What to Know About Buying in Mexico

If you’re looking for property that’s close to the beach in a year-round warm climate, you’d probably have to pay heavily for that stateside. But south of the border, Mexico is home to a flourishing real estate market that is much more affordable and has successfully lured hundreds of thousands of expats. Whether you’re seeking a retirement home, a rental property, or a recurring winter getaway, Mexico has countless options for scenic places to live and is only a few hours away from the US by plane.

While figures vary, in 2019, the Mexican Institute of Statistics estimated that there were at least 799,000 American-born people living in Mexico and The U.S. Embassy in Mexico City put that number closer to 1.5 million. In San Miguel de Allende, ten percent of the city’s residents are originally from the United States. Despite a lot of negative publicity that Mexico has garnered in recent years, expats have found Mexico to be much safer in general than the news would indicate.

While it may seem complicated to buy property in Mexico, the real estate market is hospitable to foreigners, who are able to legally purchase, live in, rent, sell, and even bequeath their property to their heirs. There is a catch though: foreign ownership of Mexican property was outlawed in 1917 and remained prohibited until 1973, when the government passed the Foreign Investment Law. The law allows foreigners to acquire property in Mexico, as long as it is located outside of the so-called Restricted Zones, which includes any land within 100 kilometers of foreign borders or within 50 kilometers of the ocean. As a consequence, this law largely prevented development in those zones and was modified in 1993 by the Mexican government. Foreigners are now allowed to buy property in the restricted areas but only indirectly through a “fideicomiso,” which is a trust agreement between the buyer and a Mexican Trust Bank. Under this arrangement, the title to the property is held by an authorized Mexican financial institution.  As the beneficiary of that trust, your property cannot be sold or modified without your express written permission. Today, these trusts operate on 50-year terms, and are renewable and transferrable. It’s always a good idea to work with an experienced real estate company that is familiar with Mexican law so that you are protected with the most accurate and up-to-date information. 

Financing

Financing a property in Mexico is technically available to Americans, but not quite as accessible as it is for Mexican citizens. Case in point: only about five percent of the real estate transactions that take place in and around the Puerto Vallarta area have any kind of mortgage financing. Over the years, there has been a trickle of lending institutions aimed at international buyers, but none of them stuck around for long. There were multiple challenges for creating this type of financing infrastructure, including a lack of reliable credit reporting services and verifiable appraisals. The majority of buyers have found it much more efficient and much less expensive to arrange financing in their home country based on the assets they already have there.

The Pros and Cons of Paying Cash

You may have recently sold a property and have yet to buy a new one. Or you’ve simply been able to earn and save and now you find yourself in the enviable position of being able to pay cash for a property. Either way, you’re ready to be an all-cash buyer. That sounds great, right? After all, most buyers are competing with cash offers, so at the very least, you’ll be competitive. While it may be hard to believe that there could be a downside to buying a property outright, there are a few things to consider. But first, let’s consider the advantages of paying all cash.

Pros:

No Interest

Interest rates are low right now, but they’re still not all the way down to zero. Being able to avoid financing altogether could save you tens of thousands of dollars – if not more – over the years.

No Closing Costs

This is another major area of saving. Lenders will usually charge thousands of dollars in closing costs. The application fees, underwriting fees, and mortgage insurance really add up.

Peace of Mind

Your property is completely paid for. Whatever financial hardships, job loss, or other issues you could face in the future will not have the power to force you to move. You’ll never have to worry about making another mortgage payment as long as you own this property.

While it’s difficult to imagine that there would be any drawbacks to being an all-cash buyer, here are a few things to keep in mind.  

Cons:

Reduced liquidity

If you bought your property outright and were ever in a situation where you needed to free up some cash, you’d be more likely to need a home equity loan. Home equity loans tend to have higher interest rates than traditional mortgages. Also, you would need to pay the closing fees you’d avoided earlier by paying cash. While this is a hypothetical situation, it’s not an uncommon turn of events with all cash buyers.

Missing out on tax deductions

One of the best advantages of having a mortgage is being able to deduct the mortgage interest on your taxes, but homeowners who pay all cash wouldn’t be able to benefit from this deduction.

Reduced investment capability

If you were to pay all cash for your property, your ability to buy an investment property or properties would be severely curtailed. If you can’t reap the benefits of passive income or grow your finances, that’s a pretty substantial sacrifice.

The Great Industrial Real Estate Boom

While the housing market has been grabbing all of the headlines, there’s another real estate market that’s been taking off in its shadows. Industrial real estate has been experiencing unprecedented demand that’s still continuing to grow. The need for warehouse space and e-commerce fulfillment centers has been so strong that it’s created a boom in an unexpected region of the country.

The need for industrial space was well in motion before 2020. Amazon had already introduced next-day and even same-day delivery for its Prime members. Simultaneously, major retailers such as Walmart and Best Buy were buying as much fulfillment space as possible to meet their demand. Once in-person shopping became either difficult or impossible, retailers entered a level of even greater demand for space, with newer types of retailers entering the fray. Even grocery stores suddenly became online retailers, a trend that has persisted, with Instacart now planning a network of fulfillment centers.

