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Buying an Airbnb Vacation Rental in Mexico

Buying an Airbnb Vacation Rental in Mexico

If you've always wanted to explore your real estate options in Mexico, now is a great time to start dreaming big. In owning your own vacation rental property you combine two things that are very interesting. You get to live out your dreams while earning money. In recent statistics presented through Statista, When it comes to buying vacation rentals - Mexico is proving to be a truly remarkable destination far beyond oceanic views, tacos, or tequila!

As a property manager who is on the lookout to scale your business with a foreign investment then Mexico could be your next big real investment. However, as you would for any major investment, it's important to do your due diligence before purchase. So let's dive right into the details.

Aloha - Discover Mexico!

Mexico is the third-largest country in Latin America. A country bursting with historic landmarks, interesting cultures, and world-renowned cuisine, Mexico has it all. Well known for its world-class beaches along its Pacific and Caribbean rivieras to 16th-century Spanish-colonial towns oozing with charm, Mexico offers up some of the best of Latin America.

Buying an Airbnb Vacation Rental in Mexico

Tourism in Mexico: What to know

Tourism is an important industry in Mexico. Traditionally the country has been among the most visited countries in the world and it is the second-most visited country in the Americas, after the United States. In 2017, Mexico was ranked as the sixth-most visited country in the world for tourism activities. Furthermore, Mexico recorded a total of 97 million tourists in 2019 ranking fourth in the world in absolute terms!

Mexico has a significant number of UNESCO World Heritage sites with the list including ancient ruins, colonial cities, and natural reserves, as well as a number of works of modern public and private architecture. Mexico has 35 World Heritage Sites as of 2018, including 27 cultural sites, 6 natural sites, and 2 mixed sites. In terms of a number of Heritage sites, the country ranks first in the Americas and seventh worldwide. From the Agave Landscape and Ancient Industrial Facilities of Tequila to the Pre-Hispanic City and National Park of Palenque, the country is bursting with Mexican cultural traditions that are beloved world round.

Among the main attractions of this beautiful country are the cultural festivals, colonial cities, nature reserves, as well as coastlines adorned by Spanish colonial culture and architecture. Mexico has a strong and colorful indigenous influence, with amazingly fine weather amidst dozen mountain ranges forming some of the key attractions that bring tourists as well as foreign investors into this beautiful country.

Buying an Airbnb Vacation Rental in Mexico

Peak Tourism Season in Mexico

Tourism peaks in the country during December and the middle of summer, with brief fluctuations during the week before Easter and Spring break, when many of the beach resort destinations become popular with students from the United States.

U.S. and Canadian tourists make up the majority of tourists in Mexico. Most of the other visitors are from Latin America. Europe and Asia also make up a small portion of the tourists.

Why invest in a vacation rental In Mexico?

Renting out your vacation property in Mexico can be a great way to build up your expertise and experience as an investor. It's not only a great way to see your investment grow, but it's also a great way to relax and enjoy yourself in the process too!

Forbes announced that Mexico is the country to invest in 2021. Mexico is also a popular location for second home ownership because foreigners can own property in Mexico. Mexico has long been a destination for retirees but Latin America's second-largest economy is heating up and is rated as one of the top four places in the world to own a second home and/or a profitable vacation home investment. The exchange rate is attractive to a lot of foreign investors and there has never been a better time to invest than now.

Buying an Airbnb Vacation Rental in Mexico

Some of the top reasons to invest in a vacation rental in Mexico are,

  • Strong and growing economy
  • One of the world's top tourist destinations
  • Well established tourism sector
  • Strategic location - which is the close proximity to the United States.
  • Great retirement investment
  • Earn a healthy rental return by investing in real estate.
  • Great opportunity for expanding your vacation rental portfolio in a foreign country

What you need to know before buying a vacation rental in Mexico

Here are a few things you should know about buying in Mexico.

1. Mexico’s Best Bargain Land

Ejido land can be a terrific bargain. But, in Mexico, ejido land is communal agricultural land granted to a community, usually an indigenous one. Even though this land was not worth much at the time, it is now considered prime beachfront land. To purchase some of it, you would need the approval of 100% of the community members, separation of your parcel from the ejido, and conversion of your parcel to a freehold title.

Converting ejido land to private ownership is a complicated and difficult process There are, however, reputable legal firms in Mexico who specialize in converting ejido land into land that can be sold via a freehold title.

If you feel you’ve got an irresistible opportunity to buy legally converted ejido land, the below process is recommended

  • Verify that the property is recorded in the property registry as a freehold title before your purchase (don’t convert it concurrently with your purchase).
  • Have an independent, third-party attorney review the title’s history and assess the legality of the ejido land’s conversion to freehold title.
  • Purchase title insurance to guard against future legal claims, which may be valid or frivolous.

Side Note : Altogether it’s best advised to avoid ejido land.

2. Foreign ownership is not restricted

Generally, there are no restrictions on the ownership of residential property in Mexico, and you can hold the title in your own name.

  • You can choose to hold it in a trust—for asset protection or estate planning purposes—but it’s not required.
  • If the property is near the coast or an international border, however, special rules will apply.

