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.