Investing in Tulum?

17 Replies

Hi all, newbie here with a few questions regarding investing in STRs in Tulum. I’ve been evaluating a few different recommended markets for STRs (Florida panhandle, Smoky Mountains etc) and I’ve found that from a numbers perspective, Tulum has the most potential for returns, here’s why:

1. You can buy a pre-sale hotel-condominium with resort like services and property management features for 100-150k. These have potential to easily go for $100+ a night. I don't know much about management fees, but from what I've found is that they rival HOAs in popular STR markets

2. Tulum is growing very quickly and it’s easy to find developers who are building new condo-hotels left and right. I know that supply must meet demand but it seems like the growth in Tulum has a ton of potential to aid in appreciation

3. Real-estate in Tulum has been heavily impacted by Covid thus slashing prices.

I’d love for someone to point out what I’m missing in my current analysis and let me know what the risks are

I can't speak to Tulum directly at all, unfortunately.   On the surface it sounds like a good idea with little risk.

But my grandfather invested in Honduras for a rental/vacation spot several years ago.  He went down there for weeks at a time during construction and he basically ended up with a substandard house that a river all but washed away after a big storm.  The developer said "sorry" and moved on to his next project. 

I'd be worried about pre-construction projects for your own safety.   I'd with a proven developer or an existing condo,  though.

@Justin Anderson

Mexico is no Honduras. Many developers are reputable.

@Arwin Nassiri

I’d avoid condotels. Very expensive for what it is and you have hardly any control. Plus their rental projections are generally wildly inflated. I’d go for a real condo itself and avoid those that have a rental pool (unless you want to have nothing to do of course).

2. This would make me nervous. The scales could easily tip with an oversupply and not enough demand. 

3. Especially because of #3. Tulum is so dependent on tourism. Pandemics aren't the only things that can shut down tourism. Covid should be a reminder vacation rentals have tempting pro forma returns, but income can get eliminated overnight.

Even something as simple as seaweed - The last time we were in Tulum there were mounds of seaweed covering the sand and the water was brown as far as we could see. Locals were saying this is becoming a more common occurrence, and not good if the tourists can't go in the water. We won't be going back. 

@Nick C.

You bring some interesting points.

The sargassum has been an issue for a while now but it's mostly seasonal and so its impact hasn't been what I initially feared, as you can read from this very recent article: https://www.riviera-maya-news..... Mind you, if its was to become a more serious problem, it would be a disaster for your state of Florida, which is being hit as well (in particular the Atlantic side).

The potential oversupply issue is a serious problem for Tulum. The path of progress has been moving from Cancun to Tulum through Playa del Carmen. When I decided to invest in the Riviera Maya a few weeks back, Playa del Carmen was pretty much "done" and Tulum was supposed to be the next best thing. Yet, I went first for Playa del Carmen. Part of it was for lifestyle reasons but I thought it was a better investment.

Like in the US and everywhere else for that matter, real estate investment is about location, location, location. And there is no more land available in Playa del Carmen proper. I had the opportunity to invest in the last plot of land available and we'll be almost right by the beach and 5th Avenue. This is absolute prime location. Even, if, for any reason, the overall occupancy rate for short-term in Playa del Carmen would drop (for example as a result of an increased supply), we'll probably still get rented. And new construction occurs further and further from downtown, which is much less short-term rental friendly.

In Tulum, there is no 5th Avenue and there aren't any condos or villas close to the beach. So, unlike Playa del Carmen where it's about being close to the beach and the 5th Avenue, it's about being in the jungle in Tulum. The problem is that there's already a huge amount of condos under construction in Tulum and there's a huge amount of jungle left to be built out. So, yes, there is a potential oversupply problem there. Moreover, what people liked about Tulum was its hippie bohemian chic character that is fast disappearing with the huge developments taking place there. As Tulum becomes more like Playa del Carmen, it will lose its attractiveness to these people. But it will never be as Playa del Carmen because of the building restrictions so it won't be a viable alternative to the Playa del Carmen-style people like me either.

Many people have been discovering Tulum recently but it's nothing new. The best time to invest there was a few years ago. When buying a new property today, I'd definitely be conservative when it comes to rental income projections.

great thread, im actually here right now on calle 7 and 14, La Velata area thats booming. Imagine this: dirt roads with massive potholes, jungle on one side and im paying almost $100/night and barely any hot water, the water in general is dangerous.. but foreigner yuppies like me everywhere walking on the road.. breakfast place La Paleta or sthing is full of ppl and theres dogs trying to chip away at your food, other side of the road major contruction happening 2 large condotels/apartments are being built. And this is Tulum proper, the actual beach area.. forget it, La Zebra, Be Tulum etc $500-1000/night, had a dinner at Rosa Negra $200 easy and that was just a quick treat. 

Overall the air is full of potential and I asked my airbnb host to buy his place, its a larger lot w 2 buildings, hes renting essentially 4 rooms/studios out some without kitchen and theres a room for the 247 cleaner lady and a pool (tiny) in the middle, 2 parking spots, 450k. Idk, i can buy 2 condos in miami for that..

