“Is Mexico a great place to invest in real estate?” This is a question we often get asked.
With a population above 125 million, great weather, beautiful scenery and authentic Latin American culture, Mexico is among the 15 largest economies in the world and the second largest in Latin America. Does this make it a good destination for your investment dollars? In this article, we look at the many reasons why we think that Mexico is definitely one of the best countries to invest in real estate.
A Rising Middle Class
Mexico’s economic rise in recent years is largely due to its participation in the North American Free Trade Agreement (NAFTA). NAFTA was established in 1994 and allowed for free trade between the United States, Canada and Mexico. In July 2020, the agreement was revised and renamed as United States – Mexico – Canada Agreement (USMCA).
The country’s economic growth is far from over. According to PwC, Mexico’s economy will grow to become the 7th largest in the world by 2050, and will have surpassed that of Japan and all European countries.
The economic growth has already translated into more job opportunities at better wages which, in turn, has resulted in higher income, wealth and standard for the Mexican middle class. According to the latest available figures, it accounts for 47% of the country’s total population and keeps growing.
The long-term effect of the rising middle class on the local real estate market is powerful and dramatic as the number of people who can afford to purchase a (bigger) house substantially increases. This is especially the case for Mexico, given the size of its population. The resulting increase in real estate values in Mexico has therefore some real substance behind it. This is very different from what is happening in places like North America or Western Europe, where prices get ever more disconnected from rents and have been mainly if not exclusively rising strongly because of artificially maintained ultra-low interest rates and also the supply shortage of properties as a result of the Covid-19 pandemic.
A Booming Tourism Industry
Over the last decades, Mexico has become one of the world’s most visited countries. It was the seventh most visited country in the world in 2019. Then, Mexico’s openness to visitors during the pandemic catapulted itself to the third spot in 2020, almost tying for second place with Italy. It is not difficult to understand why. Beautiful beaches, tropical weather, rich culture, authentic food and reasonable prices are just a few of the many reasons attracting travelers to Mexico in ever bigger numbers.
The Mexican government has been a genius at capitalizing on these factors and bringing tourism to the country and there are no signs of that changing any time soon. They have a tried and true recipe that works without fail, spearheaded by Fonatur, Mexico’s national trust for the promotion of tourism. They identify a location, invest massively in infrastructure, which gets the large hotel chains on board and then invest massively in marketing to bring airlines and visitors. Few countries have the means to compete against the juggernaut the Mexican tourism industry has become and the proximity to the US and Canada.
The best example of this is the incredible success of the Riviera Maya. 40 years ago, Cancun was merely a coconut plantation. Today, the Riviera Maya is one of the most visited locations in the world. Pretty much every hotel chain has a presence there and a large number of airlines fly directly into Cancun International airport, which keeps growing. The government is not resting on their laurels though. They are now building a high speed train through the Riviera Maya and are going to build a new airport in Tulum.
Fonatur is repeating this recipe all over the country. The other main locations that are the recipient of massive government and foreign investment are the Puerto Vallarta – Riviera Nayarit and Cabo areas. There are some emerging areas as well, like the Oaxaca coast for example. When it comes to this, other countries competing for tourists have fallen asleep at the wheel.
Visitors traditionally came during the winter from the United States and Canada due to the proximity and better weather. Nowadays, they come from all around the world and all year round. This, together with the huge and ever increasing number of tourists visiting the country makes Mexico an ideal location for owning short-term rentals, which can be very profitable indeed.
A Growing Number of Visitors Beyond Tourism
Mexico has also become the destination of choice for many snowbirds and that trend is likely to accelerate as well. Indeed, places like Florida and Arizona are becoming more and more crowded and expensive and, unlike in Mexico, nice and hot weather isn’t guaranteed all year round.
Mexico is the largest overseas retirement country for Americans and Canadians retirees. An increasing number of them are retiring to Mexico and that trend is unlikely to stop anytime soon. Sadly, it is forecasted that most of them will not have enough money to retire comfortably in their home country. Money, whether from social security checks or other sources, will go a lot further in Mexico and therefore most people can significantly upgrade their retirement lifestyle when moving to Mexico. To be clear, it is not only about the money that goes a lot further. Mexico offers a great climate, a nice lifestyle away from stress and pollution, the proximity to the US and Canada and the presence of many of the facilities that Americans and Canadians take for granted like Costcos or Walmarts and that make them feel at home.
For similar reasons, Mexico has been one of the preferred destinations for digital nomads. According to a study published on the Forbes website before the pandemic, already 4.8 million Americans considered themselves digital nomads then and experts predicted that, by 2035, there was going to be one billion digital nomads on the planet. The Covid pandemic has undoubtedly accelerated that trend. The digital nomads have now been joined by the remote workers.