3. Purchases near the coast or land border are subject to special rules

Mexico has a restricted zone—called the Zona Restringida — that occupies a band within 50 kilometers (31 miles) of the coast or 100 kilometers of an international land border. It has been illegal for non-citizens to own property in this zone since the early 20th century.

To encourage foreign investment, the government created a workaround in 1973, which was formalized in 1993. Briefly, it permitted property to be bought within the restricted zone through a trust. Known as Fideicomiso trusts, they are similar to Land Trusts in the United States.

What is a Fideicomiso?

A fideicomiso is essentially a bank trust. The system is sanctioned by the Mexican government and is secured by Mexico's central bank, and through this setup, foreign buyers can have the Bank of Mexico legally hold their property title. The property trusts are renewable on a 50-year basis, and the beneficiary (the foreign buyer) has all the rights commonly enjoyed by Mexican owners. In a fideicomiso, the bank cannot sell the property without the buyer's written consent, and the buyer can own multiple properties, leave them to heirs, and sell the trust. Owning property through a trust includes a setup cost and maintenance fees between $ 500 and $ 700 USD.

4. The Notary

The notary in Mexico is appointed by the state governor and must be an attorney with at least five years of experience. A notary is your representative in the buying process in Mexico. He is not an impartial third party, nor does he represent the seller.

  • The notary will perform a title search, prepare all the paperwork, process the real estate transaction, record the new title with the municipality, and collect the taxes and fees.
  • Be sure to hire a notary who is fluent in English, unless you’re a fluent Spanish speaker. He will serve as your translator, and explain what all those Spanish-language documents are saying.
  • Don’t have your real estate agent serve as your only translator at the notary office.
  • Don’t use a notary who does not speak your language.

__Side Note : In a straightforward property sale, you do not need a second attorney. __

5. The Sales Contract

In Mexico, all official documents are in Spanish, which includes your sales contract and closing documents. Most good realtors will provide you with an English translation of the sales agreement. It is a great way to make sure both you and the seller fully understand the terms of the transaction, such as the sales price, included items, or any special conditions or contingencies.

  • It's important to keep in mind that if there is a conflict between the English version and the Spanish version, the Spanish (official) version will prevail.
  • During negotiations, ensure that any changes made by you and the seller on the English version make it through to the Spanish version.
  • Depending on your needs, you can have some of the official documents translated by a third party.

5 Tips to Buying the Best Vacation Rental in Mexico

1. Location

Everyone wants a vacation home where the weather is great, and there are lots of fun and interesting things to do. Choosing “off-the-radar” holiday home destinations will keep your purchase price low and your occupancy rate high.

2. Research for a better ROI

Buying a vacation home at a high price can take a long time to pay off. You can calculate your ROI and potential profit by comparing the prices of nearby vacation homes.

3. Property Management Team

Your vacation home may be occupied or vacant depending on the quality of your property management team. Online reviews are essential when booking vacation homes. As you are aware, online reviews can significantly impact the occupancy rate of your holiday vacation home.

4. Taxes

Foreigners in Mexico are subject to different tax rates on rental income, capital gains, and property taxes. Depending on how you structure your rental income taxes, you can either be profitable or lose money.

5. Quality Construction & Design

Choose a unique property with special features or uncommon architecture. Knowing which room designs and features tourists desire the most can help you generate higher occupancy rates and ROI. Properties with high unique selling points tend to generate more income.

Buying an Airbnb Vacation Rental in Mexico

A Quick Guide to refer when Buying a Vacation Rental in Mexico

The notary and your agent will handle the majority of the processes outlined here. Your only responsibility is to sign the documents and pay the fees.

  • Negotiate a Price - This is usually done verbally, either with the seller or through your real estate agent.

  • The Sales Contract - This can be called a promesa de compraventa, convenio de compraventa, or contrato de compraventa, depending on local custom. Document the terms and conditions of the sale here, including any special payment arrangements and penalties.

  • The Deposit - Normally, this will be 5% to 10% of the sales price.

  • Initiate Creation Of The Fideicomiso (If The Property Is Within The Restricted Zone) - Alternatively, you can transfer the previous owner’s fideicomiso into your name.

  • The Foreign Secretary's Office Must Approve Your Purchase - You will be asked to sign a statement indicating you will not seek foreign jurisdiction in relation to your property transaction.

  • Title review and official valuation (Avalúo) - The notary will perform or arrange these activities. The valuation will be used to establish the home’s value for tax purposes.

  • The Escritura (The Title / Deed) - Sign the escritura at the notary office, and make the closing payment. When signed and recorded, this escritura will be your title to the property.

  • Taxes, Fees, and Property Registration - All of this is done by the notary. You’ll just need to hand over the money.

  • Final Registration - The property registry will complete and record the final registration within three months.

  • Closing Costs - Closing costs should be about 5% of the purchase price. This includes a 1.5% notary fee, a 2% transfer tax, as well as other fees, including the fideicomiso setup fees. If you are getting a mortgage, the fees will be higher.

