Investing in Tulum, Mexico
Contractor · Edgewater, Md. · Member since 2018 · 28 posts · 15 votes
Investing in Tulum, Mexico
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John UnderwoodPro Member
Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votesMight be less risky to buy in a hot U.S. market and use proceeds to visit Tulum and rent a place there.
57 Replies
- Member since 2020 · 201 posts · 118 votes6y
Originally posted by @Mike Lambert:
Your rationale for wanting a bank guarantee is totally legitimate but it doesn't make sense for a developer to give it to you in most places. And any transaction will work only it is a win-win.
A developer providing a bank guarantee is not standard in many countries, except maybe in some European countries.
It's useless in the US and Canada since the buyer only needs to advance 5% of the funds before delivery of the property. It might make sense for a developer to do it in Europe since it'd cost a developer less money to pay the bank for a bank guarantee than to pay the bank for a loan and so it's cheaper for him to use the buyers' monies.
No developer in an emerging market country will provide a bank guarantee and they are the ones asking for prepayments because they need them. This thread was about investing in Tulum, Mexico; not about investing in Spain or Portugal.
However, if you're able to negotiate a bank guarantee for a Mexican developer, please let me know because, if you're successful, I'll do it too! :-)
It just seems to me extremely risky to advance money to a developer without a guarantee; the developer can just take the money and run away. So what's the point of purchasing at the pre-development stage in Mexico instead of making a cash purchase of a property already built? A discount?
Developers provide this bank guarantee in Spain, even when they get bank financing to build. It is a guarantee to the prospective purchasers who advance the money in exchange for a bank guarantee. Seems like common sense to me.
- Member since 2020 · 201 posts · 118 votes6y
Originally posted by @Mike Lambert:
Your rationale for wanting a bank guarantee is totally legitimate but it doesn't make sense for a developer to give it to you in most places. And any transaction will work only it is a win-win.
A developer providing a bank guarantee is not standard in many countries, except maybe in some European countries.
It's useless in the US and Canada since the buyer only needs to advance 5% of the funds before delivery of the property. It might make sense for a developer to do it in Europe since it'd cost a developer less money to pay the bank for a bank guarantee than to pay the bank for a loan and so it's cheaper for him to use the buyers' monies.
No developer in an emerging market country will provide a bank guarantee and they are the ones asking for prepayments because they need them. This thread was about investing in Tulum, Mexico; not about investing in Spain or Portugal.
However, if you're able to negotiate a bank guarantee for a Mexican developer, please let me know because, if you're successful, I'll do it too! :-)
Actually, let me rephrase the question: how can prospective buyers in Mexico be sure that the developer will comply with the terms of the contract, including deadlines to finish construction and sign the sale and purchase deed?
What do they get as a guarantee or collateral when they advance 70% of construction costs?
- 6yMike LambertPro MemberInvestor · The Americas and Europe · Member since 2016 · 1k+ posts · 1k+ votes
Things make total sense now. You're getting bankguarantees in Spain and so you think it's normal to get that everywhere. But it's not and you're lucky to have that in Spain. Mind you, the Spanish banks shouldn't be doing this as it's way too risky for them. The Spanish banks seem to have forgotten that their over involvement in the real estate business led to their collapse and bailout during the financial crisis.
As to the situation in Mexico, buyers will only advance significant funds to developers if they get a significant advantage for doing it, which has to be at least a large pre-construction discount. Then, I have to weigh that advantage against the risk. The developers I buy from have a perfect long-dated track record, I got to know them personally and they're very wealthy already so they won't take my money and flee to South America. So the risk is totally acceptable for me to take, especially given what I get out of it. A bank guarantee wouldn't add much added value and Mexican banks aren't into that business. And, if they were, it'd be very expensive and the developers would include the cost in their sale prices. I wouldn't want to have to pay for that if it isn't clearly necessary. I wouldn't do that with any developer though.
Like you, I try to minimize my risks whenever possible but, at the end of the day, investing in real estate implies risk taking. And, let's not forget that no risk = no return. It's all about knowing what you do and taking calculated risks. And, of course, different people will have different risk threshholds so maybe you'd prefer to buy at a higher price when construction is finished.
