Investing in Mexico the smart way
For most people buying property in Mexico, it is for an investment. It might be an investment as a rental property and part for your own personal use or as an investment that you might sell in the future. At any rate, you probably will want to know if you are making a good investment. In many countries around the world, property is seen as a fairly reliable investment that appreciates in value over time. How does investing in Mexico differ from other countries? Well, as the expression goes, it is a whole different market. Mexico has a lot of differences to other countries when it comes to real estate.
What happens over time to property values in Mexico? How can you make a smart investment when buying a property in Mexico? We will discuss this in this article.
Properties that almost always appreciate in value
There are two main types of property in Mexico that are fairly reliable in terms of appreciating in value. The first is beachfront property and the second is land. Both types of these investments have something in common, limited supply. Of course where you buy either type of these properties is important in relation to how good an investment it will be.
Beachfront properties in Mexico
The saying in real estate is ” There is only so much beachfront” and that means it will be sought after. Beachfront land and houses rarely lose value and this is the case in the Riviera Maya. There is actually not that much available to individual investors. For example, in Playa Del Carmen there are only a handful of houses on the beach (found in Playacar Phase 1). Most beachfront properties in the Riviera Maya are occupied by hotels or large parcels of privately owned land. Condos with great beach views and are in fact beachfront do work well for an investment because they always attract renters and hold more value due to the fact it is beachfront. Although we will say that privately owned land or property on the beach has the best potential as an investment because you have more possibilities with it.
There are still a few places individuals can get beachfront land or houses in the Riviera Maya. They are in exclusive areas and demand a premium price, but many say living with the Caribbean at your door is priceless. One of the most sought after areas is between Tulum and Playa Del Carmen. In the past eight years beachfront land and homes have been snapped up due to demand and growing wealth in the area.
Buying land or land banking
The same expression goes for land, there is only so much of it. In Mexico land is more limited that you might think. Let us explain. Not all land in Mexico has a title. Some many areas of Mexico are set aside as communal land and overseen by communities. People are allowed to use it and live on it, but not sell it to people outside of the community because it basically belongs to the community and not one person. This type of land is called ejido. Most towns and cities have plots of land that are all titled. Rural land often is ejido and not available for purchase. Hence, this type of arrangement in Mexico supports land supply for locals, but not for sale as an investment.
This arrangement in Mexico makes titled land even more valuable because there is less available. If you are looking for land, it is best to make sure that all the paperwork is correct so you have a clean title and ownership. This is normally done with a lawyer and by the notaria overseeing the transaction. Of course a good realtor will only list and show land that has been verified to have a clear tittle.
Where land investments have been profitable
Here are some local examples of investments that have worked well for people here in the Riviera Maya.
In Playa Del Carmen
Buying land in and around towns can be a good investment if you buy in a location where development is coming that way. Not all land is going to be in a good location to purchase it. Some good land purchases have been in Playa Del Carmen where there might have been a house. The lot is cleared and eventually a three or four story condo building goes up. We have a whole article about it here.
Knowing what areas are developing and the direction development is moving is a key way to know where to invest. For example, Playa Del Carmen has been moving northward over the past 5 years or so. Many of the blocks between 5th Avenue and 30th Avenue from 34th to CTM Avenue have been in a transformational period. Many of the small houses have been sold and condo buildings have been going up.
Buying land in Tulum
In the early 2000’s, people started to buy land in Tulum. This process was called land banking. They were banking on Tulum growing and the value of land to rise. At first, this seemed a little iffy because Tulum was a small town where many people came to Playa Del Carmen to shop because lack of basics in Tulum. Those that held the land really have gotten the payoff from it. Land in Tulum has doubled, tripled and even quadrupled in recent years.
Buying land in a developing area and doing so with a knowledge of what is possibly going to be developed in the near future, is a good way to have an investment that will appreciate in value. We have a good video about Tulum and what is going on in the real estate market now in this article that you might be interested in.
