I am considering buying a real estate property in Cancun, Mexico and renting it as an airbnb. I tried calculating the cap rate but because the house price is so low (being bought in pesos) it's throwing off the cap rate. I converted it to the equivalent in USD but the cap rate is insanely high. Does this not work for properties bought with foreign currency?
Investor · The Americas and Europe · Member since 2016 · 1k+ posts · 1k+ votes
5y
The CAP rate only makes sense for commercial properties but I understand you want to calculate your potential return on investment (ROI), which, in this case, would come down to pretty much the same thing.
There are two property markets in Cancun / Mexico depending on the kind of buyer.
1. You have the US-style standard properties that only the foreigners and wealthy and upper middle-class Mexicans can afford and buy. These are traded in USD or, sometimes they sold by the developers in pesos (MXN) when they're primarily marketed at Mexicans. These properties are cheap for foreigners but expensive for the average Mexican. They are either rented short-term or long-term to foreigners at rates that the average Mexican can't afford.
2. Then, you have the properties that the average Mexican can afford. They trade in MXN and are cheap by our standards.
What you're attempting to do is to buy a cheap property from bucket 1 and rent it expensively in bucket 2. That would give you a huge return but it won't work because short-term renters will never rent your property because 1) it will be in a wrong location and 2) the quality of the property will be too low. If that was working, everybody would be doing it!
Conclusion: if you want to rent short-term, you have to buy in bucket 1 and your CAP rate / ROI will look like it's more normal. Mind you, if you buy the right property in the right place at the right price, you could still get a very high ROI even though you buy in bucket 1, although I'm doubtful that it could get as high in Cancun as in the Riviera Maya.