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. 

[Charles Large]

Originally posted by @Mike Lambert:

@Charles Large

Have you ever invested in Mexico?

Just setting the record straight here:

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. 

Best regards,

Charles.