While the sheer number of tourists make Mexico the perfect place to earn short-term rental income, snowbirds, retirees and “work from anywhere” people are great for medium-term rental income. They all provide support and a substantial tailwind for real estate values.
The Best Possible Regulatory Climate
Short-term rentals represent the most profitable type of real estate investment in Mexico. This is especially true given the number of visitors in the country. In places like in the US, Canada or Europe, there is a trend towards stricter regulations that drastically limit the profitability of short-term rentals when they haven’t become downright illegal. This is unlikely to change anytime soon, given the shortage of long-term rentals and the increase in long-term rents in many locations. Add the HOA restrictions on top and you can forget about building wealth through short-term rentals there.
Contrast that with the situation in Mexico, where short-term rentals are unregulated and that’s unlikely to change anytime soon. Indeed, there is absolutely no rationale behind short-term regulations or restrictions there. Short- and long-term renters do not compete for the same properties. Only hotels would have a vested interest in curbing short-term rentals but they have very high occupancy rates so they are not that bothered by the competition. Moreover, the various levels of government in Mexico support short-term rentals as these bring substantially more visitors.
For a short-term rental strategy, having a favorable regulatory climate is key. That is one of the biggest contributing factors making Mexico a great place to invest in real estate.
Much Lower Prices and Costs
The building quality in Mexico is top notch and Mexican architects are as good as their American and Canadian counterparts. Yet, similar properties are much less expensive in Mexico than in the US or Canada. While Mexico is already much cheaper than Florida, the comparison is even more striking with California, where a similar property would typically cost several times more.
Oftentimes, 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 return on investment in Mexico! Add to that that there are no bidding wars and you do not have to pay way above the asking price in Mexico, which makes buying/investing there look even more attractive.
It’s not only the real estate prices that are much lower in Mexico. The property-related costs are significantly below those in the US and Canada as well. That includes the operating costs when using the property as a (short-term) rental. The icing on the cake is the property tax, which is close to 0.
Diversification, Lower Risks and Asset Protection
For investors who do not own property overseas or only have a small portion of their assets outside of their own countries, buying property in Mexico actually reduces their overall risk because of the diversification it procures.
Moreover, buying property in Mexico itself is way less risky than many people think. One could argue that it is actually less risky to buy in Mexico rather than in the US or Canada today, when American and Canadian prices, propped up by cheap debt, have gone up tremendously (and are way overpriced in many markets according to several metrics) at a time when interest rates are about to rise significantly. Because the overall majority of buyers in Mexico are paying cash, the market there isn’t artificially inflated. Therefore, the risk of mass foreclosures and an ensuing downward spiral in prices doesn’t exist.
Many people 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 necessarily. As we mentioned above, 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. And the profitability would allow for a more expensive mortgage in Mexico. For the options to get financing to purchase your property check out How to Finance Real Estate in Mexico.
Let’s note that the currency risk is very limited. Indeed, the properties bought by foreigners trade in USD and are rented in USD. Only the costs would increase if the Mexican peso would significantly strengthen against the USD. However, the impact would be limited given the low level of those costs.
Buying property in Mexico also gives you the benefit of asset protection. Indeed, you don’t have to declare the ownership of foreign real estate to your government since property taxes are paid to the Mexican local government. While you do have to declare any taxable income you’d earn on your Mexican property, you don’t have to disclose the precise origin of that income.
While your property will be pretty much out of reach of your government or creditors by virtue of being overseas, most foreign buyers in Mexico get additional asset protection without knowing it by purchasing through a fideicomiso. This is because, in that case, the name appearing on the property title in the property register will be the bank’s, not yours. Therefore, nobody will be able to find out which property you own unless you tell them.
Bear in mind though that laws change and that we aren’t tax advisors so make sure you get proper legal advice before taking action based on the information we’ve shared here.
Conclusion: Why is Mexico a Great Country to Buy or Invest in Real Estate
With an increasing number of foreign tourists, snowbirds, retirees, digital nomads and other work from homers, the demand for short-term rentals will likely continue to accelerate. Short-term rentals provide the highest income in real estate. Coupled with low property taxes and operating costs, this results in a pretty significant return on investment.
The profitability of these properties pushes more and more foreign investors to buy. They are joining the foreign buyers of second homes. The rapid rise of the Mexican middle class has made quality properties affordable for them too. These three sources of demand should ensure healthy capital gains going forward, on top of the juicy rental yields.
To conclude, all the factors mentioned in this article make Mexico one of the world’s best locations for real estate investment dollars.
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.
