't restrict short-term rentals; it welcomes them. So, as much as Mexico is a bad market for long-term rentals, it's a great market for short-term rentals.
Finally, @Porf Fenton's original question was whether he should sell his long-term rental to get into the vacation rental market. After reading your comments and mine, I guess he'll come to the conclusion that it's probably a great idea.
Rental Property Investor · Mexico City, D.F. · Member since 2020 · 12 posts · 3 votes
5y
@Mike Lambert
Yes, I agree it is a good idea to shift from long- to short-terms in tourist areas.
I am currently fishing for a seller in Acapulco willing to sign a master lease-option so I don’t have to wait on the sidelines until my long-terms sells.
And I also have my eyes set on a couple of developments in Tulum. Maybe we’ll meet there sometime.
Property Manager · Kansas City, MO · Member since 2018 · 280 posts · 221 votes
5y
@Porf Fenton if you want to explore other markets, I’m happy to share numbers for STRs in Kansas City. I’m loving it - the city is growing and it quickly bounced back from COVID.
Rental Property Investor · Mexico City, D.F. · Member since 2020 · 12 posts · 3 votes
5y
Update:
I kept my studio and am currently setting it up to turn it into a STR. Given its location it should bring in at least 20% more than having it as a LTR. Numbers backed by airdna.co that I use to estimate income for STRs. If you are looking into STRs you should definitely check it out!
I never found a seller willing to sign a lease option in Acapulco. But I found a great deal (2 BR, 2 Bath) and was able to finance it with 80% from a conventional mortgage and 20% + closing + set-up costs covered by a private investor. I've been running it as a STR with much better returns than I initially estimated. Cashflow is tight because of the financing costs but that should turn around quickly as summer kicks in full and COVID restrictions recede.
I now have made 5+ offers for 3 BR and 4 BR apartments in Acapulco again looking for a lease option. I need to follow this path until I can get pre-approved for another mortgage. So far I have been turned down from the lease option by two owners, but one of them agreed to my purchase price. If his property is still available in a couple of months I might negotiate again. But hopefully I will find a seller willing to sign a lease option to speed things up!
When I wrote my first post on BP I never thought it would be possible for me to buy an apartment with $0 down while holding on to my studio. Now that I know how it worked out I feel limitless and buying a second, larger deal within six months of the first one seams like a real possibility. And why stop there? If I can get preapproved again after my second deal, I will shoot for a third one this year!
The information available in this site has turned out to be invaluable to me. Thanks to all who make it happen, including members. Thanks to all of you.