The Mexican real estate market is mostly a market for cash buyers but there are options available to finance real estate in Mexico. In this article, we are looking at the main options available to foreigners to finance real estate in Mexico.
Let us note that many buyers will initially think that the difficulty for foreigners to get a mortgage in Mexico and the high interest rates are negatives. That actually does not have to be the case, as many properties paid for 100% in cash in Mexico can be more profitable than properties bought with a mortgage in the US or Canada, in particular short-term rentals in the right locations. Moreover, this kind of property could be even more profitable with a mortgage that has a high interest rate.
Mexican Banks
It can be bureaucratically excruciating at times but creditworthy people from certain countries can in theory get a mortgage from a Mexican bank. If you qualify, the conditions are much less favorable than in the US or Canada. Again, that does not mean that these mortgages are not worth it and that your investment will be less profitable. Therefore, that option should not necessarily be eliminated right off the bat.
Banks in Your Home Country
Many realtors in Mexico are suggesting that buyers can get their Mexican property financed by a bank in their home country, especially in the US or Canada. This is not true. To be clear, no bank in one country will take a mortgage on a property in another country. So, no bank outside of Mexico will give you a loan on a mortgage on a property in Mexico.
However, if you have equity available in a property in the US or Canada, you can take a HELOC (home equity line of credit) against that property from a US or Canadian bank but what you are (re)financing is the property in your home country. You are actually tapping into the equity of your property and you can use the money for whatever you want, including going on holiday if you want. So it’s exactly the same as if you were paying 100% in cash because the equity in your property is basically cash.
If you have equity in a property in your home country that you are never going to use for any other purpose than buying a property in Mexico, by all means, take advantage of the HELOC’s low interest rate and use it to buy your Mexican property. If you’re an investor though, if you use your HELOC to buy a property in Mexico, you will not be able to use it to buy another property in the US or Canada. As any astute investor knows, the only way to use leverage on a property is to take a mortgage on that specific property to tap into the equity of the property you are buying. Taking a mortgage on another property is exactly the same as paying cash from an investment/return point of view.
Using Your Retirement Account
Like with a HELOC, using your retirement account is akin to paying 100% in cash. You’re basically using your own money. It’s like when banks give you a loan that you can use to buy a property against your cash or securities as collateral. You’re basically borrowing your own money. There is no other people’s money (OPM) and therefore no leverage involved here.
Cross-Border Finance Companies
They often advertise 2-3% interest rates when, in reality, when you understand the structure of the loans, the real interest rate is more like 10-20%. I don’t know how many people use those but you’d have to be smart and good in mathematics and take the time to figure this out and I’d suspect many people don’t realize it. There is no secret in finance. The cost of funds for these companies is much higher than that of the Mexican banks so there is no way they can charge less for their mortgages than Mexican banks, whose mortgage interest rates are much higher.
Seller/Developer Financing
While it’s not that common in Mexico, it’s possible to get seller financing. Case in point, I have actually sold property with seller financing in Mexico as a buyer offered me a great deal.
One particular category of seller financing is developer financing. Developer financing occurs when the developer allows the buyer of a pre-construction property to pay part of the sales price in installments after the property has been delivered. This has never been common and it’s even less common today because the Mexican real estate market is red hot in the most popular places.
Beware of what I call fake developer financing. True developer financing starts after your unit is delivered. Anything else is not developer financing. For instance, if you pay in installments in full before the unit is delivered, there is no developer financing involved. Financing should only be called that way if you are able to use the profits from renting out the property to pay off the financing.
Also, even if the developer financing is real, it does not make up for a bad deal. It is by the way possible that a developer would offer developer financing because he has not been able to sell well without it. This is obviously a red flag.
If you want more details about how that kind of financing is structured, feel free to contact us. Indeed, we are actually going to offer financing in our upcoming developments. We are going to offer it from the beginning, not as a trick to increase our sales later on.
Also, if you want to learn more about buying pre-construction, check out this article about buying pre-construction in Mexico.
Conclusion
To conclude, there are options available to finance real estate in Mexico. You could get financing in Mexico but it is going to be more expensive than in the US or Canada and the LTV will be lower as well. This can work if you buy the right deal but it most likely will not work if you buy the average deal in the market.
You actually have several options. Our personal favorite is developer financing if it is available. Make sure that it is not fake developer financing though.
If you want more information on this topic or any other topic pertaining to buying or investing in real estate in Mexico, reach out to us through the contact form.
