In a Nutshell: Although Mexico has everything that a real estate investor could ask for, due to it’s on-going problems with drug related violence, I do not recommend investing anywhere in this country at this time.
Politics
Mexico has been an electoral democracy since 2000, and alternation in power between parties is routine at both the federal and state levels. However, the country suffers from severe rule-of-law deficits that limit full citizen enjoyment of political rights and civil liberties. Violence perpetrated by organized criminals, corruption among government officials, human rights abuses by both state and nonstate actors, and rampant impunity are among the most visible of Mexico’s many governance challenges. (Freedom in the World 2019)
Drug related violence continues to increase and 2019 is expected to be a record year for homicides. This is a major factor to consider wherever you might consider investing in Mexico. Personally, the violence is bad enough that I am currently not advocating any investment in this country. If crime can ever be more controlled, Mexico will make an excellent country to invest in.
Economic Outlook
Economic growth is expected to more than halve this year from 2018, dragged down primarily by weaker domestic demand. Fiscal consolidation, lower business confidence and lingering policy uncertainty are set to dampen investment and consumption. The risk of renewed trade tensions with the U.S., weaker global demand and Pemex’s ailing finances weigh on the outlook. FocusEconomics expects growth of 0.8% in 2019, which is down 0.3 percentage points from last month’s forecast, and 1.5% in 2020.
President Andres Manuel López Obrador’s uncertain economic policy has slowed Mexico’s economic growth perspective. However, consumption, fueled by positive consumer sentiment, is strong and is expected to drive growth slowly but steadily. The central question is whether the government will continue to implement austerity measures and what deceleration effects they may have on the economy.
Historical Real Estate Prices
Mexico’s housing market continues to strengthen with the nationwide house price index rising by 4.73% during the year to Q1 2019, an improvement from last year’s growth of 2.98%. In fact, it was the biggest increase since Q2 2016. On a quarterly basis, house prices increased 1.27% during the latest quarter.
Mexico’s real estate market has been buoyed by strong demand in resort communities, according to the International Consortium of Real Estate Associations (ICREA). American and Canadian buyers are returning to Mexico, after a several-year slump, thanks to low oil prices and the strong US dollar, pushing home values up.
Mexico’s rising middle class continues to boost the housing market. The country’s middle class was estimated to account for almost half of the total households, at 14.6 million. They are expected to continue growing, with about 3.8 million more households projected to move into the middle class by 2030.
Mexican Ownership Laws
Foreigners may obtain direct ownership of property in the interior of Mexico. However, under Mexican law, foreigners cannot own property outright within the restricted zone. Instead, a real estate trust (fideicomiso) must be set up to hold title for the foreigner. The restricted zone encompasses all land located within 100 kilometers (about 62 miles) of any Mexican border, and within 50 kilometers (about 31 miles) of any Mexican coastline.
All real estate transactions involving a fideicomiso are governed by federal law. This means that all such transactions are carried out the same way regardless of where in Mexico the property is located.
A fideicomiso is a trust agreement created for the benefit of a foreign buyer, executed between a Mexican bank and the seller of property in the restricted zone. The bank acts on behalf of the foreign buyer, taking title to real property. The bank, as trustee, buys the property for the foreigner, then has a fiduciary obligation to follow instructions given by the foreigner who is the trust beneficiary. The trust beneficiary retains and enjoys all the rights of ownership while the bank holds title to the property. The foreigner is entitled to use, enjoy, and even sell the property that is held in trust at its market value to any eligible buyer.
In order to allow foreigners to enter into the agreement contained in the Calvo Clause, Mexico requires all foreigners to apply for and obtain a permit from the Ministry of Foreign Affairs prior to contracting to acquire real estate in Mexico. This is currently done by the trustee/bank at the time a real estate trust is set-up.
Short Term Rental Regulations
In Mexico, only the owner of the property, also known as the landlord in a lease, has the legal authority to rent the property out. In a fideicomiso, it’s typically the trustee that has the authority to lease out the property. However, given the fideicomiso is nothing more than a contract, foreigners should not make any assumptions and should instead verify the terms of the fideicomiso to confirm who is the party that has the authority to lease.
Some fideicomisos will have language allowing the beneficiary (fideicomisario) to lease the property out, however, in the absence of such language, the trustee may be the only party with authority to lease and consequently, the only party that will be able to sign leases or license to use agreements. Unfortunately, dealing with trustees for short term leases may be impractical because of delays, and fees charged by trustees. Alternative recommendations include obtaining a power of attorney to lease, a trustee’s lease consent letter, or simply amending the fideicomiso to include express leasing authority for the beneficiary.
As an Investor, buying a property in Mexico to rent out short term can easily be done, but be careful. Legally, Mexican taxes must be paid and certain requirements must be met. Many people don’t bother and although they may get away with it for awhile, the risk is that they could be fined or have their property confiscated. Mexico is starting to crack down on owners not paying taxes on short term rentals.
