Finding the best real estate deals in Mexico needs a slightly different approach compared to the US and Canada.
In Mexico, there are no publicly accessible central records for real estate transactions like the MLS in the US or in Canada. It makes it very difficult for a buyer to know how the asking price of property compares with its market value.
On the one hand, this can be advantageous to the seller, especially if the buyer is a foreigner who is not familiar with the market. The practice of setting the asking price much above the market price for properties marketed to foreign buyers is often referred to as “gringo pricing”. On the other hand, the fact that the market is somewhat inefficient means there are buying opportunities that do not exist in your home market.
In this article, we are looking at how to get the best real estate deals in Mexico, taking that situation into account. Hopefully, this will help you avoid the gringo pricing trap and be comfortable that you did not overpay for your property. This is especially important as your rental yield and potential capital appreciation could otherwise be significantly negatively affected, especially if you use a significant amount of cash for your purchase.
Know the Market
To avoid overpaying for a property, you need to know the market and surround yourself with people who know the market and who are on your side. Never forget that a real estate agent is on the side of the seller and that they tend to look at their market with rose-tinted glasses.
In their quest to get to know the market, many would-be buyers will defer to real estate agents. They can help you get a feel for the market, especially those who do the most business. They could give you a good indication of prices in the market. They will be able to tell you the price levels of similar properties in specific neighborhoods. Indeed, it is important to note that agents only have access to their own inventory and that of the other agents they’re working with.
Beware though that their interest is for you to buy the most expensive property possible within their own inventory in order to get the highest commission. Therefore, they could take advantage of your lack of knowledge of the market. Because most foreigners make a one-off purchase in Mexico and are based overseas, agents are not motivated to do the right thing to develop a relationship or to safeguard their reputation.
We think the best way to handle this situation is to look for properties and then talk to the listing agent instead of focusing on one agent in particular. This way, you get to talk to several agents and have access to more properties. If you absolutely want to work with a single agent, the best way to find a good one is to get recommendations and interview them. This can be done remotely through phone calls or videoconferences.
There are other and even better ways to get to know the market than through real estate agents. With the advent of the internet, it has never been that easy to educate yourself and find relevant information online. Most importantly, nothing replaces having well connected people in the know in your team. This is precisely why we are here for you.
Understand the Difference Between Lifestyle and Investment Properties
It is very important to understand the difference between lifestyle and investment properties. Indeed, many people make the mistake of buying a lifestyle property as an investment and do not get their expected return on investment as a result. This is a surefire way to overpay for your property.
As the name indicates, a lifestyle property is a property that is best suited for the buyer’s own use. Indeed, the buyer will have to like the property and will therefore generally be less price sensitive buy a more expensive property. The owner of a lifestyle property might not want or care about renting his property. He will rent if he wants to cover his costs or make some profit but that will not be his main motivation. If it is a lifestyle property you are after, Mexico is a great place for that, as you will pay significantly less than you would in your home country for a similar property.
An investment property is a property bought in order to produce a return in the form of income or capital gains. Given that the capital gains are purely speculative, most investors will want their property to generate the highest possible amount of income. Therefore, they will not have to like the property, as it will be all about numbers. Mind you, a good rental property will by definition be a great place to stay in as well. 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 financing if you need and can get any.
Some properties could be a lifestyle and investment property at the same time, depending on the expectations of the owner when it comes to standard of luxury of the property and target investment return.
Buy Pre-construction When It Makes Sense
In Mexico, pre-construction opportunities are often the best deals because they allow the buyer to buy cheaper, which translates into instant equity. Moreover, the lower maintenance and operating costs of brand new properties and the lower purchase price both translate into higher rental yields.
While Mexican properties are already cheap by international standards, one of the main advantages of buying pre-construction is the possibility to buy at a significant discount compared to Mexican market prices. This will result in a higher return on investment (ROI) for those who want to rent their property when they are not using it.
As a result of these substantially lower prices, the total purchase price of a property in Mexico will be as low as the down payment on a similar property in the US or Canada. Same down payment but no debt and therefore a potentially much higher ROI! Many developers offer a very large 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 and your ROI will be.
However, buying pre-construction following the traditional approach adds some significant risks to the purchase. If you want to know more about buying pre-construction in Mexico, checkout this article.
Buy the Right Kind of Properties
In Mexico as anywhere else, the most important determinant of the value of a property is “location, location, location”. The best deals are to be found in the best locations and your market knowledge will lead you to them. A great location can be defined as a place where there is a lot of demand for renting. For example, in Playa Del Carmen, it is about being close to the beach and 5th Avenue. This is where the action is and where you will get the highest rental income.
Once you have identified the right locations, the next step is to determine the type of properties that are in demand there. By that, we mean condos vs. villas, the number of bedrooms and the size of the properties. Then, you need to look at the balance between demand and supply for that specific type of property.
Finally, once you have narrowed your search down to the right type of property in the right location, you need to look at the price and make sure you do not overpay for a lifestyle purchase or you can get your target return on an investment property.
Go for High Rental Yields
Over the last decades, Mexico has become one of the world’s biggest tourism destinations. It was the seventh most visited country in the world in 2019. Mexico has also become the destination of choice for many snowbirds, retirees, digital nomads and remote workers and that trend is likely to further accelerate. This is one of the reasons why Mexico is a great country to buy/invest in real estate. You can read this article to find out what the main other reasons are.
With an increasing number of foreign and domestic tourists, snowbirds, retirees, digital nomads and remote workers, the demand for short term rentals has been increasing at a rapid pace and there seems to be no end in sight. As anyone knows, short term rentals provide the highest income in real estate. A high demand for short-term rentals makes a perfect recipe for high rental yields.
Not All Mexican Properties Are Cheap or Great Investments
Overall, Mexican properties are cheap by international standards and they can be great investments. Yet, many are not and it is important to be able to tell the difference, especially if you want to make money with your property.
For example, I am often asked my opinion on 2-bedroom condos in Tulum in the upper $300k – $400k range. Such high prices would lead to a low ROI and would only make sense if they are bought for lifestyle and, even in that case, you could most likely find a much better deal. Such condos are meant to be second residences, not rentals. One of the problems here 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 smaller 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 (foreigners and upper middle-class and wealthy Mexicans) is very good. The beauty and the quality of many developments is impressive and it is hard to resist the call of the beautiful renderings. While it will make you feel great to have an exceptionally beautiful condo, you will have to pay a significant premium, which you will be unlikely to profitably recoup through your rental income.
Conclusion: How to Get the Best Real Estate Deals in Mexico
To summarize, Mexico is in our opinion one of the best countries to buy or invest in real estate. To find the best real estate deals in Mexico, we like to look for quality properties in great locations that will attract a lot of renters. By combining a large demand and high income from the short term rental strategy, you can generate a high yearly revenue. In addition, if you find the right property at a pretty low price compared to the market, you will set yourself up for a great deal as your ROI will be even higher.
As a rule of thumb, fancy properties do not yield great investment returns and pre-construction properties are great ways to get a discounted price. Also, remember that you buy a property by the square meter (or square footage) while you short-term rent by the room.
Of course, if you are mainly looking at buying a property for the lifestyle, investment returns will not matter as much.
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.