- Member since 2020 · 201 posts · 118 votes6y
Originally posted by @Mike Lambert:
Things make total sense now. You're getting bankguarantees in Spain and so you think it's normal to get that everywhere. But it's not and you're lucky to have that in Spain. Mind you, the Spanish banks shouldn't be doing this as it's way too risky for them. The Spanish banks seem to have forgotten that their over involvement in the real estate business led to their collapse and bailout during the financial crisis.
As to the situation in Mexico, buyers will only advance significant funds to developers if they get a significant advantage for doing it, which has to be at least a large pre-construction discount. Then, I have to weigh that advantage against the risk. The developers I buy from have a perfect long-dated track record, I got to know them personally and they're very wealthy already so they won't take my money and flee to South America. So the risk is totally acceptable for me to take, especially given what I get out of it. A bank guarantee wouldn't add much added value and Mexican banks aren't into that business. And, if they were, it'd be very expensive and the developers would include the cost in their sale prices. I wouldn't want to have to pay for that if it isn't clearly necessary. I wouldn't do that with any developer though.
Like you, I try to minimize my risks whenever possible but, at the end of the day, investing in real estate implies risk taking. And, let's not forget that no risk = no return. It's all about knowing what you do and taking calculated risks. And, of course, different people will have different risk threshholds so maybe you'd prefer to buy at a higher price when construction is finished.
Spanish banks finance developers at their own risk, they provide bank financing.
Developers have to hand over bank guarantees to purchasers for any sums advanced, for any money advanced before completing contruction. This is actually required by law, after so many scams happened, with developers running away with the money of prospective purchasers... and some of them were subsidiaries of big construction companies.
- 6yMike LambertPro MemberInvestor · The Americas and Europe · Member since 2016 · 1k+ posts · 1k+ votes
That makes total sense now. I forgot about the Spanish scams.
It's not like that in most countries so you don't need that level of protection and it's therefore not required by law. You'd have thought that there are more scams in a country like Mexico but that's not the case. It's actually not a surprise because the main cause of the scams is the abundance of cheap money, which you can only get in the US, Canada, Europe and Japan.
- Member since 2020 · 4 posts · 2 votes5y
@Mike Lambert, in your opinion, how long do you think Tulum will keep the same renting price per night, before it decreases due to bigger apartments inventory?
- 5yMike LambertPro MemberInvestor · The Americas and Europe · Member since 2016 · 1k+ posts · 1k+ votes
Nobody, including myself, know what average prices of short-term rentals will do in Tulum in the future. Mind you, it wouldn't be that helpful if you knew because your net rental income will be very dependent on whether you own the right type of property. Also, it's not necessary absolutely necessary to have such information to make a proper buying decision.
There's another way to find out whether your property will be profitable enough. You calculate the costs of owning/holding the property, which in Mexico are pretty low. You then add your required return expressed in dollars and that will tell you the minimum income you need to generate. Then, you divide that income by 365 and that tells you how much you need to make per night.
Let me give you an example with one well located and desirable condo in Playa del Carmen. The yearly costs amounted to only $6,629, which isn't much. However, there were financing costs of $23,014 in financing costs, but just for the first 5 years. You'd be happy to just break even in the first 5 years because it'd mean that you'd get a killer rental yield thereafter, as the large amount of the financing would go directly in their pockets. In order to break even, you'd need to earn $29,643 in rental income. Divided by 365, this gives you a nightly rental rate of $81. If you'd own and rent such a condo in Playa del Carmen for $81 a night, it's pretty much a given that you'll have 100% occupancy (being well-below the market price with a high margin of safety). Therefore, you could conclude that it's a good deal.
- Investor · Washington, DC · Member since 2020 · 7 posts · 8 votes5y
This is such a great thread! Thank you everyone for sharing your stories and thoughts.
@Mike Lambert Thank you for sharing your views and your knowledge. I completely agree with you. You know your stuff.
@Ricky Cassidy I am currently in the process of purchasing a property in Tulum that I plan on using as a vacation rental. I fell in love with Tulum back in 2018 while on vacation. I found a great development with stage 1 due for delivery by 12/1/20. I put down a large sum of money (not 100%) so I could take advantage of the 10% preconstruction discount. It knocked off about 35k off the purchase price. Which saved me a little money on closing cost fees (ask me via DM). I'm also able to make some slight alterations to the interior due to preconstruction phase and large deposit. You can't do this with completed projects. (I'm just saying!) If the developer doesn't deliver within 90 days of delivery date then they have to pay me money for the delay as well as return all monies paid if I decided to withdraw from contract. Yes, the home buying process in Mexico is different, weird, unusual but I was willing and open to taking a calculated risk, with conducting due diligence of course.