For a foreigner to be within Mexican regulations for short term rental property:
- You must have a Temporary Residence Status (Green Card
- You need to hire an accountant and get an RFC (Tax ID)
- Obtain Temporary Residency for Lucrative Activities
Other local short term rental regulations vary by city. So, in addition to the federal requirements, popular tourist cities will likely also have their own regulations and tax requirements. See my blog on San Miguel de Allende for more on that city’s short term regulations.
Renovation Challenges
Check out this very thorough resource for building or renovating a house in Mexico
Renovations are never easy, and almost always take longer and cost more than initially expected. Mexico is no different. But renovations are very doable and there are plenty of good workmen available in most cities. Labor is cheaper than the U.S., materials are about the same cost as U.S. Most important, find a competent general contractor.
Fees to Buyer When Purchasing and Selling a Property
When you buy a property in Mexico, you’ll be presented with a range of ‘closing costs’ in addition to the property price; these costs usually range between 5% and 10% of the property’s sale price.
Purchasing and Selling a Property
Buyer pays:
- Notary costs ($650 to $1,200)
- Certificates of no liens, Buyer or Seller ($200 to $300)
- Registration Filing Fees ($100 to $300)
- Appraisal Fee, Buyer or Seller ($300 to $500)
- Acquisition tax (2% of purchase price)
- Trust Permit Fee ($1,000)
- Foreign investment registration fee ($300 to $800)
- Title insurance (.5%)
- and attorney fees (varies)
Seller pays:
- Real estate agent fees
Mexican Taxes on Rental Income and Capital Gains
Some foreign owners assume they do not need to pay taxes on the property because the income for the rent is paid to their home country bank account. This is not the case. Any rental property in Mexico is subject to tax in Mexico, no matter which country or bank account the rent is paid into.
Income Tax
Foreigners are normally required to pay a 25% gross rate, with no deductions. In some specific cases, they are allowed to apply a 35% expense deduction known as the “blind-deduction”, and lastly, foreigners residing in a country that has a tax treaty with Mexico may benefit from lower taxes or other treaty benefits.
Value Added Tax
Payable by renter but managed by owner or managing entity.
Local Property Tax
The local real estate tax is called predial, and it is payable yearly. Predial on average constitutes 0,1% of the assessed value of the particular property at the time of sale and is unchanged throughout the period of your ownership.
Property Tax
Property taxes in Mexico vary throughout the country and are calculated yearly depending on the real estate value established by officials. Residential property tax is typically around 6,5 pesos per 1000 pesos of assessed value.
Capital Gains Tax
The percentage is calculated on a sliding scale in relation to the gain. You should assume 35% as residential property sales with a gain above $250,000 pesos ($13,000 US dollars) will be subject to this rate.
U.S. Tax Laws
- Income from properties in countries outside the U.S. are taxed the same as income sourced from the U.S.
- Selling a property from abroad incurs same US capital gains tax as property in U.S.
- If it is your primary residence, you can exclude some or all of the capital gains depending on tax status and length of ownership, same as how this is calculated for a primary residence in the U.S.
- You cannot do a 1031 exchange between a U.S. property and a foreign property.
- You can take a foreign tax credit for any capital gains paid in the country where your property was located.
- If real estate is held through another entity, then tax form 8938 may be required.
Banking and Finance
US citizens can open bank accounts in Mexico. But they must have Mexican residency. As a foreigner, you cannot open an account online. You need to go into the bank. This is what you will need.
- Plastic immigration card
- Passport
- Proof of address
- Cash to put in the account (most require around 5,000 pesos to open)
You must make copies of items 1-3 listed above and bring them with you.
All principal Mexican banks offer online banking. Most major bills can be paid online, and queues in banks are notoriously long, so be sure to register for online banking as soon as possible.
If you have one or more bank accounts in Mexico with deposits totaling $10,000 or more, you must file form 114 (FBAR). If you have over $50,000 in Mexican foreign assets, other than real estate, you may need to file form 8938 (FATCA). See my blog on US Tax Laws.
Transferring money from a US Bank or institution is very doable. When you transfer money, you will send US dollars from your U.S. bank to your Mexican bank account. The Mexican bank will use its bank exchange rate to change dollars to pesos and put it in your account. Mexican banks aren’t going to offer very good exchange rates. US banks and most brokerages generally offer a better exchange rate. Convert to pesos within your financial institution before transferring to a Mexican bank.
Most real estate purchases by foreigners in Mexico use cash or equity from their property back home or with a developer’s short-term financing as there are few financing options in Mexico. But, if needed, you can get financing through a Mexican bank as long as you have residency and good credit. Interest rates will be higher than in the US. But a depreciating peso may make up for the higher interest. In other words, as the peso deprecates, you are paying off the loan with more valuable dollars when you exchange to pesos for the loan payment. Typical loan terms are 5 to 20 years, 80% to 90% LTV (loan to value) and rates from 11% to 15%.
Other Resources