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Updated 8 months ago, 04/01/2024
Buying pre-construction properties in Tulum and Mexico in general
Hi everyone,
Over the last few years, I've responded to almost 700 posts on buying and investing in international real estate yet I haven't written any single post. In order to best help all of you who want to buy or invest overseas, I figured out it made more sense to answer your questions rather than trying to guess what you'd like to know.
So, this is my first post. Those of you who've read my replies to posts know that my answers can be long because I try to put in as much useful information as I can. Obviously, since this is my own post, I had to follow the same standards or higher so you might want to get yourself a nice cup of coffee and sit comfortably ;-).
Why did I decide to finally write a post now and write specifically about buying and investing in pre-construction properties in Tulum and Mexico in general? On the one hand, many of you have been asking about that subject, whether through the forums or through contacting myself directly (which is understandable since buying a pre-construction condo in Tulum or Mexico in general can be a very attractive investment opportunity if you buy the right property at the right price in the right location from the right developer). On the other hand, I just started working on my own development in Tulum so there’s a lot I can share on the topic.
Many of you have thanked me for helping you buy a property in the area thanks to the informative content I have published on the forums or I have shared in our private communications but I know that there are many more people I've helped who haven't pulled the trigger even though they wanted to. The three reasons that come up the most are: 1) they’re not comfortable with handing over their money to a developer without knowing if he’s trustworthy and capable of delivering the property as agreed, 2) they feel they’re priced out of the market and 3) they don’t have either enough cash or access to financing. Sadly, in those cases, sharing my knowledge and experience might not be enough indeed. By wondering if there was any other way I could help these people, I decided to do my own development project in Tulum that would address these three issues of risk, price and financing, in order to meet the needs of the savvy buyers and investors.
To this end, I spent almost the entire month of May on the field. With the help of my local partners, I found solutions to these three issues that I’m going to use in my own development. I’m now going to share them with you to help you assess and compare the offerings from the different developers.
1. Risks
Unlike what many people think, the main risks of buying a property in Mexico pre-construction have little to do with corruption or drug cartels. They have most to do with the developer and the fact that you have to advance a significant amount of money against just a piece of paper without any guarantee that you’ll get either your property or your money back.
There are actually two distinct risks here. The first is that the developer is dishonest by either scamming you or using your money for other purposes than the construction so you’d need to find out whether the developer is trustworthy. I realize that it’s easy for me to do thanks to my network on the ground but it’s probably much harder for you. Yet, you can do online searches and, most importantly, use your common sense.
A few days ago, one of you asked me what I thought about a particular development in Tulum he was thinking of buying into. I looked at the website and I saw these beautiful renderings. Yet, I didn’t let that distract me and the first thing I wanted to know is who is behind the development to see if I know them or at least can ask my network about them. I was flabbergasted to see that there is no “about us” section and absolutely no information about the developer anywhere. This tells me one of three things: either it’s a scam or the developer has something to hide, has nothing in his background to justify that he could make the project a reality or the developer doesn’t think it’s necessary that he gives any information about himself, which in my book amounts to gross incompetence. Whichever it is, I don’t know about you but I’ll give that project a pass, even if I find the project attractive.
Now, onto the second developer-related risk associated with any pre-construction purchase/investment. Let’s assume that you found a great project with a trustworthy developer. You decide to purchase and you start making payments, alongside with other buyers. The developer cannot wait to make his money as quick as possible and move onto the next project. Therefore, he’s going to start construction as soon as he gets some money. This is a problem because if he can’t sell enough units, he’ll have to halt construction, his project is going to go bust and the buyers will lose their money. This is the main reason why a project would fail and that’s probably what it is when you see idle building frames in the landscape.
There’s another version of that same risk when the developer uses the money from his first buyers for anything other than the construction like personal expenses for example. He thinks it’s ok to do that because he’s going to use the money raised from future sales to complete the construction. By doing so, he’s putting himself and his buyers at great risk of having the project go bust as there’s no guarantee he’ll sell any more units. One of the advantages of being longer than usual on the ground was to catch up with the latest gossip. I was flabbergasted to hear that even some of the largest and most experienced developers are doing that and other shenanigans. By the way, this shouldn’t discourage you from buying in Mexico because the majority of the Mexican developers are honest. It’s the few that aren’t who account for the horror stories you might be hearing or reading about from time to time.