I visited Tulum at the end of August to view inventory. I saw at least 5 developments and ended up selecting a project where I met several of residents a few years prior. I was able to see the completed phase 1 & 2 of the development (ours is in phase 3). I was also able to speak to a few residents about their experiences with the developer and their thoughts on the property overall. I also researched the developer who had several successfully completed projects (residential/commercial) which made me more confident that I wasn't going to get scammed.
I was apprehensive but committed to the goal. I asked a lot of questions and did my research which eliminated any lingering concerns. I chose a realtor who was very knowledgeable about the short term rental market in Tulum specifically because he has a short term arbnb rental unit in Tulum. After many cancellations he took a longer tenant for 2 months. Then Mexico finally opened up for tourist and he's booked and cash flowing again. I am learning that having a plan and multiple exit strategies will eliminate a lot of anxiety and apprehension when it comes to making a decision to purchase internationally or period for that matter.
Since this will be my first international property (first of many, fingers crossed) I decided to share the load with a partner. We are splitting everything 50/50. We also hired an agent that was referred to me by one of the residents I met back in 2018 while on vacation. She was from Canada. I also met and spoke to, at length, a very nice older couple from Atlanta, Georgia. They have been living in Mexico for 4 years now and love it.
In short, you will have fears but don't let that keep you from building your real estate portfolio. RESEARCH, RESEARCH, RESEACH! Do Your homework, ask a ton questions about every possible thing that could come up, get a partner if that makes your feel more comfortable but take action! (when you're ready of course).
There are some details I left out because this feels like an essay already. lol But feel free to ask me any questions.
One more thing...Please remember the US has the most cases of covid. But still a lot of Americans and other nationalities have been traveling to Mexico since their borders opened. Like @Mike Lambert said, now is a good time to buy while developers are offering great deals.
I hope this has been helpful to some of you.
**excuse typos. it's 2:30am for me**
- 5yMike LambertPro MemberInvestor · The Americas and Europe · Member since 2016 · 1k+ posts · 1k+ votes
You're very welcome. The fact that people are benefiting from what I wrote encourages me to continue answering people's posts on international real estate investing. As I was getting to the end of this thread to find your comment in which you notified me, I realized the length and details of my answers, just in this thread. Writing quality content in large quantities takes time so it's great to be reminded by comments like yours that it's not for naught!
Kudos to you from taking the plunge. Good luck with your investment but it seems that you won't need it! While you bought already, feel free to message me more details about the property you bought as I might have some knowledge about it and about the developer.
Great idea of doing your first foray into international real estate investing with a partner to cut risks. That's what some investors are doing with me. While their objective is mainly to benefit from my knowledge, contacts and access to off-market deals to get superior returns, the most important thing they're doing is reducing their risks and they don't always realize it.
As you pursue your objective of building your international real estate portfolio, feel free to read my numerous answers on posts on the matter and feel free to reach out to me if you have any unanswered questions. You seem to already be well on your way though!
- 5yMarc RiceBusiness MemberReal Estate Agent · Columbus Cleveland Dayton, OH · Member since 2018 · 2k+ posts · 1k+ votes
@Ricky Cassidy
Read the book on long distance real estate investing by David Greene and see if you’re comfortable with setting up those systems in a foreign country. It’s definitely more risky, hence the greater returns.
Marc Rice | Investor Friendly Agent at Reafco Tailwind Team574 Reviews - Member since 2020 · 4 posts · 2 votes5y
@Mike Lambert, your answers have been very helpful and thank you so much for sharing your knowledge with all of us.
- Investor · Washington, DC · Member since 2020 · 7 posts · 8 votes5y
@Mike Lambert Yes Mike. Please know that your comments and feedback are very thorough, informative and much appreciated!
Thank you for kind words! YES, I will definitely be in touch as I still have many questions. Listening to BP podcast has helped me conquer my fears. Now I want to create more ways to monetize and scale all my vacation rentals. I'm so excited to get started and I will continue to share my experience on this platform to encourage others to take action.
Looking forward to making more connections with like minded people.
Good luck everyone!
- Kirkland, WA · Member since 2016 · 39 posts · 17 votes5y
Thanks @Yan Wang for sharing your experience. Hope you didn't get rip off/taken advantage. If you did, please share what to look out for.
