Investing in Tulum, Mexico

37 Replies

This would clearly be a very risky move, but has anyone considered buying a vacation rental in a vacation based rental market such a Tulum, Mexico?

Unlike certain sub markets in the US that are very hot right now due to low inventory and high demand, I feel somewhere like Tulum may offer deals that cannot easily be found here in the states (or at least where I am in Annapolis, MD).

I’ve done some quick research and there are most definitely discounts to be found... the question is, when will tourism return to normal? Could be months, could be years...

Full Disclosure - I love Tulum and would love an excuse to own a condo there to visit.

I looked into buying in Mexico. The biggest disadvantage that you will face there is the near complete lack of financing options. You will probably have to make the purchase in one lump sum cash payment. If you do manage to finance it, it will be at a high interest rate with 50% down, and a 5 year term. All of that combined usually means a leveraged buy in the US will give you a better ROI/ROE.

@Ricky Cassidy

A few points here:

1. Would you rather have bought US property in 2009 in the midst of the Great Recession or right now? Have you heard about "buying when there's blood in the streets"?

2. Let's say you buy today and you miss one year or even two of rental income. Unless you flip (and Tulum isn't a place for that), you're gonna buy and hold. In that case, your future profitability is going to be much higher if you just miss one or two years of income but buy much cheaper. It's mathematics.

3. The holding costs are very low and, if you're like most buyers, you're not gonna take a mortgage. Therefore, the reduced income during Covid needn't be that much of a problem for you.

4. Aren't you lucky that you want to buy a vacation property in a place that you love and where it could eventually be paid off by your tenants? If you buy because you want to own there as opposed to being a pure investor, you can care less about the state of the market and take advantage of a bargain if you find any.

Or maybe, you prefer to wait that the tourism and market fully recover and pay top dollar?

@Brian Harker

It depends on the deals, on both sides. You bring a good point, even though I don't necessarily agree with it (again, it'll depend on the deals). This is because your cash flow can be strong enough to repay your mortgage within the 5 years. Compare this with a US property for which you have to wait for 30 years or even 15 to get a decent cash flow out of it. I just sold one of our properties in the Riviera Maya with high interest rate seller financing and I can tell you that the buyer got a killer deal, assuming that he'll be a decent short-term rental operator.

@Nicholas Herold

Let's be clear. Mexico hasn't done a great job handling the coronavirus thus far. The US has by far the largest number of cases though. Would you not buy a property in the US because of that? I wouldn't think so.

Let's not forget and hope that the worst effects of the virus will be temporary. It's therefore questionable whether it should affect long term investment decisions that much.

@Mike Lambert . Good points, despite being a bit snarky. Since the investor will be paying cash, it's a different ballpark, and one that I've never played in. That being said, there are more points on a curve than the bottom and the top. I think it depends on your appetite for risk. I prefer to make my investments when the market is going up, not going down. You pays your money and you takes your choice. For example, I'm not going to invest in single family properties right now in Maine both because because the prices are high and also because I want to have cash when the market seems to have bottomed out. 

@Nicholas Herold

I'm not sure where the snarkiness but, if there is any, it was involuntary.

You're bringing some good points too. You're assuming that the bottom in the market is still to come. The fact is you don't know. It might have passed and you might then have to contend with even higher prices going forward. It makes me think of all the investors who waited for a lower bottom on the stock market and missed on big gains as a result. Personally, I don't know what prices will do in the future so I work with what I can control. I look at current prices and I see whether I can make them work or not.

The current downturn is pretty unique as there is a binary outcome. If a vaccine gets approved, the discounts offered might be disappearing in a heartbeat as sellers know that the economy and the market will recover (further). I'm an optimistic person by nature and I know that there is a huge effort being made worldwide to come upon with vaccines and solve the problem. I refuse to believe that lockdowns and mitigation measures will be with us for an extremely long period, until proven to the contrary. And I invest accordingly.

I totally agree with you that you shouldn't necessarily overpay for properties to so, in your market, staying on hold like you're doing might be the best approach.

@Mike Lambert . Thanks Mike. To clarify, I am not assuming that the market is still headed down. I am not qualified to make any assumptions about the real estate market in Mexico, the only market I'm familiar with is certain areas in New England, and there are many micro-markets here I wouldn't make any assumptions about.

My entire point point is that it is certainly possible that the market is still falling, and to illustrate this, I am demonstrating that I am voting with my feet--I am not planning to visit Mexico as a tourist this fall, despite the likelihood that I will forfeit the fare. As a tourist, I don't feel like I will be able to ensure that my family and I will be safe. There are plenty of yahoos in Maine who don't feel they need to wear masks, both customers and shopkeepers, but I know that I can choose to buy my staples elsewhere. When will I go back to Tulum--an area that I adore? We'll see. I'm not willing to risk myself and my family. 