There is a double solution to eliminate or at least significantly decrease these two risks:
a. Instead of having the buyers advance the funds to the developer directly, the buyers will pay into an escrow account under the control of an independent third party. In order to access the money, the developer will have to prove that the project is fully funded, present invoices from his suppliers and/or provide evidence of construction milestones being reached. That’ll make the buyers much more comfortable that the project isn’t a scam and that their money is going to be used for the construction.
b. Having the developer wait for the project to be fully pre-sold before asking the buyers for any non-refundable money. This way, when the time comes for the buyers to put their first dollars on the line, they can be confident that the project is fully sold and therefore fully funded and won’t go bust during construction. Many developers aren’t doing that because selling a project completely first takes time, which obviously is a problem.
So, if you know the developer or have good reasons to think he’s honest and capable, you could consider advancing the money directly to him if you’re comfortable with that. Alternatively, choose a developer who uses the escrow account mechanism.
Also, if you’re one of the first buyers in a project, you’ll pay less but your risk will be higher. If you’re one of the last buyers, your risk will be lower but you’ll pay more. So, if you buy early in a project that you know will go ahead only if it’s fully pre-sold, you have the best of both worlds: a lower price and a lower risk.
2. Prices
As mentioned above, prices in Tulum (and other parts of Mexico for that matter) have risen over the years. This, combined with the necessity to have a sizable amount of cash, has priced many would-be buyers out of the market.
Here, the solution is for the developer to sell properties that are qualitatively as good below market and make up for the lower profit margin by selling quicker and more and having happier clients.
Some of you have asked for my opinion on 2-bedroom condos in Tulum in the upper $300k - $400k range. It would only make sense to me if it’s a lifestyle decision and, even in that case, you could most likely find a much better deal. Such condos are meant to be second residences, not rentals. If you’re looking at an investment, I’m not sure how you’d be planning to make a profitable one. The problem is that you buy by the square footage (and the fanciness) and you rent by the number of bedrooms. As a result, the smallest condos in a given category will generally be the most profitable investments. So, if you absolutely want to spend $350k - $400k, you might as well buy two condos instead of one, which will increase your return and decrease your risk.
Now, a word about the fanciness aspect. Mexico has a lot of great architects and the quality of the construction in the higher-end of the market (in which foreigners and upper middle-class and wealthy Mexicans buy) is very good. The beauty and the quality of many developments in a place like Tulum is impressive and it’s hard to resist the call of the beautiful renderings. While it’ll make you feel great to have an exceptionally beautiful condo, you’ll have to pay a significant premium, which you’ll be unlikely to profitably recoup through your rental income.
On another note, many developers offer a discount if the buyer pays 100% of the purchase price or at least a large part of it at the signing of the contract or at the early stages of the construction. Typically, the more and/or the earlier you pay, the higher your discount will be. However, the higher your risks too (remember the two main risks I outlined above?)! The solution to that, as mentioned above, is for the buyers to pay into a third-party controlled escrow account. As a buyer, I’d have no problem paying 100% of the purchase price at the conclusion of the contract against a substantive discount provided that I can pay into an escrow account.
And for the buyers who are less comfortable with the pre-construction risks, there’s a solution too: buying through resale shortly before delivery. From time to time, I find myself on the selling end of this. When a pre-construction deal is exceptionally good, I might buy more condos than we need knowing that we can resell the surplus shortly before delivery. I actually did one such sale recently. The building was almost done and so the pre-construction risk for the buyer had completely disappeared. Yet, I still gave the buyer a large discount to have him buy from me instead of the developer and I gave him some seller financing that he couldn’t get from the developer.
Let's finish this section with an important distinction. If you buy a property for lifestyle that you might be happy to rent as well to cover your costs or even make a small profit (or not rent at all), by all means buy that more expensive beautiful property, which would still cost you significantly less than a similar property in a comparable US location. If you buy a property mostly as an investor, try to buy at the best possible price, without sacrificing excessively on the quality. This will be the main determinant of your ROI, alongside with the financing if you can get one (see next section).
3. Financing
The other and actually the main solution for buyers priced-out of the market for the lack of available cash is for the developer to offer financing.
