In November, Cabo welcomes the return of those seeking to escape the cooler temperatures in the northern regions. Many arrive with rental reservations intending to remain through the winter months and into the spring. In past, I have emphasized the conditions making the current real estate market in Cabo ripe for buyers. For those renting a house or condo, it’s time to consider a purchase of property in Cabo. Turn that money you’re spending on rent into an investment. Many long-term renters spend between $1,000 – $3,000 a month for housing here in Los Cabos. Why not turn that monthly expenditure into income for you and your family?
A key factor when evaluating an investment is determining its “return on investment.” This is a simple mathematical formula to determine the performance of one’s money spent on a purchase; in other words, its profitability.
ROI = Net profit of investment / Cost of Investment
The return on investment is determined by dividing the net profit of the investment by the cost of the investment. Consider the following example.
Suppose you purchase a one or two-bedroom condominium in Cabo for $200,000. Consider a fair rental value of $160/night or $1,100/week. The general rule of thumb for rental property here in Cabo is a quality two-bedroom condo with a view of the ocean or access to the beach will have an occupancy rate of approximately 65 – 70% of the time or 36 weeks per year. These estimates forecast an annual rental income of $39,600. Note: Mexican law requires foreign investors to pay a minimum of 25% tax on rental income reducing the income in this example to $29,700.
ROI for Owning Property in Cabo Example
Determine the sum of all your annual expenses:
- Property taxes (annual) | $250
- HOA – $300/mo. (Varies by development) | $3,600
- Management (Varies depending on service provided) | $6,000
- Miscellaneous (Utilities, repairs, insurance, etc.) | $3,000
- Total annual expenses | $12,850
- Subtract the total annual expenses from your annual income $29,700 – $12,850
- For a Net Profit of | $16,850
To determine ROI, divide the net profit of the investment by the cost of the investment.
- $16,850 Net profit / $200,000 Cost of Investment
We discover your purchase of a condominium in Mexico has a return on investment of .084 or 8.5%. Please understand, this example is very elementary and one’s actual ROI is dependent on the various factors related to your investment. The important point to glean from this hypothetical is your real estate investment in Cabo can generate substantial cash flow for you and your household. On top of the income produced, you will benefit from the gradual and steady increase in
On top of the income produced, you will benefit from the gradual and steady increase in value of the real estate over time. Traditionally, vacation rental properties retain and appreciate in value due to their unique locations with a geographically limited supply. Additionally, it is recommended you discuss the benefits of owning a rental property with your tax professional. Paying less in taxes means more money for you! Soon you will discover that owning a rental property can be quite profitable.
Despite the financial benefits of owning a rental property in Cabo, one must not overlook the intangible advantages. Your very own piece of Cabo paradise waits for you to enjoy at your convenience! Consider how easy your traveling will be without schlepping all of your clothes, beach gear and essentials for each and every visit. The best part comes with the realization that your thoughts of the beach, the ideas of tranquil relaxation and romantic enchantment are no longer a distant dream. Your ownership of a part of Cabo becomes a reality.
When considering the purchase of a vacation rental property, the ROI calculation can provide a snapshot of your investment’s financial strength. Overall, it is best to engage the services of an experienced realtor. I have been helping real estate buyers for nearly decades and I also own rental property. I look forward to the opportunity to assist you in buying property in Cabo.
4 Comments
Lynette Fontreyes
Love your article lots of information to consider do you have any information on financing?
I live in Colorado and I would love to invest and Cabo San Lucas Area I am on a budget and would need financing thank you for your time.
Louis
We are looking to fiance a second home in Cabo and use it for a vacation rental.
Jeff Fisher
I am a gringo realtor having lived and sold real estate in Costa Rica for the past 20 years. Over the past five years our ROI
for rental income on vacation properties, is now closer to 1%, mainly thanks to high commissions paid for finding the rental clients,
whether from an independent local company, VRBO, Airbnb, or whatever. The property owner typically pays about 30% of the
rental fee to the rental management agency. How is it possible that in this analysis you guys put down only:
Management (Varies depending on service provided) | $6,000 for the year HUH? from $39,600 gross rental income? HOW?
I look forward to your response.
thanks
jeff
Jud
Jeff –
Thank you for your inquiry. As stated, many variables go into calculating the return on investment (ROI). The sample shown above includes actual numbers from a rental I am personally familiar with. The owner performs most of the effort utilizing a managing company for the simplest of services. My experience is the vacation rental sites such as VRBO and Airbnb do not assess a 30% fee for their services. In fact, both and charge a small (less than 5%) fee for processing payments and an annual advertising fee. When applying your 30% management fee to the example above, I calculate an ROI greater than 5%, still better than the 3-4% yield on Wall Street.
I emphasize I do not sell investments. I advertise and sell affordable real estate with incredible amenities offering a unique lifestyle in Los Cabos. Prospective buyers have the opportunity to generate income from their second-home when not utilizing it for their personal use. The return on investment formula is a tool to determine the efficiency and profitability of the property.