Buying an Airbnb Vacation Rental in Mexico

Impact of Airbnb in Mexico

According to data reported by Airbnb, travelers that use this rental platform in Mexico generated 2.7 billion U.S. dollars in tourism revenues in 2018, putting Mexico in the top ten ranking of countries with the greatest Airbnb direct economic impact in the world. This impact was calculated based on host income and estimated guest spending.

According to data from Airbtics.com, the share of international Airbnb guests in Mexico slightly surpassed domestic travelers in May 2020. In April, local tourists accounted for over half of the guests that used the popular online lodging platform, overturning the trend registered in previous months. From November 2019 to March 2020, the country registered the highest shares of domestic Airbnb guests, with figures above 63 to nearly 70 percent. In 2019, domestic spending accounted for 85 percent of total spending on travel and tourism in Mexico.

Agreement between Airbnb and Mexico

In Mexico City, Airbnb has negotiated with the local government to pay city taxes directly to Mexican authorities. Like hotels, Airbnb pays a 3% tax to local officials on total booking revenues. Airbnb has also said that their objective in the region is to replicate the same agreement that has been reached in Mexico City.

Airbnb Rules and Regulations in Mexico

Mexico is a popular choice for first-time Airbnb hosts. Mexico Airbnb hosts must, however, keep up with Mexican taxes or face penalties and fines. You need to understand how to calculate and pay Mexican taxes on rental income if you own an Airbnb property in Mexico.

Tax Considerations for Mexico Airbnb Hosts

When it comes to paying taxes in Mexico, there is no distinction between residents and non-residents. Regardless of whether you're an American citizen or not, you must pay Mexico Airbnb taxes.

As a rental property owner, you are required to pay Mexico Income Tax, called ISR (Impuesto Sobre la Renta) in Spanish, and Mexico Value Added Taxes, called Impuesto al Valor Agregado (IVA) in Spanish. Thanks to a tax treaty between the United States and Mexico, the IVA that you pay is deductible on your US tax return and you can use the amount of Mexico Income Tax paid to offset your US taxes so that you are not doubly taxed.

How to Pay Mexico Airbnb Taxes

  • In order to pay income taxes in Mexico, you must first register with the Servicio De Administración Tributaria (SAT), which is part of the Finance Ministry (the Secretaria de Hacienda).

  • If you earn income in Mexico, you must register for taxes. The rules are the same for both residents and non-residents. Upon registering with the SAT, you will receive a tax identity, known as Registro Federal de Contribuyente (RFC).

  • For non-residents, only income that is earned in Mexico is subject to taxation. While Mexico does require both individuals and businesses to pay taxes, they pay taxes at different rates. You must submit your annual tax return by April 30th of the following year. For example, you have until April 30, 2022, to file taxes for the tax year 2021.

How to Calculate Mexican Rental Tax

There are three main methods of calculating the tax on rental income:

  1. You can claim a blind deduction equalling 35% of your total income, without any additional deductions. You must pay a 35% tax on whatever is leftover.

  2. Taxpayers can also deduct permissible expenses and pay a 30% tax on the leftover net income. Qualified deductions include property tax, maintenance, employee wages, and other business-related expenses.

  3. If you’re not a resident of Mexico and you don’t have an RFC or FM3 visa, you can pay a 25% Income Tax (ISR). However, you must still collect IVA from your Airbnb guests. If you own Mexican property through an LLC, you can also qualify for this program.

Mexico Airbnb: IVA Tax

You must collect IVA from your Airbnb guests. The IVA tax rate is 16% in the country’s interior and 11% in the border zones. Due dates for IVA vary based on your RFC number.

Each state government also has its own taxes on lodgings which you are required to pay. This tax totals roughly 2-3%. The municipal government may also tax your rental property, so check local regulations to stay in the clear.

Emerging Mexico Vacation Rental Markets

The following data analyzed by AirDNA gives a screenshot of the emerging markets in Mexico to look out for,

San Cristobal de Casas

Market Grade: A+ (95/100) 1,337 active rentals.

Saltillo

Market Grade A- (84/100). 311 active rentals.

Guadalajara

Market Grade: A (93/100). 3,412 active listings.

Chapala

Market Grade: A (94/100). 544 active rentals.

Oaxaca

Currently in the top 10 in the country for places with the most long-term stays (28+ days)

Market Grade: A+ (97/100). 2,449 active listings.

Mérida

Market Grade: A+ (97/100). 3,511 active listings.

Word to the wise before we conclude

With foreign investors clamoring to claim a piece of this Haven country, Mexico is clearly a buyer's market, perhaps one of the best in the world when it comes to vacation rentals. It's getting out among the international elite, and the market is stabilizing rapidly, even as we speak. For those looking for foreign investment to expand their portfolio now is the most opportune time and that too at a fraction of the cost! Act now before the window of opportunity closes.

Hostaway

How can Hostaway Help?

There are a wide array of services that Hostaway provides through the Property management system (PMS) which also serves as a channel manager. It is one of the most sophisticated state-of-the-art systems that support, managing inquiries, recurring guests, distribution channels, owners, and staff all in one place.

Contact our sales team or request a free demo if you need help setting up your Airbnb listing.

Ready to find out how Hostaway can transform your business?

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