Mexico: Mexico

Guide to the Risk and Opportunity Ratings

At the end of each country profile, we have given a risk rating and an opportunity rating. These ratings are a summary of our analysis indicating the levels of risk when investing in a market and the level of opportunity to profit from it.

The ratings themselves are simple. Both work on a scale of one to five. The opportunity rating is indicated by the $ symbol. A single $ equals a low opportunity whilst 5 of them ($ $ $ $ $) equals the highest opportunity ranking.

For risk we have used the * symbol. A ranking of * equals a low risk rating whilst * * * * * equals a high risk rating.

Introduction

Bordering the US, Guatemala and Belize and with coasts on the Pacific Ocean and the Gulf of Mexico, Mexico is an exciting and vibrant nation filled with Latin spirit. From the hectic clutter of Mexico City to the lively coastal resorts of the Yucatan Peninsula, the country offers a wealth of experiences. Mexico has it all – superb beaches, an enviable climate, bucketloads of culture and 10% of the world’s known species – and, in recent years, an increasingly stable and secure environment for foreigners wishing to buy property. The countryside is also extremely varied, from semi-arid desert in the north and volcanic mountains in the centre, to tropical terrain in the south. The remains of the Mayan civilisation add an exciting dimension to the country.

Today’s Mexico is among the fastest-growing industrial powers in the world, with cities boasting 21st Century facilities and an increasingly good transport infrastructure. The country has a free market economy which recently entered the trillion dollar class. It contains a mixture of modern and outmoded industry and agriculture, increasingly dominated by the private sector. Recent administrations have expanded competition in seaports, railroads, telecommunications, electricity generation, natural gas distribution, and airports. Mexico has twelve free trade agreements with over 40 countries, putting more than 90% of its trade under such agreements. GDP growth was 3% in 2005, whilst inflation dropped to 4.1%. The next government, due to take over in 2006, will be expected to confront the challenges of boosting economic growth, improving Mexico’s international competitiveness, and reducing poverty.

Property values in Mexico have been growing year by year. In the popular cities and coastal areas prices have risen significantly, but in most parts prices have not increased as quickly as in the US and Europe in recent years. It is still therefore possible to buy property or land at significantly lower prices than in these countries and the popularity of Mexico, with its exotic mix of Mayan and Spanish culture, is likely to increase over the coming years. All this goes a long way to explain the reasons for the growing numbers of American and British investors looking to Mexico to fulfil their requirements.

Is this a good place to buy?

As stated above, property prices in Mexico have risen substantially in recent years, especially near the coast, but with time and patience it is still possible to find good value purchases. It is also possible to find properties with good rental potential – net rental yields of 15% on a basis of 40% occupancy are available in some areas, and coupled with annual property price increases of 10-20%, this adds up to an attractive package. The costs of ongoing ownership, such as maintenance and taxes, are also fairly low, the cost of living in Mexico is around half that of the UK or USA, and labour costs are low, so those wishing to live in Mexico will also find benefits.

Mexican law on property ownership is comprehensive, and provides protection for both the seller and buyer in all property transactions – as long as the law is followed, correct procedures adhered to and all necessary documentation completed. Most real estate brokers and developers in Mexico are honest and above board. The notary public plays a major part in all property transactions in Mexico, and ensures the legality of the entire process. After buying, it is virtually impossible for titles and properties to be interfered with officially without a legitimate reason. Property purchasing in Mexico is, therefore, an extremely secure process. The market is relatively stable, with moderate annual inflation, meaning that the peaks and troughs of markets such as the UK are unlikely.

Price history

Prices vary significantly across Mexico, and the wisdom of property purchases here depend heavily on location. In key areas such as the Yucatan Peninsula, near Cancun, property values have risen significantly, whereas other less popular areas will not have seen such growth. As a basic guide, a good two-bedroom apartment in a popular area should cost between £80,000 and £140,000 ($136,000-$240,000) depending on size, location and facilities. Three-bed homes are typically upward of £180,000, and at the top end, ocean view villas can sell for several million US dollars or more. Property can be found for as little as £15,000 ($25,000), but average prices are much higher.

