Mexico Vacation Rental Property: A Dream Investment… And Lifestyle

One of the best options for investing in Mexico real estate is by purchasing a vacation rental property. Some of more attractive elements of this investment are: Strong …

One of the best options for investing in Mexico real estate is by purchasing a vacation rental property. Some of more attractive elements of this investment are:

  • Strong and growing tourism market
  • Relatively low expenses
  • High rent to value ratio
  • Personal enjoyment of the property

While not something an investor would typically consider while evaluating an investment opportunity, the last point is one of the most attractive parts of investing in Mexican vacation rentals. Since investors can personally enjoy their investment, in addition to making a profit, it means that a vacation property in Mexico can be a  “dream investment,” whilealso helping to create a “dream lifestyle” for the investor at the same time.

The following are points and factors which buyers will want to consider while looking to purchase a vacation rental property in Mexico.

Location Factors

There are basically three location factors to consider:

  1. Region of Mexico – When deciding where to invest in a Mexican vacation rental property, the most logical choices would be the main tourist regions of the country – the Riviera Maya (Cancun, Playa del Carmen, etc.), Puerto Vallarta, Los Cabos, Lake Chapala, etc. If the main return on the real estate purchase is intended to be rental income, buyers should go straight for the locations that are the strongest and have an established international reputation and accessibility.
  2. Existing Rental Market – Within these markets, buyers will want to do some basic research on the availability of existing rental properties already out there on the market. Are half of them sitting empty, or do properties get booked out for the main holiday seasons months in advance? A slightly less trafficked but growing area with a shortage of rental properties may prove more profitable than a high-traffic area where everyone and anyone is renting out their condo. A real estate broker will be able to point people to information on this.
  3. Specific Location – Every region has its rental hotspots. In the Riviera Maya, for example, those investing in vacation rentals will want to consider properties a block or two from the beach, if not overlooking the sand. Resort locations are attractive since they are close to all vacation activities and services on site and facilitate promotion (especially if they have a rental pool – see below.) In other locations, there is a higher demand for views, even if the property is not on the waterfront. Buyers will usually pay somewhat more for these high demand locations, but the extra invested usually pays off if location is chosen carefully. Also, buyers can watch for price reductions or other discounts.

While planning to purchase a vacation rental property, a buyer should consider location carefully. First choose a region with strong tourism, and than discuss your plans with a real estate broker to ensure you choose the optimal location within the region.

Estimating Revenue

It is important for buyers to make an educated revenue estimate based on existing numbers and stats. Unfortunately such estimates can never be 100% accurate, especially in Mexico where there is less official data available and more is based on local, direct research and unofficial sources. It is worth noting, however, that this same situation can actually leave greater opportunities open for small, individual investors.

Estimated revenue will be based on:
  • Nightly fees of comparable rentals
  • Average occupancy
  • Expenses

Estimating nightly fees can range greatly based on region and location within a given region. For example, if someone bought a 2 bedroom condo on the beachfront in Playa del Carmen, they could easily find nightly price comparisons on websites like Trip Advisor or VRBO (see the end of the article for an example estimate). Keep in mind, though, that rates will be higher during peak seasons, as will occupancy.

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Another important factor will be how many people can comfortably stay in the unit.  More bedrooms can increase the rental value. Small groups tend to be the best target market for vacation rentals.

Estimating Occupancy Rate

There are official statistics available from Mexico’s Department of Tourism; for example, http://www.concanaco.com.mx/documentos/Estadistica_09.pdf, page 9, shows hotel occupancy rates for various regions throughout the country, through 2011. It must be remembered, that these are average occupancy rates, including both the most attractive and least attractive locations within a given region. The occupancy rate for the Riviera Maya was 71% for 2011. Beachfront condos and hotels, however, would likely have a higher percentage. It is also worth noting that occupancy rates have been increasing every year since the height of the recession in 2009. It is relatively safe for a buyer to use the average occupancy rate for a given region, which should be lower than actual occupancy, as long as the investor selected their property location carefully, and they have a reasonable plan for promotion.

Expenses

General maintenance expenses tend to be fairly low in Mexico, both in an absolute sense, and relative to the property value. HOA fees tend to be around $2-$4 USD per square meter; a 200 m2 (or 2160 sq. ft.) condo, for example, should have fees between $400 and $800 USD a month, depending on location and amenities.

Bills also tend to be lower than what buyers typically expect. Gas and water bills are fairly minimal expenses, and internet and phone packages can be found for cheap. The most expensive monthly utility is typically electricity. For high usage, rates in Mexico tend to be considerably higher than in many parts of the U.S. and Canada. Unfortunately in beachfront areas, air conditioning, which usually consumes high amounts of electricity, is often necessary.

Rental Management Companies

Investors looking to buy a Mexican vacation rental property will want to consider the services of a rental management company. The fees for this service tend to be around 15% – 20% of rental income. While that may seem like a significant chunk of the income, this cost can be balanced out by a greater occupancy rate. Since these companies can offer better exposure, occupancy rates tend to be higher for properties managed by professional management companies. It also makes the investment more hands off for the owner, freeing up time that can then be used for other investments, or whatever else they want to do.

Resort Properties & Built In Rental Pools

If an investor doesn’t want to be involved at all in the management of their property, they should look at resorts or complexes that offer rental pools. While these are fully owned and titled condominium properties, the resorts will often take care of all levels of maintenance and decoration. The fees on these type of properties tend to be higher, however, resorts usually have the best international presence and promotion strategies as well – which increases rental occupancy. Such resorts will often provide rental and market analyses for buyers, which can then be compared to third party statistics.

Personal Use of a Vacation Rental Investment

As mentioned at the beginning of this article, one of the most attractive perks to vacation property investment is that the owner can enjoy not only the income from their investment, but also the property itself! Resorts with rental pools and rental management companies make this easy, allowing owners to “book” time in their property with a certain amount of notice. In all situations, owners will want to consider high seasons and – whenever possible – make use of their property in low seasons in order to maximize revenue.

Example Rental Estimate

The following is an example calculation for rental income. It is based on a new 3 bedroom beachfront unit in Playa del Carmen. Remember that the numbers below are based on annual averages, and high-season and low-season will fluctuate considerably.

Property Cost
$600,000 USD
Average Nightly Prices
$350 USD*
Average Occupancy
71%
Annual Gross Income
$90,703 USD
Monthly HOA Fees
$550 USD
Monthly expenses – (bills, maintenance, etc.)
$500 USD
Total Annual Expenses
$12,600 USD
Estimated Annual Net Income
$78,102 USD
Annual Return on Investment
13.02%
 

*All numbers are estimates, and the examples are given for reference purposes only.

*Double hotel rooms with views of the beach average between $250 USD and $350 USD per night (as of late 2012.) The price for two bedroom condos for rent can range anywhere from $200 to $700 per night. A three bedroom would bring higher rental income. Weekly rentals offer lower per-night rates, but tend to increase occupancy.

As mentioned above, a property management company would lower the nightly prices (due to their commission), but, if the right company is chosen, it should increase occupancy.

Remember, buying a vacation rental property in Mexico not only a profitable investment, but also a great lifestyle investment.

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