Am I unique in wanting not to increase my risk of being exposed to a deadly virus? That's unlikely.

@Nicholas Herold

The Riviera Maya has reopened and was the first international tourist destination to obtain the seal approval by an international organization for implementing safe protocols. Since the reopening, tourism has been on the up but it is nowhere to where it used to be. Many people like yourself won't travel yet and we can hardly blame them.

This is besides my point though, which is this. People who own property in Tulum are in the overall majority well-to-do and therefore less affected by the virus. Even if there was no tourism, the holding costs are extremely low and they generally have no mortgage to pay down. Some hold the property (partially) for the rental income but many do not. There is no reason why tourism shouldn't come back one the health situation improves significantly so property owners are under no pressure to sell when the market is down. For that reason, it's highly possible, if not likely, that the market won't drop any further from here, even if tourism takes time to come back.

To me, the main issue with Tulum isn't Covid, which is temporary. As I have mentioned several times on this forum, the issue with Tulum is that there's a huge amount of new supply coming up over the coming years, which will create competition and could exert downward pressure on rental rates depending on the further growth of tourism post-Covid. I'm regularly getting opportunities to invest off-market in the best projects in Tulum but I haven't pulled the trigger on buy-and-holds because of that. I'd buy in Tulum and resell with seller financing to create opportunities for buyers who can't or don't want to pay all cash. However, what I tell potential buyers (even if it's again my own interest) is that, as a final buyer, I'd buy in Tulum if I want to own something for my own use and then my financial objective would have to have at least all my costs covered. That should be easy to do if I own the right property there, even if I'm the worst short-term rental operator. If you have a great property and are a great short-term rental operator, you could make a nice profit. When it comes to that though, beware of the competition and make sure you own a best-of-breed property.

@Ricky Cassidy

You're welcome.

You generally get the best deals when you buy pre-construction but you put the finger on one of the main risks. You can go around that by doing your due-diligence and look at the track record of the developer.

For example, I bought a few pre-construction condos in the same development in Playa del Carmen a couple years ago. While I didn't know at the time that it'd be the case, the development is completely sold out, even though it's only gonna be finished by the end of next year! Given the developer's prepayment policy, it means that the developer is pretty much guaranteed to have enough money to complete the development. Even if that wasn't the case, I know that the best-in-class developers belong to v very wealthy families so they could most likely complete the development if they hadn't sold a single unit.

Of course, you don't always know about the financial situation of the developer. Yet, if the majority of the units are already sold, your risk is much lower, assuming that the developer isn't a crook. That's why I only do business with developers I personally know and am connected with. Of course, most buyers don't have that sort of connections but they can compensate for that by doing a proper due diligence. 

Be very careful! I bot one in Tulum and just got title deed this week. It was a long way. I started to regret about the purchase decision I made almost immediately after I signed the contract. If you really want to buy, I would suggest only working with large renowned developer. Mexico real estate is a cash market, a 2-bed condo in Tulum usually sale for ~200k. If you ask me today, I would use that cash to invest in Florida. At least you have peace of mind not having to worry about being scammed by your lawyer, real estate agent and the developer....

Originally posted by @Yan Wang :

Be very careful! I bot one in Tulum and just got title deed this week. It was a long way. I started to regret about the purchase decision I made almost immediately after I signed the contract. If you really want to buy, I would suggest only working with large renowned developer. Mexico real estate is a cash market, a 2-bed condo in Tulum usually sale for ~200k. If you ask me today, I would use that cash to invest in Florida. At least you have peace of mind not having to worry about being scammed by your lawyer, real estate agent and the developer....

Yan Wang, thanks for sharing your experience with us. How long did it take for the development project to be completed? How much time elapsed since you started paying for the property at a pre-development stage until you were handed the title deed?

 

I singed contract in Jan 2019. it took about 1 year and 3 months for the project to get completed. I paid 70% for the property when signing the contract. Then 20% 2 months after. I paid the final 10% in August. Part of the reason I get the deed today is because the pandemic and risk of traveling to Mexico

@Yan Wang

I'm not sure what's horrible about your buying experience. You're not supposed to get the deed title before your unit is ready for delivery and you have paid the amount it full, like anywhere in the world. I assume you paid the last 10% upon delivery. If it's the case, yes it might feel a bit long between August and November to get the title but, if you got the unit, I don't see why you wouldn't get the title. And yes, the area was strongly hit by Covid so you should have expected delays.

I'm sure you can find many Americans who had a "horrible" experience buying in Mexico, like you could find many Americans who had a "horrible" experience buying in the US. The fact remains that Americans and Canadians have been buying properties in Mexico for decades in ever greater numbers and numbers don't lie. If it was that horrible, they just wouldn't do it. Or maybe, some buyers think that their experience is "horrible" just because they haven't figured out that Mexico, still being a developing country, has a less efficient bureaucracy than that of the US. Finally, the idea that all Mexican lawyers, real estate agents and developers are scammers is a fake preconceived idea. There are many great professionals in Mexico and actually a few of them are Americans who moved to Mexico permanently.