Tip: If you want to buy either land to build a house, or just to hold on to it as an investment, it is best to do so though a good realtor. It is very hard to shop for land online because there are a lot of posts for lots in developments and independent owners that are putting whatever they want online (accurate info or not). Land purchases need to be scrutinized more due to many factors in Mexico to be sure you are getting a clear title. Often times with family owned land, there are disputes or difficulties getting all the signatures and approvals.
Hot Tip: How to get a jump on property appreciation
There is a third type of property that can jump up in value fairly quickly. This is presale condos, but not just any presale condos. Often at the very first public announcement of a project, there is an offering of units to friends and family. This is where the first units are reserved and often which are often the best ones. From the time the project breaks ground to completion, many of the units have appreciated in value. This can mean that the market value of your investment has already gone up a possible 10-15%. Of course, there are many presale offers out there, but it still takes a good real estate agent to guide you to the better options.
Property appreciation in Mexico
In many places there is a general and gradual increase in value of real estate investments. For example, in the United States a general average is somewhere between 3% and 5% yearly gains. This of course varies greatly on individual areas and how value is calculated. There can also be downturns in the market and values undulate, so how is Mexico a little different?
Real estate bubbles and prices
One of the main differences in Mexico is there are not price swings in the real estate market it is the fact it is mainly a cash market. There are no real bubbles that form and burst, creating undulating prices. There are factors that affect how strong the market is and this might affect rental income but not wide price swings.
Many have noticed that condo prices seem fairly similar over the past few years. Even with a fairly strong market prices have seemed relatively similar. One important note about this is the size of the condos. Prices have stayed similar but the actual square footage is less. Many newer condos are smaller, but often have more public spaces.
Mexicans have traditionally invested in real estate as a way of keeping wealth stable. This was the case in the 90’s when there was a devaluation of the peso and also in the early part of 2020 when the corona virus was hitting the financial and currency markets. This is evidence of people confidence of stability of value in real estate.
Fees and cost of buying property for investors
One thing that slows down people from buying and selling a property rapidly in Mexico are the cost of fees. There are the traditional closing costs like anywhere, but there are also bank trust fees (fidecomisco). Since most investments are within 50 kilometers from the coast in Mexico, a special bank trust needs to be set up. Buying a property and flipping it will need this cost calculated into the equation. For part of this reason, most investors buy and hold properties longer.
Condos over time
The Riviera Maya is always moving forward and is still developing at a rapid pace. This means that each year the styles of condos change and over a period of a 5 or ten years, there is a noticeable difference is the style and age of the buildings. Most people renting, both short term and long term, prefer the newer condos for their conveniences and feel. This means that older condos loose their appeal to renters, hence making it harder for investors to rent.
In most traditional real estate markets, there is a payoff after paying the mortgage, but in Mexico the payoff is more on the front end. Since most investment properties are bought with cash, there is no mortgage. Most investment properties get the most return in the first few years. As condos age, they often are not prime rentals and the returns go down.
Cost of owning a condo long term
Construction methods in the tropics are different than many places people move from. The building methods are more basic and have less types of materials used in construction. Most construction consists of concrete blocks and lots of concrete. Concrete is a durable material, but the ocean air, humid climate and hot weather can all take a toll on a building. Wiring starts to go bad, AC units need to be upgraded, plumbing fixtures get mineral buildup and more. Some of these things are easy fixes, but other things can mean a big repair bill or mounting condo association cost. Smart investors and some buyers know that these repairs will be coming down the road when a condo is aging. Because of this, the appreciation of the value of a condo is tempered by the repairs and maintenance cost.
Houses in fraccionamientos (planned communities)
These types of neighborhood are good for lower and middle class Mexicans to enter the property ladder. These neighborhoods also can appeal to some foreigners on a budget, especially those with children. These types of properties normally hold value, but also appreciate more slowly because the similarity of the hundreds of same units in a community. Your property value is more connected to the entire area since you basically have one of a hundred of the same houses.
Five things that appreciation depends on for fraccionamientos
- What are the bylaws about changing the use of the houses? Can storefronts be added? Often this makes a neighborhood less desirable and has less curb appeal. Different developments have various regulations to what you can do to your property.
