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.

Active vs. Passive Investing: Which is More Profitable?

There are as many ways to invest your money as there are ways to spend it. Having said that, most investment strategies can be classified in either two ways: active investing and passive investing. Each strategy has its advantages and disadvantages, but one has a stronger track record for return on investment. But first, let’s break down each one.

Active investing is typified by investing in fluctuating assets, such as stocks and bonds. Active investing requires active oversight, typically by a portfolio manager. With active investing, you’re trying to anticipate the way the markets will rise and fall in order to determine the best times to buy and sell. It’s up to the portfolio manager to be laser-focused on market changes in order to strategize transactions.

Passive investing is carried out over the long-term with more stable assets for a buy and hold approach. Index investing in a good example of a passive investing strategy, in which investors buy into a representative benchmark, such as the S&P 500 index, and hold onto it for the long term. This strategy removes the need to scrutinize the ups and downs of each investment. Passive investors need to resist the impulse to buy or sell depending on market fluctuations. It’s basically a long-term investment in corporate profits across multiple companies.

So how do these two strategies stack up against each other?

Passive Investing Pros

  • With passive investing, the fees tend to be lower, since no one is actively managing the investments.
  • There is a clarity and straightforwardness to investing in an index fund. You always know what funds are included.
  • You are unlikely to have a large capital gains tax as the gains are modest.

Passive Investing Cons

  • When you buy into an index fund, those funds are pre-set, so the investor has no ability to specify which stocks to invest in or divest from.
  • The immediate returns on passive investing are smaller than the potential dividends from active investing. With passive investing, slow and steady is the name of the game.

Active Investing Pros

  • With active investing, investors and their portfolio managers have the freedom to invest in whatever stocks they like.
  • Active investors can exit specific stocks when they are underperforming. 

Active Investing Cons

  • Active investing is more expensive. With active portfolios, managers can charge one percent or more, compared with 0.6 percent on average for passive investments.
  • Active investing is inherently uncertain and requires constant attention.

As with most investments, the real question is which strategy will be more profitable.  Surprisingly, multiple studies have concluded that passive investing is more profitable. Only a small percentage of actively managed funds do better than passive indexes. With active investing, there is a higher likelihood for volatility, so whatever quick gains you receive can just as easily be canceled out by a quick drop. While passive investing doesn’t offer the exhilaration of a fast windfall, it ultimately offers a higher return.