@Maria Boykin glad you took the plunge! Where is it located? if you don't mind sharing. Did you use a lawyer to review your contracts? Any referrals? Looking at a property, and want to make the move on it. I'd like to review my options from the legal side. Don't want to use a lawyer referred by the sellers!.
@Mike Lambert thanks for sharing the knowledge. It helps to conquer fears, and make informed decisions. Would you have a real estate lawyer referral in Tulum?
- 5yMike LambertPro MemberInvestor · The Americas and Europe · Member since 2016 · 1k+ posts · 1k+ votes
I messaged you the details of one of my real estate lawyers in the Riviera Maya.They're all in Playa del Carmen, as they typically cover the whole riviera.
- Kirkland, WA · Member since 2016 · 39 posts · 17 votes5y
@Mike Lambert thank you!
It looks like it's common practice for the buyer and seller to use the same lawyer. In order to make the process simple and faster. Heard that some lawyers (when not using the same lawyer for both sides) just make it difficult or complicated to be able to charge more. Have you or anybody had this experience?
- 5yMike LambertPro MemberInvestor · The Americas and Europe · Member since 2016 · 1k+ posts · 1k+ votes
I can imagine that it can happen to foreigners if they don't know any good lawyers. That's never happened to me and I'd never get in that situation because there's an obvious conflict of interest. That's why I work with two good law offices, so that I can always have a different one than the other party.
- Kirkland, WA · Member since 2016 · 39 posts · 17 votes5y
@Mike Lambert That was exactly my point! there's an obvious conflict of interest.
Wondering how @Maria Boykin did it.
- Member since 2020 · 1 post · 1 vote5y
@Johanna V. I would love to hear more about your STR properties/experience in Mexico!
@Maria Boykin Congratulations, I am so excited for you! Please keep me in the loop as I am a newbie investor coming into the market in Tulum.
Hey everyone! Thank you for such great insight and feedback on your experiences investing in Mexico. My wife has me convinced that Tulum is where we should invest so we've been doing a deep dive looking at rental comps and potential properties. We are currently looking for referrals for trusted developers as well as trusted team players to work with such as lawyers, realtors as well as a bank appraiser. We would greatly appreciate any advice to kick start our journey of investing in Tulum!
- Member since 2020 · 12 posts · 2 votes5y
I advise anyone interested interested in investing in Tulum to read this (long) article. There is definitely money to be made there but you better watch where and with who you invest because the rule of law seems kind of lose in the region
- Member since 2020 · 12 posts · 2 votes5y
Originally posted by @Mike Lambert:
Your rationale for wanting a bank guarantee is totally legitimate but it doesn't make sense for a developer to give it to you in most places. And any transaction will work only it is a win-win.
A developer providing a bank guarantee is not standard in many countries, except maybe in some European countries.
It's useless in the US and Canada since the buyer only needs to advance 5% of the funds before delivery of the property. It might make sense for a developer to do it in Europe since it'd cost a developer less money to pay the bank for a bank guarantee than to pay the bank for a loan and so it's cheaper for him to use the buyers' monies.
No developer in an emerging market country will provide a bank guarantee and they are the ones asking for prepayments because they need them. This thread was about investing in Tulum, Mexico; not about investing in Spain or Portugal.
However, if you're able to negotiate a bank guarantee for a Mexican developer, please let me know because, if you're successful, I'll do it too! :-)
Completion guarantee secured by bonds are 99% off the time a requirement for LPs and lenders in the US, but the end buyer is not covered directly
In Europe developers must often deliver a completion guarantee to the buyer if the property is pre sold as payments are made in installments along the construction process. Usually 95% is paid during the construction and the remaining 5% at delivery. The advantage of this system is that it discourages speculative over development, reduces capital costs for the developer and free capital for more projects. Usually a minimum of 60% must be pre-sold for the project to break ground, so very little leverage is used and the developer only commits about 3-5% of the equity
- Member since 2020 · 201 posts · 118 votes5y
Originally posted by @Vassilios Kovanis:
Originally posted by @Mike Lambert:
Your rationale for wanting a bank guarantee is totally legitimate but it doesn't make sense for a developer to give it to you in most places. And any transaction will work only it is a win-win.
A developer providing a bank guarantee is not standard in many countries, except maybe in some European countries.