One of your conclusions is right though. You should still do business with people you know you can trust, especially when it comes to the developer. I can imagine that you were a bit skittish after giving 70% of the money to the developer against a promise on paper. I don't do that. I buy from developers I know and trust and I typically put 20% down and 30% progressively during the construction against progress reports - and the occasional visit if I feel the need or want to enjoy the beach :). Only if I was getting a huge additional discount would I be ready to put up to 100% of the money down with those developers. However, because they are not planning to scam me and their own money is enough to complete the project without a single buyer, they don't need more of my money. At the end of the day, whatever country you invest in, the onus is on you to find a good deal!

As to your other conclusion that you had better bought in Florida, it really depends on your objectives. It'd had been less risky but you'd have to pay much more for a like-for-like condo in a prime location (not to mention the much higher cost of living) and contend with an inferior weather in the winter. As the saying goes, you can't have the cake and eat it too.

Hopefully, you get your title in November and you can enjoy your condo in Tulum for years to come, after which you might get to view beautiful Mexico in a different light. Most importantly, be grateful that you had the chance to buy a 2-bedroom condo for 200k in a prime Caribbean location. It's pretty rare and most people don't even know that it's possible.

@Mike Lambert

I had no intention to argue on this topic. Usually I don't write on public forum. This might be the 2nd or 3rd post in my whole internet history..Yesterday I randomly came to this place while I was in search of a PM in Tulum. When I read @Ricky Cassidy post I just want to tell him be cautious when purchasing a property in Mexico, since I don't want to see him make the same mistake I had made, and that's all..

I agreed with you on most of your thoughts. But let's face it, in Mexico, foreign buyers have much less protection than in counties like US and Canada..

@Yan Wang

I wasn't arguing with you. We're just having a healthy discussion, which is the whole idea of a forum like this one.

Hopefully this doesn't discourage you to keep posting in forums. You had a good intention and you were absolutely right about posting. However, as much as it was right for you to tell people to be careful with investing in Mexico, it was right for me to mention that you most likely won't have a bad experience if you know what you do and if you're careful (as is the case anywhere for that matter).

Unlike in certain other countries, foreigners have the same rights and obligations as Mexicans under Mexican law when it comes to property purchase and ownership (apart from the fact that they need to use a trust or a corporation to hold property in certain areas of the country). Therefore, both Mexicans and foreigners are equally protected under the law. Yet, by the simple fact that foreigners are not in the country and might not know the laws and the language, their risk of buying in Mexico is higher than if they would be buying at home, as I acknowledged in my previous reply (and yes, there's a higher risk of corruption and they could be taken advantage of, being a gringo).

I'd agree buying in Mexico isn't for everyone and you that you need to do what you're doing even more than you do at home. However, I wouldn't suggest that it's likely to be a horrible experience because, most of the time, it won't be. Let's not forget that, more than ever, Mexico remains the number 1 overseas retirement destination for Americans and Canadians and many buy property there, as second residence buyers do in ever greater numbers. It's the dream of many to own a piece of property in a place like Tulum or elsewhere in Mexico so I wanted to make sure we don't shatter their dreams by giving them the impression that anybody investing there will likely have a bad experience. That's all.

Originally posted by @Yan Wang :

I singed contract in Jan 2019. it took about 1 year and 3 months for the project to get completed. I paid 70% for the property when signing the contract. Then 20% 2 months after. I paid the final 10% in August. Part of the reason I get the deed today is because the pandemic and risk of traveling to Mexico

 That's fast construction in my opinion. Almost lightning fast as compared with other countries. The payment calendar is odd, though, advancing so much money. That's shocking.

@Yan Wang Thanks for sharing the story, I believe if you want to invest out of country, I would suggest getting a local partner to support you or someone that is willing to share the risk or has the experience in the local market.

As of now I am investing in Mexico ( north  close to the border) in construction and so far it seems to be turning well, again my advantage is that I know the builders, and spanish, making it easier for me to figure out what's going on.

Yan I would like to learn more about what other issues and risk did you see, I still think they could have easily ripped you off since you paid 70% in advance.

@Tomas Barrios

Having a local partner makes sense and is almost a necessity when you do property development but only a tiny minority of the people here would ever do that overseas. When, like @Yan Wang , you want to buy a second residence to use for yourself and/or rent, a local partner makes no sense.

@Juan Pardo

The payment calendar is absolutely not odd or shocking. Developers in North America and Europe can and do finance the construction with cheap bank debt. Such debt isn't available to them in developing countries so they need the buyers' money to build.

