Is it really worth investing in Mexico?

Question

• Is it truly safe to deploy capital in Mexico?

• Is it true that a 35% tax must be paid on capital gains?

• Is it better to invest in Mexico than in the United States?

• Am I missing out on any interesting opportunities?

What do you think about this?

I read you

Michael Eskenasy · Answer

I wouldn’t frame this as “Mexico vs. the United States” because that comparison is too broad to be useful.

Mexico contains great deals, terrible deals, liquid markets, thin markets, strong operators, weak operators, tourist markets, industrial markets, border markets, and places where I wouldn’t want to own anything remotely. Same as the U.S.

The first question I’d ask is what advantage you actually have by crossing the border.

Higher yield?

Lower basis?

A market you understand better?

Tourism demand?

Personal connections?

Some operational edge?

If the answer is basically “prices look cheaper,” I don’t think that’s enough.

There are also risks that deserve their own line in the underwriting instead of getting buried inside the cap rate: currency exposure, legal structure, title diligence, property management from another country, financing, liquidity on resale, and the fact that enforcement and transaction processes won’t necessarily work the way a U.S. investor

expects.

The 35% capital-gains statement also needs context. It is not simply “Mexico charges everyone 35% when they sell real estate.” For a nonresident selling Mexican real estate, Mexican rules can generally involve either tax on gross proceeds or, if the requirements are satisfied, tax based on the net gain. The 35% figure people repeat is associated with the net-gain method, not a universal 35% tax on the sale price. (PwC Tax Summaries)

Ownership structure matters too. Foreigners can acquire property outside Mexico’s constitutionally restricted zone subject to the applicable process, while residential property within the restricted coastal/border zone generally involves a Mexican bank trust, or fideicomiso. That restricted zone extends 100 km from international borders and 50 km from the coast. (Secretaría de Relaciones Exteriores)

And if the investor is a U.S. taxpayer, buying abroad doesn’t make the U.S. tax side disappear. U.S. citizens and residents generally report worldwide income, although foreign income taxes may qualify for a foreign tax credit depending on the circumstances. (IRS)

So I’d underwrite a Mexican property exactly the way I’d underwrite anything else, then add the risks created by owning internationally.

What is the actual NOI?

What is my true basis after acquisition costs?

Who controls the property locally?

How do I verify rents and expenses?

What happens to my return if the peso moves against me?

How easily can I sell?

What taxes hit during operation and at disposition?

What ownership structure am I actually buying through?

And who represents me locally who is independent of the seller?

If the deal still beats your U.S. alternatives after you price all of that in, then yes, Mexico can absolutely be worth investing in.

But “Mexico” itself isn’t the opportunity.

A specific property, in a specific market, bought under a specific legal and tax structure, at the right basis, might be.

Rolando Morales Senjudo · Answer

I tip my hat to your response, Michael. Flawless analysis and an impressive mastery of the Mexican real estate. It couldn't have been said any better.