For example, the buyer would pay up to say 50% of the purchase price by the time the property is delivered. Then the developer will give the buyer say 5 years to pay the remainder of the price. If the buyers buy the right property, the cash flow should be more than enough to cover all the costs, including that of the financing. Such a situation would result in a much higher ROI.
Beware that some developers are offering what I call fake financing. Fake financing is allowing you to pay in installments but entirely by the delivery of the property as opposed to paying 100% at the signing of the contract! This is no financing from the part of the developer. Real developer financing only exists when you can pay back after the delivery of the property.
Do you have a good deal if the developer offers it to you? All other things being equal, you do of course. However, it isn’t a good thing if the only reason behind the financing is the inability of the seller to sell without it. In the same vein, developer financing doesn’t transform an otherwise bad deal into a good deal. Therefore, developer financing in itself alone isn’t a good reason to buy a property.
On a separate but related note, judging by the questions I’m being asked, it seems like a few people are interested in buying units condo hotels. I can see the main attraction, being that you could make some nice money by having nothing to do. Personally, I’d never consider that option for multiple reasons: 1) you cannot properly dispose of your own property as you can’t rent it by yourself, 2) the price is inflated as they make you pay for the convenience, 3) the performance of your unit is completely dependent on the performance of the building as a whole and the performance of the management, 4) property management is extremely expensive and they’re going to be the ones making most of the money while you take all the risks and 5) you cannot get rid of the property managers if they don’t perform. Also, the revenue estimates are generally widely exaggerated in order to justify the exorbitant property management fees.
Finally, if people are interested, I’m happy to post updates on how my own development project works out.
I hope this helps!
Very informative! thank you
Great post Mike very detailed and to the point.
Interested in hearing more about it!
Thank you for the info! I'm currently looking in Tulum Akumal and Playa and this was extremely helpful!
You're welcome! I just sent you detailed reply to your private message.
Originally posted by @Mayra Mangual:
Interested in hearing more about it!
@Mayra Mangual I'm almost ready with the initial presentation document but I don't have your email address. Feel free to send it to my by private so I can send you the document shortly.
@Mike Lambert, I am interesting in hearing more about your development and location. You mentioned points very interesting to me such as condo hotels and getting to know about developers
@ mike lambert.
Great info here. Thanks. Looking at Maria development by Anah in Tulum. About $300k. 2bed2bath. Seems like a good location and building is supposed to be done mid 2022. What are your thoughts on that project and potential roi.
I already replied to your DM. I'm copying my answer for everyone's benefit.
I'd stay away from any Anah project. I know people who bought in one of their project in Playa del Carmen and waited for years for their condo. I saw the idle yard by myself when I was visiting. As I mentioned in my original post, this is one of the two main risks you run when buying a property pre-construction when the project isn't fully pre-sold prior to your purchase.
On a more general note, 300k is expensive for a 2bed2bath and won't give you the best ROI.
Thank you for posting—this is very informative. I too have been looking to invest in Tulum and have been looking in Aldea Zama. I know there are a lot of factors involved but curious what you would consider a decent price in the current market for a studio or 1 bedroom in Aldea Zama (pre-construction). My goal for the property would be to use when I visit (approximately 3-4 times per year) and use as a STR for the remainder. I would also be interested in hearing about your development and location.
You're welcome.
When you mentioned that the decent price would depend on a lot of factors, I assume that you were alluding to things like size, location or amenities. However, there's another factor, you and your objectives, which I don't know about. So, I'm going to speculate that, if you want to use the condo 3-4 times a year, it's probably for short vacations, whereby the property will be more investment than lifestyle for you. If that's the case, it's your ROI target that would determine what a decent price would be for you. So, you'd start by estimating the net operating income (do your own calculations and don't use the figures from the developers on this). Then, your minimum target ROI would determine what the decent price is for you.
I will send you some information on my development as requested by DM.