I talked w locals, the problem is the infrastructure. Tulum hasnt developed the water.sewage, roads in a long time, and thats my fear. Buying something for 70-100k a condo or sthing that yea i can rent for maybe $80/night high season, but as more people come the area get polluted. It takes 1hr to get down to the beach, bumper to bumper traffic. I mean its cool and all but really? im here in mexico and have to literally pay more to party and vacay than in miami almost with dirt roads and manual shift tiny cars renting $60-80/day, the quad rental is $50/day.. 

obv this is high season, but i thought due to covid everything will be basically free. well, it isnt. but overall there is huge developments, i just dont know if the real investors already moved in 5-10yrs ago here and are cashing out and now its just mainstream folks coming to the new developments. 

happy to hear ideas, i was considering maybe a 50-150k condo w pool or just empty land 30-40k?

@Drew Slew

It was as if I was there when I was reading your "picturesque" description. It reminded me when I was there in October and the many times I've been there over the last few years.

Ultimately, you'd just have to figure out if you can get the return that you want. When you do that, bear in mind that, as you alluded to, there is plenty of competition coming. Therefore, I'd figure out how low my occupancy and rental rate can get so that I at the very least break even.

If you want to get ahead of the competition, you might want to try to get something special. To give you an example, I purchased condos in Playa del Carmen in a brand new development that is being built on the latest piece of land that was available downtown, which happens to be very close to the beach and the 5th Avenue, where everyone wants to be. It has the best amenities and developers have to go further and further for their new projects.

Your budget gets you more in the studio category or you might get a 1-bedroom but it mightn't be ideally situated or in the best development. Alternatively, you could buy land and build but you'd have to find one of the reputable builders you can trust. The challenge is that they're obviously more interested to work in the many large projects.

Conclusion: make sure you find the right opportunity.

@Arwin Nassiri Something to consider is that tourists from the US are completely different than those tourists from the rest of the world. Tourists from Europe for example hear about Mexico and want to see locals and experience the local life. The main street in Tulum is still VERY local and this attracts those tourists so properties around there are worth to have a look. The deeper and closer to the beach you go it's catered more to those that don't mind paying $300+ a night just because the vibe is more USA. I go there plenty of times through out the year, before I invested. Of course location is precedence but you have to figure out a way to differentiate yourself from all the other places near you. Luckily I invested in a place that will let me hire out my own PM so I get to dictate the rates but I'll make sure to offer something my competitors won't. You have to look at that also. A lot of developers will have their own PM and that'll eat up your profits. 

@Deisy P. @Drew Slew thanks for the insight! After visiting a few weeks back and scoping out some of the neighborhoods, I decided to invest in a presale condo in the neighborhood of Aldea Zama which includes all the necessities such as roads, sewage, water, proximity to beach etc. I am also currently in a position to choose between my own PM or developer PM and that is something I will be exploring within the coming weeks

@Paul Meyer

Most people pay cash because it's the easy option. While you might want to do that in the US, it makes sense in Mexico because a) the price of an equivalent property is much lower and b) the profitability can be much higher (through short-term rentals).

If you buy with a 30-year loan in the US, it's gonna take you 30 years before you start getting some real cash flow as you can stop giving most of it to your bank. If you pay cash for a property in Mexico, you could get your money back with cash flow in just a few years, say 10 or less and then you can get enjoy a (higher) cash flow 20 years earlier.

To be clear though, getting any financing would make your profitability even higher. Only a few banks will lend to foreigners in Mexico and it's not as easy as in the US to qualify. If it works, the bank will finance max 50% and the interest rate will be much higher than in the US. If you have the right connections, you could find a local private lender who will lend you based on the (value of) the asset but the conditions won't be better than those of the banks. Finally, you have the option of seller financing. It isn't that common and it exists. In fact, I've already offered it when I'm the seller and I might do int again whenever it makes sense for both parties.

Whatever the form of financing, it'll be more (significantly) expensive than in the US but the cash flows but the cash flow generally will be significantly higher compared to the price of the property so it won't matter than much and needn't be an obstacle.

@Drew Slew

Sorry for the delay. We were able to work a 50% down for 25% off deal with the developer landing at just over 80k for the condo that is about 400 sq feet. We were told we are looking at $50-75 low season with $100+ a night for high season. Fees come out to about $400 a month so looking at about 5-6 nights of renting out to break even

@Arwin Nassiri

I hope you're gonna do even better than that but, personally, I'd due my own due diligence to come up with my estimated rental income. I'd never trust what the seller/developer or the real estate agent tell me for obvious reasons, especially if the property is located overseas in a market I don't know. 

Developers and real estate agents in Tulum are notoriously known for wildly exaggerating rental figures. A few years back, you could walk on the streets and see billboards advertising large rental returns guaranteed by the developers. Such returns never pan out and these guarantees are long gone. Those that remain are for much lower unattractive returns nowadays.

Now, while you should absolutely do your own due diligence, bear in mind that the rental you'd come up with might be too high because of the large amount of supply coming to the market. You'll have to compete in price against the existing and upcoming supply unless you own a special piece of property that commands a premium or give you a moat over the competition. Given you bought a little studio, that's unlikely to be the case.

Hopefully I don't sound negative, as this isn't my nature or my purpose. I've generally been a proponent of investing in the area and I've done so myself but I tell the good and the bad. I wish everyone would do that.

@Heidy Fu

Arwin's purchase makes that beachfront studio you've been looking at look even more expensive!