Which type of property should you go for?

A number of different types of property are available in Mexico, ranging from traditional tourist rentals in Cancun to sophisticated golfing developments close to the US border. Much of the market is focused on tourism rentals and lifestyle purchases.

One of the traditional ways of buying a house here – and books have been written on the subject – has been to buy a ‘fixer-upper’ – a shell house in need of serious maintenance. This type of purchase is popular because it enables the buyer to purchase the property at the ‘shell’ value and to create a home almost from scratch. Some of these include old colonial buildings which can polish up into magnificent homes if you have time and resources enough to dedicate to them. To buy one of these properties, it is wise to shop around and to consider the costs that may be involved extremely carefully.

Buying land and commissioning a house to be built on it is also popular in Mexico, as the price of land and construction is likely to be considerably less than purchasing an equivalent house already built. Again, this entails investing significant amounts of time, effort and expense in project management. If you choose to do this it is very necessary to ensure that the land purchased is served by a reliable water source, and to look at examples of the architect’s previous work – not just through photographs. It is a good idea also to commission a survey of one of their previous buildings to ensure that the quality of their work is up to scratch.

In popular resort areas, the usual new-build and off-plan properties are available, and if chosen in an area which is popular or which is likely to become popular in the future, will provide good value for money. They should increase in value year on year, and it is also possible to achieve good rental yields. Master-planned communities tend to appreciate most in value, as they provide a secure community with good facilities and predictable occupation. In Baja, for example, values are increasing by between seven and twenty percent annually. Again, it is wise to look at the developer’s previous work before making a commitment here.

Property within 62 miles (100 km) of the border and 31 miles (50 km) of the coast cannot be owned by foreign investors under the Constitution – a regulation which would seem to put the popular resorts and opportunities beyond the reach of the outside investor. To solve this problem, the government ruled that it would be possible to purchase in these areas through the setting up of a “fidecomiso”, or bank trust. This trust is defined as a transaction between a Mexican bank and a foreign individual or firm, with the bank acting as a trustee or legal owner of a property and the investor serving as the legal beneficiary of the trust. The bank holds the title to the property in trust for the beneficiary, who retains the exclusive right to use and control the property. The fidecomiso is set up for periods of up to 50 years and is renewable indefinitely for periods of 50 years thereafter. To set one of these up it is necessary to obtain a permit from the Secretary of Foreign Affairs, which will cost around $150. The fidecomiso set-up cost is based on a percentage of the property value and can be up to $750, and an annual trustee fee of between $300 and $500 is also charged. It is a good idea to shop around between banks for this service, as prices and fees vary.

It is essential when buying to ensure that the land to be purchased is not “ejido” land (communal agricultural land). It is only possible to buy the right to use this land, not to own it (unless you have the agreement of the whole community, and the process is arduous and risky).

Buyers this market will appeal to

Those likely to be interested in investing in Mexico are commonly people wishing to own a second home or to retire to a fascinatingly diverse country with a reliable climate, or those who intend to take advantage of the tourist market in popular areas and resorts. The market has mainly been filled by American investors – over a million US retirees have already invested here, although the British market is also beginning to take off, with around 5,000 UK citizens already having purchased.

Hotspots

The key to property buying here lies in choosing the right location, as Mexico is a vast country and not all of it provides viable opportunities for investment. Most high-end properties are located in the popular resort destinations such as Acapulco and in quieter towns on the Yucatan Peninsula, although other towns along the Gulf coast or on the Mexican Riviera (60 miles south of Cancun, with more restrained developments) are increasingly drawing wealthy home buyers.