- Where is the neighborhood? Some older planned communities that were close to the center of town are now part of the center. This has made their value go up because they are more desirable.
- Is the neighborhood targeted at young families with children or older couples? Neighborhoods that have older residents tend to be more established and are maintained better.
- Have a lot of people renovated or done things to make their properties different? Some neighborhoods have changed for the better over time and have added to the charm of the area. Some areas almost look like a different neighborhood with individual looking homes.
- Having parks, large trees and green spaces adds to the value of the area.
What about renovations or remodeling to improve value?
Since a large chunk of properties that are bought as an investment in Mexico are condos, there is only a small area of improvement you can do with remodeling. Physically the interior of the condo is the only area you can tackle and the state of the building as a whole and the appearance of the other units are out of your control.
Renovation costs are lower in Mexico, mainly due to labor cost. Materials are less expensive, but not drastically due to globalization. If you do some updating to your unit that is a rental, normally you can recoup the investment in rental popularity and price, however you won’t see much in appreciation of your property value.
If you are using your property to live in, some renovations can actually depreciate your value of your home. Customizing your home or condo might suite your likes, but might alienate potential buyers. We have seen some very customized condos with murals and very Mexican décor added that sat on the market for a while. The units were just not what a majority of buyers were looking for.
Home renovations and appreciating value in Mexico
For the smaller group of people that end up buying a home and are planning on renovating it, this option is fraught with speed bumps to appreciating values. First of all there are no “fixer uppers” in Mexico. Houses are houses and sold as-is and even in a run down state they are sold as a functioning house. It is usually is better to just build a house on a plot of land.
Secondly, anyone doing extensive renovations in Mexico needs to know the laws regarding manifesting the expenses so you can write it off the capital gains taxes. This is not the easiest of processes and you might end up hiring an accountant to handle this. Even if you are an experienced builder or have worked with construction before, Mexico offers a whole different set of circumstances. Building methods are completely different from many other areas, materials are different and how labor works in Mexico is different. If you are someone familiar with renovations, you still might find yourself near square one with a large learning curve.
In general, smaller home improvements and renovations can add value for you, but not much of a return if you are going to sell it. If you are buying a property as an investment, it is better to buy in a good location and buy something that is more desirable as a rental that will bring you returns.
Where the value comes from investment properties in Mexico
For the hardcore investor many look at the ROI (return on investment) in the form of rental income. It normally does not come from the appreciation value of the property and potential sale to get a great return. You will see ROI mentioned on almost all billboards and magazine ads, advertising real estate in the Riviera Maya. Since most people want a condo to rent out most of the year and then come visit the other part, rental income is focused on a lot. What do you actually get for ROI? You might want to read our article about it that speaks some truth about what to really expect. It is a complicated equation and varies from condo to condo and how your property is managed.
ROI is not everything though. Part of real estate is a passion. If you are going to be living in your property or perhaps just visiting for part of the year, you still should love your place and have a passion for it. Having a space you love and location that you can lead a lifestyle you want is worth a lot more than money in the bank. Quality of life and having a place in Mexico can add a lot of value to your life.
Property values of investments in Mexico are affected by many factors, construction methods, demand, type of neighborhood and what new construction is offering. If you buy a property that you plan on using for you, examine your personal circumstances to see what fits you best. Property prices are fairly steady in Mexico and do not move and sway as much as other markets. Most investors focus on rental income of an investment property rather than counting on selling it for huge gains. Real estate investments in Mexico have worked well for many in comparison to other types of investments, but it does come with homework. Remember, investing can mean more that just putting money toward something. It can also mean investing in a quality of life that you want and want to share with others.
For more articles about real estate in and around the Playa Del Carmen area, see our guide here. We also have articles like How to get off on the right foot with a realtor in the Riviera Maya. We write these articles to help out our readers. Since don’t sell real estate we try to answer any of your questions for you in an honest way. If you have any questions, feel free to post below or send us an email.