I know my question was a bit broad. I would be looking at combination of location and amenities. I focused in on Aldea Zama due to proximity to beach and town as well as internet. I would be working remote when I am using the property so an area with decent internet is important and I believe Aldea Zama has faster internet than other areas. Since this will be my first foreign investment I am focused on spending the least amount possible to achieve the max ROI. I am currently researching and putting together some assumptions and trying to keep it on the conservative side and not base it on some of the inflated numbers that are published. Since I will be using this for personal use as well I would be happy if I covered my expenses and returned a small profit for my first foreign investment at the beginning. That being said and as others have mentioned--there is no MLS and limited data available so it can be somewhat difficult to determine what price to pay in each area. For next steps I am planning on finding a reputable real estate agent in the area that focuses on pre-sales for foreign investors. I'm just trying to gather as much information as possible and outline a plan ahead of time to ensure that it makes financial sense before I move to the next step. Appreciate all of the information. It is helpful so I can formulate what plan and price makes the most sense for me.
Look forward to seeing the DM with with your development as well.
I know it's not that easy given the lack of information but feel free to ask me for help if you find something interesting. Aldea Zama use to be the place because of the lack of competition but that is no longer the case. Therefore, make sure you don't overpay for something there as the premium might no longer be justified. Like some other cities in Mexico, Tulum is fast becoming one of the favorite spots for digital nomads and the work from anywhere crowd so you should have good internet throughout. I've never heard anybody complaining about that or use that topic as a buying criteria. Paying more for the best possible internet connection will cost you much less than paying more for your condo.
If you buy the right property, you should reach your objective. However, you don't have to settle for it, as you could get yourself a nicely profitable investment. And that would give you a margin of safety. Indeed, if something don't go as well as planned, you could still end up covering your costs and achieving your objective. By contrast, if you buy anything that just cover your costs, that might no longer be the case if things don't go as well as you expect. In that sense, the more profitable investments are the least risky, even though this might sound counter-intuitive.
Finally, an agent can help you access opportunities that you might otherwise not know about, since there is no MLS. However, I'd use them mostly for that. You still need to do your homework because they generally have one objective only, to make you buy so they will tend to embellish the situation the same way the developers do.
I have a few things to finalize before I can send you the info on my own development but it shouldn't be that long. Don't hesitate to remind me if it takes too long in case I accidentally forget.
Good points--I will keep this in mind. Are there any other areas that you would recommend? I've been focused on Aldea Zama but am open to other areas as opportunities become availability. To you point, it's about finding the right property.
In regards to an agent, are you recommending only using one for assistance in finding opportunities and new projects that I may not find on my own? While I plan on doing my homework and research I was hoping to leverage an agent for information that may be specific to purchasing in Mexico that I may not be as familiar with as foreigner.
You can use an agent for anything like you'd do in the US, including asking him questions about the buying process in Mexico. All I was suggesting was to take any advice from him to buy a specific piece of property with a pinch of salt and make your own opinion.
@Mike Lambert always appreciate your contributions to the forums, Mike. Thanks for your “first post”. Keep’em coming. Viva la Mexico!
You're welcome and thank you for the kind words.
I figured out that the best way I can help people is by answering their questions rather than trying to guess what they want to know and write a post about it. However, if there's another topic that people constantly ask me about, that would be a good reason for me to write a post again.
Agreed--will take all info from the agents with a grain of salt and use them for more detailed knowledge of purchasing locally.
Based on your experience are there any other areas that you would recommend in Tulum other than Aldea Zama? This would be based on focusing on ROI for the short term rental market.
La Veleta, Region 15 and Region 8 would work for the right properties.
Hi Mike your post is very much appreciated, my wife and I recently bought a townhouse in region 15 (Kaah) from Menotto. I was wondering if you had a recommendation on property managers. I am currently deciding between two larger ones (“Lockey” and “Vacation Tulum”) I was also referred to some smaller ones but was interested in hearing if anyone had some positive or negative experience with PM in the Tulum area?
Thank you!
Luis
Hello, I am curious about property management companies. I have heard that the worst way to get scammed is by the company managing your rental property. Can you recommend a trustworthy company in Tulum?
You could get scammed if you deal with the wrong people. Thankfully, that's probably the minority but you should definitely be careful with who you deal with. Also, you'd want an honest and performing property management. A good property manager can make a huge difference in your investment returns and can make a difference between a good and a bad deal.
I'm going to put boots on the ground in the next few weeks so I should be in a position to give you the best name(s) then.
@mike lambert
Im looking in the Holistika area by 5th Ave at a property called Nequen. What are your thoughts on this area and development?