The most successful tourist destinations in Mexico are Cancun and Acapulco. In Cancun, investors, developers, operators and professionals from all over the world have transformed a 429-person fishing village into one of the most attractive destinations in the world in only 30 years. This is not a place to go for solitude, however – it plays host to three million visitors a year and has ranks of towering hotels. A two-bedroom apartment in the hotel area of Cancun, close to the golf course, can be bought for £48,000 ($81,000), while beachside apartments usually cost substantially more. Acapulco is the most famous beach resort in the country, with a pulsating nightlife and buzzing social scene. On its doorstep is jungle, the Sierra Madre mountains and gorgeous beaches. Condos on the beach start at £100,000 ($170,000) and go up to five bedroom villas with a pool for around £530,000 ($900,000).

Around Baya de Banderas, Mexico’s largest natural bay, is an area of great contrast. The bay is home to Puerto Vallarta, another fishing-village which has become a world-class resort exemplifying the palm-fringed, thick jungle and up-market resort towns of the Mexican Riviera. The town has grown into one of Mexico’s slickest and most-loved destinations with 250,000 residents and more than 1.5 million visitors per year. Despite this popularity and development, the town still has cobbled streets and relaxed, white-walled architecture. Property in this area is considered a solid investment, with property prices rising faster than in Acapulco and Cancun. A three-bed, five bath two-storey house here can be bought for around £150,000, while luxury, beach-side villas can be found for upwards of one million US dollars.

At the lower end of the market are resorts on the Baja California Peninsula. With low rainfall, temperatures ranging from 25°C to 32°C with low humidity and its own international airport, the area has a lot to recommend it. The Los Cabos region, at the southern tip of the peninsula, is currently enjoying a real estate boom, with property prices ranging from £40,000 ($70,000) for a one-bed condo near the beach to several million for a large beachfront house. More typically, a three-bedroom, three-bathroom villa costs around £100,000 ($170,000). Developers will normally provide mortgages of 70%-80% of the value of the property.

Examples of other areas which are attracting large numbers of tourists every year are: Tijuana, with more than 36 million visitors every year – and Rosarita, south of Tijuana, which has a reputation for nicer beaches; Cabo del Sol, with a Jack Niclaus golf course chosen as the best course in Latin America in the prestigious Golf Digest poll of international golf courses; Tenochtitlan, with an ex-pat population of almost 60,000 US citizens; and Lago de Chapala, with an ex-pat community of over 40,000. This latter destination has earned a reputation for having the best year-long weather in the world, protected from the humidity of the Pacific by the Sierra Nevada mountains, and with an altitude which ensures warm winters and summers where the temperatures rarely rise above 26°C.

Purchase process

The most important person in a property purchase in Mexico is the notary public. The notary public, unlike in the US and UK, is an official appointed by the State Governor with the capacity to attest and certify documents and business and legal transactions that require authenticating. He also provides for strict security of original records and documents, and is required by law to perform a thorough title search for the benefit of the purchaser, and if buying from a developer, will be able to check their permits for the developments.

The basic purchase process follows a prescribed format, much of which the notary public will do for you. First, find a property and agree a value and find a notary public. An agreement to sell/buy (a “Convenio de Compra/Venta”) will then be set out, with detailed costs, inclusions and exclusions as well as deadlines, and a deposit of 5-10% is paid. If the property is in an exclusion zone, the fidecomiso must be set up. Then, permission must be sought from the Foreign Secretary’s office for the purchase of land. This is a formality. You will be asked to sign the “Calvo Clause”, stating that you will not seek foreign jurisdiction in dealings regarding your property transaction. A copy of the land/property deeds should then be obtained from the seller, and the notary public will check that the land is not ejido land and commission an official appraisal of the land. The notary public will require photo id, birth and marriage certificates and your visa showing that your presence in Mexico is legal. The seller will then need to present the original deed, up-to-date tax receipts for the property, public utilities bills (shown as paid), and up-to-date details of land service fees – also shown as paid. Capital gains tax is then paid by the seller, unless the purchaser has agreed to pay as part of the buying agreement. This will be calculated by the notary public. Payment of the balance, the notary public’s and solicitor’s fees, and taxes is made at the time when the deed is signed over, at the notary public’s office. The property must then be registered with the Registro Publico de la Propriedad, validating the transaction. On average, a sale will take up to three months from the initial agreement and payment of the deposit.

