This is the third of three blogs in our mini-series covering what makes a real estate investment in Tulum such a great diversification tool for your investment portfolio. The first two parts touched on how the timing and structure of Tulum’s development fit into the history of Quintana Roo’s as well as the driving forces behind the healthy revenues that can be generated with a rental property.
If you haven’t already checked those out, here are the links:
This week we look at the operating costs that one incurs on a rental property in Tulum. A recurring theme that we hear from our investors is that they are quite a bit less than either country north of Mexico’s border, so let’s jump right in and use a two-bedroom, two-bathroom property of 130m2 with a purchase price of $250,000 as an example.
There are fixed and variable expenses, so let’s keep them separate. On the fixed side, there are annual fees like maintaining the real estate trust (the fideicomiso), HOA fees, internet, and my personal favorite: property taxes. The fideicomiso amounts to about $520 per year. HOA fees average about $2.50 per square meter of your property ($325 per month or $3,900 per year), and ultimately the owners in the building will come to an agreement regarding building maintenance, expenses, and if they want to build a reserve fund for the property for future capital expenditures. Depending upon the strength of the signal, the internet should cost about $25 per month ($300 per year). Property taxes are a mere $1 per $1,000 invested, meaning the aforementioned $250,000 property would cost $250 in annual taxes. The government even runs incentives that can reduce that by about 20% if property taxes are paid on time. Add these four items together and you have a fixed annual cost of $4,970.
What I did not include in these annually occurring expenses was property insurance. Many of my investors opt against it because construction is done with steel and concrete, and buildings are not going anywhere. Also, there are no frivolous lawsuits in Mexico, so liability insurance is unnecessary. If one were located closer to the water, content insurance may be a good option, and that would run about $450 per year to guarantee about $35,000 worth of goods.
For variable expenses, the primary items can also be the most expensive: electricity and property management/vacation rentals. Electricity varies on many things, however, a/c is usually the largest contributor to the bill. I recommend working with your property manager in order to strategize ways to remind guests to limit its usage, especially when they are not occupying the property. Regardless, if your property is consistently being rented out on a vacation basis, it will likely come in about $200-250 per month. Vacation rental/property management is super important, because they are marketing, selling, and maintaining your property. It is a big business in the area, however, I have found that spending the most (30% commission on rentals) does not necessarily mean that you will receive the best service. We have a few recommendations of trusted folks that we have worked with over the years, all of which will contribute to your generating the most income, and you keeping as much of it as possible.
I hope this rundown of expenses helps with your idea of what can be expected. Of course, other unforeseen expenses may arise over time as a property is rented. We are consistently seeing our investors that purchase the right properties, in the right area, decorated in the right way, and managed by the right companies very happy with the performance of their investments. Feel free to reach out to us with any questions. We would love to lend our expertise.
By: Andrew Schisler
