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Mexico: Overview

Country Rating  » Not Rated

Last Updated: Apr 04, 2009

Mexico never fails to disappoint

Mexico has long been marketed as the perfect retirement haven for American baby boomers. As the sunnier neighbor of USA (compared to Canada), it has excellent beaches and coastal towns. Property prices in Mexico are significantly lower compared to California or Florida.

In 2006 and 2007, when the US house price bubble was at its peak, many American developers started luxury resort and retirement communities in Mexico hoping to lure in retiring baby boomers.

However, the massive flood of American buyers never came. The current drug crisis with its link to violence and organized crime has been a big turn-off. Add to that, numerous stories of fake and dubious titles.

When the US housing bubble burst in late-2007, American developers were forced to cancel or put their projects in Mexico on hold. Scattered reports on the internet point to dropping sales since the second half of 2008. One article mentioned sales of vacation properties dropping anywhere from 12% to 60% in September 2008 from a year earlier.

One of the reasons for the lukewarm interest of foreigners on Mexico’s housing market is the constitutional ban on foreign ownership of land. Under the current system of fideicomiso, foreigners indirectly own real estate by setting up bank trusts.

Although this set-up is relatively safe for investments, it depends on the overall credibility of Mexico’s banking system and property registry administration, which not all foreigners are prepared to put their trust in.

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RENTAL YIELDS

Last Updated: Nov 20, 2008

Prices per metre in 4 parts of Mexico

Currently there are no 2008 yields figures for Mexico. However, prices per metre are available for houses in Acapulco, Baja California, Los Cabos and Quintana Roo from anywhere between 80 to 1,350 square metres. Highest average can be found in Los Cabos at US$ 3,763 per square metre with an average price tag of US$ 2.8 million. Versus a fraction of the price in Baja California at US$ 290,000.

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TAXES AND COSTS

Last Updated: Feb 18, 2009

Mexico has high taxes on rental income

Rental Income: Non-resident individuals are generally liable to pay 25% withholding tax on their gross rental income. However, they can elect to have their rental income taxed as business income and through this option; they will be taxed on their net income at progressive rates.

Capital Gains: Non-resident individuals selling Mexican property are generally liable to pay 25% withholding tax on the sales price. However, non-resident individuals with appointed local representatives may be taxed on their net capital gains (sales price less acquisition costs and related costs) at 28% for 2008.

Inheritance: There are no inheritance taxes in Mexico.

Residents: Mexican residents must pay income tax on their worldwide income at progressive rates, from 1.92% to 28% for 2008.

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BUYING GUIDE

Last Updated: Apr 20, 2007

Total transaction costs
range from low to high in Mexico

The total roundtrip transaction costs are around 4.3% to 17.8% of the property value, depending upon the location, and value of the property. Property acquisition tax, notary public fees and registration fees vary in each state and/or city. Additional costs for the buyer include title insurance, legal fees for Spanish-speaking lawyer, bank fees for setting up a trust (fideicomiso), and permit from the foreign affairs office. Real estate agent’s fee is around 3% to 6% (plus 15% VAT) and typically paid by the seller.

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LANDLORD AND TENANT

Last Updated: May 31, 2006

Laws are pro-tenant

Mexico landlord & tenant law is pro-tenant.

Rent Control: The rent freeze imposed in Mexico City in 1948, and lifted only in 1992, have driven investors out of the rental sector or to the informal rental market. Rent increases are generally tied to the consumer price index.

Tenant Security: The law favors the tenant and it is difficult for the landlord to evict the tenant upon the termination of the contract.

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ECONOMIC GROWTH

Last Updated: Apr 04, 2009

Mexico’s economy weakens with the US

The 1994 Tequila Crisis is one of the worst crises to hit Mexico. Years of overspending and fiscal irresponsibility led to a huge deficit and growing national debt. With the spending binge for the 1994 election combining with political uncertainty (the leading administration candidate was assassinated), risk premium for Mexico dramatically rose.

Since the peg of the Mexican peso to the US dollar could no longer be supported by borrowing, the government announced that it would allow the currency to float within a 15% band. This triggered capital flight. The massive pressure forced the government to abandon the peg. Within weeks, exchange rate rose from MXN4 per US dollar to MXN7.

The crisis led to massive economic disruption with millions of Mexicans driven back to poverty. Inflation was above 35% in 1995 and 1996, Short-term interest rates shot up to 48% in 1995 from around 15% from 1990 to 1995. Lending rates for mortgages skyrocketed while lending institutions were filled with huge non-performing loans.

Since then, the country has gradually recovered, while occasionally encountering political crises. After contracting by 6.2% in 1995, the economy grew by an average of 5.5% from 1996 to 2000.

However, Mexico’s recovery is highly anchored to developments in the US. About 90% of Mexico’s trade, nearly 90% of its foreign tourism, more than 75% of foreign investments come from the US. Remittances from more than 11 million Mexicans in the US amounted to US$24 billion in 2008, about 3% of GDP.

Hence, the economy contracted by 0.16% in 2001, due to the US techno-bubble burst and the 9-11 terrorist attacks. When the US economy recovered in the mid-2000s, Mexico’s GDP grew by average of 4% from 2004 to 2006.

With the US economy in recession since 2007, Mexico’s economy has also weakened. GDP growth in 2008 fell to 1.8% from 3.2% in 2007. Economic contraction is expected to continue in 2009, with GDP shrinking by as much as 3%. A minor recovery is expected in 2010 with 1% growth.

 

  • High yields for luxury units
  • Moderate transaction costs
  • Low to moderate income taxes
  • Pro-tenant rental market

RESIDENTIAL PROPERTY FACTS
Price (sq.m): $3,227 For a 250 sq. m. property, usually an apartment. Rental Yield: n.a.
Rent/month: n.a. Income Tax: 25.00% Assumptions: Owners are a non-resident couple drawing US$ / €1,500 per month in rent, with no other local income.
Roundtrip Cost: 12.8% The total cost of buying and then reselling an apartment. Includes:

* all transaction taxes and charges:
* lawyers' and notaries' fees
* agents' fees

Assumptions: The buyers are non-resident foreigners. The apartment cost US$250,00 / €250,000.
Cap Gains Tax: 23.8% Assumptions: The property was bought for US$250,000 / €250,000, and sold 10 years later, after a 100% appreciation.
Landlord & Tenant Law: Pro-Tenant Rating is based on a detailed study of each country’s law and practice.

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