Customarily, the buyer pays taxes as follows: acquisition or transfer tax, at 2-6% of the land’s value; notary fees, at 2-3% of the appraised value (which is often much lower than the actual sale price); appraisal tax (the tax authority may choose to perform a commercial appraisal of the property after the purchase. If the appraised value is 10% greater than the price paid, the buyer will be asked to pay 20% tax on the difference between the two amounts); a registry fee, at 1.3% of the transaction value, in order to have the records updated. Property taxes are low, and are payable in January of each year. No VAT is payable on residential property. It is also wise to take out title insurance, which will cover you in case of any unexpected liens being found on the property – rates are usually around $5 per $1,000 of the property’s value. Fees add up to around 7% of the property’s value.

When selling, you will be subject to the fees of any professional service you contract, plus income tax on any gains and agents’ fees. If the home has not been your main residence for at least two years, income tax is payable – either 20% of the gross amount of the transaction, or 40% of the net profit. The notary public will calculate the exact amounts payable. Agents’ fees will be around 3-6% of the value of the sale, but may be negotiable. Finding a reputable agent is important, and a good starting point for this is the Real Estate Association, which represents 10,000 practitioners. Their web site is www.ampinacional.com.mx.

All property transactions are conducted in US dollars rather than the Mexican peso, eliminating concerns over currency devaluations. Remember that cash or monetary instruments of any kind with a value of or exceeding $10,000 must be declared when you enter Mexico (and when you leave the USA, even in transit from elsewhere). There are no limits on how much can be transferred in or out of the country, but official forms must be completed.

Finance is available in Mexico, but requires deposits of around 30-40% and entails high interest rates (around 14%). Some American banks offer mortgages on Mexican property, but they are usually offered on the back of equity built up in the USA and the rates are higher on the initial loan amount, to reflect the additional risk. It is more advisable to have your own funding available – possibly through mortgaging your own property at home.

Key risks and opportunities

In Mexico, as in many other countries, there are considerations which must be taken into account when buying property. Not all areas have a well developed infrastructure or are popular with tourists, and property prices will be cheaper in areas which don’t. It is a good idea to look at planned infrastructure improvements when looking for property. If a high speed road is being built connecting a previously remote location to other, better developed places, for example, a property investment in that area may increase substantially. Mexico is a vast country, and road and other infrastructure is improving every year – though this process will obviously take time.

It is a good idea to get to know the country, the problems and advantages, the specific area, the people and the real estate values. Seek the advice of someone who reads and speaks Spanish fluently so that you don’t miss legal nuances and idioms. Make sure the land is not ejido and that you know exactly what is included in the transaction – light fixtures, furniture and telephone lines are often not a part of a property purchase here.

Overall, Mexico provides a good, secure, potentially profitable investment. Mexican law favours investors and does not discriminate between foreign and domestic buyers. The country is growing in popularity, and is fast gaining a reputation as a tourist market to be reckoned with. This provides potential investors with substantial motives for investing – values are likely to rise and rentals to remain high in the popular areas for a long time to come.

Opportunity rating

With a great climate, vibrant culture and increasing demand from the US and international markets, Mexico presents a good opportunity for investment, and prices are still accessible to a variety of budgets.

Rating: $ $ $

Risk rating

Risks include the possibility of overdevelopment in the major tourist areas and cooling of relations between Mexico and the US.

Rating: * *

© Vacation Work 2005

“Where to buy a property abroad – An investors guide”, First edition 2006 David Cox, Ray Withers, Kate Godfrey.

Reproduced with the permission of Property Frontiers.

Further information on this topic can be found in “Where to buy a property abroad – an investors guide” 1st edition, by David Cox, Ray Withers and Kate Godfrey.

This book is available from all good bookshops nationwide at a recommended retail price of £12.95 or can be ordered directly from www.aninvestorsguide.com for £10.95 including postage and handling (to UK addresses only).

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