It's useless in the US and Canada since the buyer only needs to advance 5% of the funds before delivery of the property. It might make sense for a developer to do it in Europe since it'd cost a developer less money to pay the bank for a bank guarantee than to pay the bank for a loan and so it's cheaper for him to use the buyers' monies.
No developer in an emerging market country will provide a bank guarantee and they are the ones asking for prepayments because they need them. This thread was about investing in Tulum, Mexico; not about investing in Spain or Portugal.
However, if you're able to negotiate a bank guarantee for a Mexican developer, please let me know because, if you're successful, I'll do it too! :-)
Completion guarantee secured by bonds are 99% off the time a requirement for LPs and lenders in the US, but the end buyer is not covered directly
In Europe developers must often deliver a completion guarantee to the buyer if the property is pre sold as payments are made in installments along the construction process. Usually 95% is paid during the construction and the remaining 5% at delivery. The advantage of this system is that it discourages speculative over development, reduces capital costs for the developer and free capital for more projects. Usually a minimum of 60% must be pre-sold for the project to break ground, so very little leverage is used and the developer only commits about 3-5% of the equity
Thanks for your input! Have you invested in Tulum? How is it doing now in COVID times?
- CA · Member since 2018 · 124 posts · 33 votes5y
Been these posts and other post regarding buying in Tulum. I would like to invest in Tulum but I'm trying to make logistic sense of it all. Interested in a condo but aside from that, I'm a full time registered nurse and ironically take care of Covid patients. Some make it and others do not unfortunately. My point is that I work long hours at nights and trying to do as much research as I can before I make a decision to buy in Tulum, Riviera Maya and or Playa del Carmen. But due to my hectic schedule its difficult. I was wondering if you can answer a few questions and elaborate if need be. 1. Where to get the best deal as far as investment whether it me long term or short term? For me it makes no difference. I can ride out the Covid situation and decline in tourism.2. Im told 20% down? 3. Any pre construction developers you can suggests?4. Any real estate agents you can suggests?5. Any lenders you can suggest. any other info you can think of is appreciated.
- 5yMike LambertPro MemberInvestor · The Americas and Europe · Member since 2016 · 1k+ posts · 1k+ votes
I got your private message but since it's a copy/paste of your post here, I'll answer here for the benefit of everyone.
I understand you're looking at pre-development property. The terms and conditions will depend on the developer.
For example, the developers I'm personally connected to typically will ask their retail clients to pay 20% at the signature of the contract, 30% during construction and the remaining 50% upon delivery. Some developers will offer discounts if you pay more upfront. In that case, the more you pay earlier, the bigger the discount.
I won't recommend them here for ethical reasons, as I'd have a conflict of interest. Indeed, the more people I refer to them, the better the conditions I'd get from the developer for my own deals. However, I'm happy to recommend the real estate agent I'm working with when I'm not directly dealing with the developers. He obviously has knowledge about developers too.
I can suggest lenders or mortgage brokers but the conditions won't be anywhere close to what you'd get at home. Typically max 50% LTV and double digit interest rates. That is, assuming you qualify. Real estate in Mexico is mostly a cash business for foreign investors. However, even if you pay 100% cash it could be very profitable if you buy the right properties.
Taking action is awesome but beware of the fact that your inability to have enough time to do a proper due diligence might lead you to make a wrong decision. So it's a good idea for you to ask questions here.
- CA · Member since 2018 · 124 posts · 33 votes5y
Thank you for the info. If you could PM me with the info of the RE agent and lenders?
- Rental Property Investor · South Padre Island, TX · Member since 2018 · 160 posts · 157 votes5y
My two cents on this thread. I purchased a presale as a Mexican citizen this past summer. 25% down and the last part at the time of delivery. I hired a lawyer and specified exactly what I wanted. I let my agent know I only wanted to put down 20% and presale. I was very specific about that. The developer worked w/ me and I got 25%. I researched them too. I wanted to have control of my rates and have my own PM. I wanted to make adjustments on what is included in the apartment since it's completely furnished. I got what I wanted. Of course, there are other details but as a Mexican citizen, it's going to be a different process than foreigners but there are incredible opportunities. One requirement for a foreigner is that there is an annual trust that needs to be paid. I think it's about $1k. I just recently started reading about Tulum topics on here and @Mike Lambert your info has been exceptionally helpful. I follow you now.
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