While demand was escalating, the pandemic also exposed the fragility of the global supply chain. Facilities in China and elsewhere had to close down, which created shortages of consumer goods stateside. Retailers responded by securing more storage space to help stave off future shortages, according to James Koman, CEO of ElmTree Funds, a private equity firm focused on commercial real estate. “The reshoring of manufacturing is gaining momentum,” he told CNBC.

Real estate firm CBRE said that almost 100 million square feet of industrial space was absorbed in the first quarter of 2021, and that a record 376 million square feet is under construction. Rents rose 7.1 percent from the same period a year earlier to an all-time high of $8.44 per square foot. Prices in densely populated coastal regions have been soaring by double-digit percentages. In Northern New Jersey, average base rent for industrial properties jumped 33 percent in May from a year earlier, and California’s Inland Empire saw an increase of 24 percent. The scarcity of inventory in these areas has often led to bidding wars.

With space on the east and west coasts becoming less of an option, retailers have embraced a new region to help address this logistical issue. Instead of looking for warehouses near the ports, retailers have tapped into what KC Conway, chief economist of the Certified Commercial Investment Member Institute is calling the Golden Triangle of industrial real estate. While the name evokes pricey real estate along a coast, the Golden Triangle actually stretches through the south and Midwest, between Illinois, Texas, and Georgia. No longer sticking to the ports, retailers are putting their freight on trains and storing it in warehouses and fulfillment centers in inland destinations.

In addition to its relative affordability, the Golden Triangle offers other logistical advantages. The region includes more than half of the U.S. GDP within its boundaries, while 90 percent of area households live within a five-hour truck drive of the rail lines and primary “last-mile” facilities. As a result, developers now build and lease more new warehouse space in Conway’s Golden Triangle than they do in the West Coast and Northeast regions combined.

Betting on a long-term need for fulfillment and logistics facilities, ElmTree Funds has acquired about $2 billion worth of industrial space over the past seven months, outpacing prior years. In order to meet demand, they project that there will be a need for an additional 135-150 million square every year in order to meet growing e-commerce demands.

“Last-mile logistics has become integral in every aspect of our economy and a critical component in the functionality of commercial real estate,” says K.C. Conway.

Can Commercial Real Estate Solve the Housing Crisis?

America is in the midst of a summer of recovery. While there’s still a way to go before we fully return to normal, millions of people are returning to their pre-pandemic way of life. People are gathering with friends and family again. They’re getting on planes and taking trips. Bars, restaurants, gyms, movie theaters, and even concert venues are reopening.     

Unfortunately, there are a lot of businesses that won’t be welcoming people back. Thousands of businesses in retail, dining, and hospitality had to permanently close their doors because of the pandemic. In addition to those spaces sitting empty, there’s a whole sector whose usefulness has been upended by the pandemic: office space. Some employers have shifted to partial work from home setups, while others aren’t requiring their employees to return at all. As a result, there is a saturation of available commercial real estate, while at the same time there is historically low inventory for residential real estate. On its surface, the solution looks simple: turn all of the unused space into housing. Crisis solved, right?

Unfortunately, there are some challenges to making this a reality. Transforming commercial real estate requires planning, a lot of capital, and in many cases, a local government that is favorable to the process. One of the major challenges of converting commercial real estate into housing is zoning laws. If the zoning for a building doesn’t permit residential use, the property owner has to apply for a zoning variance, which is a special permit to build something that doesn’t conform to the letter of the law. The process for this is fairly involved and there is no guarantee that it will work. The other option is to request rezoning. While this is an even greater uphill battle than requesting a zoning variance, some communities may be flexible on these regulations in the face of long-term commercial vacancies.

New York City: A Test Case

No US city has been more impacted by closures than New York City, where space is always at a premium. In addition to the shops and restaurants that were forced to close, more than 17 percent of Manhattan’s office space was vacant as of March of this year. As a result, New York is becoming a test case for efforts to transform commercial space into residential.

John Cetra, a co-founder of the New York firm CetraRuddy, has overseen numerous conversion projects throughout his career. According to Cetra, a common hurdle when converting office space to residential is the size of each floor. The distance from the building entrance to the elevator, referred to as a “lease span,” needs to be a certain size for the conversion to work. According to Cetra, a span of 30 feet is ideal. When it’s greater than that, sections of the new residence won’t have windows or any outdoor light. Even in buildings where the floor size is ideal, the costs on conversions can run high. Things like installing showers and kitchens can require an overhaul of a building’s plumbing and electrical systems.

It remains to be seen how long this commercial real estate slump will last. Currently, owners of vacant commercial real estate may be weighing their options, wondering how much longer they can afford to have their properties sit empty and whether it would be worth the expense to start the process of conversion. That’s assuming, of course, that there wouldn’t be any conflicts with the local zoning laws.

In New York, the government is starting to find ways to respond to the housing shortage. The state assembly recently passed a bill which would earmark $100 million for converting distressed hotels and office properties into affordable housing. (It’s currently awaiting the governor’s approval.) With a surplus of commercial real estate and a housing shortage in all fifty states, New York’s solution might become the norm in other markets.