If a developer is honest, the main risk you have when you buy pre-construction is the risk of the developer running out of money during construction. Therefore, the earlier you pay the developer, the lower your risk because the odds that the developer run out of money will be lower. This is counter-intuitive but makes sense when you think about it. This is why the more money you pay the developer and the earlier you give him that money, the bigger your discount on the price will be. It's is a win-win for both parties!

Originally posted by @Mike Lambert :

@Tomas Barrios

Having a local partner makes sense and is almost a necessity when you do property development but only a tiny minority of the people here would ever do that overseas. When, like @Yan Wang , you want to buy a second residence to use for yourself and/or rent, a local partner makes no sense.

@Juan Pardo

The payment calendar is absolutely not odd or shocking. Developers in North America and Europe can and do finance the construction with cheap bank debt. Such debt isn't available to them in developing countries so they need the buyers' money to build.

If a developer is honest, the main risk you have when you buy pre-construction is the risk of the developer running out of money during construction. Therefore, the earlier you pay the developer, the lower your risk because the odds that the developer run out of money will be lower. This is counter-intuitive but makes sense when you think about it. This is why the more money you pay the developer and the earlier you give him that money, the bigger your discount on the price will be. It's is a win-win for both parties!

There is no way I would advance any developer 70% of the purchase prince unless I get in exchange from the developer a bank guarantee for all the money advanced, which I can execute right away if the deadlines for construction, for signing the deed etc are not met.

 

@Juan Pardo

If the developer and the deal are right (so in a minority of cases), I'll advance up to 100% any day, as will many astute investors. I rather pay 100% upfront for an awesome deal than pay nothing upfront for a mediocre deal. Generalizations are always counter-productive. Mind you, if the developer asks for a lot of money upfront, he better gives his buyers a heck of a deal. If he doesn't, I wouldn't advance that much money either.

This kind of deals are common in many countries, where the developers don't have access to cheap bank financing like in the US, Canada or Europe.

You can only negotiate the terms with a desperate developer. As a buyer, you don't set the conditions and no developer will ever give you a bank guarantee. Besides it makes no sense for him to do so. If a bank would be ready to give a bank guarantee on behalf of a developer, it'll be ready to lend the same money to the developer as well, whereby the developer would never give you a large discount for you to pay 70% upfront as he rather borrows from the bank. Also, an astute developer will only ask a lot of money upfront if he knows that the market supports that, in which case, he doesn't need your business.

Most importantly, if every buyer would pay 70% upfront to an honest developer, the risk that the developer can't complete the project and deliver to his buyers is very low. And is much lower than if the buyers pay much less upfront, in which case the odds that the developer doesn't have enough money to complete the project is much higher. Therefore, deals in which the buyers have to pay a lot upfront are much less risky, which would have seem counterintuitive without a bit of an explanation.

Obviously it makes sense for you to stay away for this kind of deals if they're not your cup of tea. They're not for everyone.

Originally posted by @Mike Lambert :

@Juan Pardo

If the developer and the deal are right (so in a minority of cases), I'll advance up to 100% any day, as will many astute investors. I rather pay 100% upfront for an awesome deal than pay nothing upfront for a mediocre deal. Generalizations are always counter-productive. Mind you, if the developer asks for a lot of money upfront, he better gives his buyers a heck of a deal. If he doesn't, I wouldn't advance that much money either.

This kind of deals are common in many countries, where the developers don't have access to cheap bank financing like in the US, Canada or Europe.

You can only negotiate the terms with a desperate developer. As a buyer, you don't set the conditions and no developer will ever give you a bank guarantee. Besides it makes no sense for him to do so. If a bank would be ready to give a bank guarantee on behalf of a developer, it'll be ready to lend the same money to the developer as well, whereby the developer would never give you a large discount for you to pay 70% upfront as he rather borrows from the bank. Also, an astute developer will only ask a lot of money upfront if he knows that the market supports that, in which case, he doesn't need your business.

Most importantly, if every buyer would pay 70% upfront to an honest developer, the risk that the developer can't complete the project and deliver to his buyers is very low. And is much lower than if the buyers pay much less upfront, in which case the odds that the developer doesn't have enough money to complete the project is much higher. Therefore, deals in which the buyers have to pay a lot upfront are much less risky, which would have seem counterintuitive without a bit of an explanation.

Obviously it makes sense for you to stay away for this kind of deals if they're not your cup of tea. They're not for everyone.

I don't advance money without a guarantee. 

If a developer is serious about completing a project any sum advanced by prospective purchasers has to be covered by a bank guarantee that the purchasers can execute if the developer fails to comply. 

This way if a developer tries to run away with the money, in the end he will be chased by the bank, and not be individual investors or prospective purchasers. In this scenario the bank does not finance the deal, only provides a guarantee for investors who advanced money for the project. This is standard in many countries, and actually all sums advanced have to be covered by a bank guarantee that the developer provides to the buyers.