Puerto Vallarta, Mexico – There are a number of reasons why people purchase homes in our little corner of the world. Some purchase with the idea of living (often a relocation) in the Bay of Banderas (be that Mismaloya, Puerto Vallarta, Nuevo Vallarta, Bucerias, La Cruz de Huanacaxtle, or Punta de Mita, etc.)
Others purchase for the purpose of investing in real estate in our recovering market (prices fell significantly with the Great Recession in the US) – with an eye toward a resale at a higher value a few years from now. Still others purchase with the idea of renting out their home either 100% or a solid portion of the year.
As an investor (I have owned rental properties) and a local real estate agent, I thought that I would write a quick article related to a rental investment.
Owning a rental in a vacation city such as Puerto Vallarta is a bit different from owning a rental in a city such as Chicago. Rentals in the Chicagoland area (as I know well) are generally long term (year-to-year lease.)
While some rentals in the Puerto Vallarta area are long term, most people rent on a much shorter term (and higher $ / day) basis; most are daily or weekly rentals, with a heavy concentration (with higher rates) on our peak months (October – May). The nature of this type of turnover in the rentals lends itself toward offering separate monthly / weekly / daily rates (and even longer term yearly rates if the owner wishes to do so), but also toward the possible use of a local rental company to help ensure that tenants are checked in / checked out, and that any issues are addressed during their stay (or between rentals). I have used companies to assist me with my rentals in the US (it’s not easy to manage them long-distance), and I think that such a plan certainly makes sense here – especially with higher turnover (generally by design).
Many investors are concerned about the return on investment. In calculating the return, I have traditionally considered the following:
• Revenue – Expenses
• Annual expected appreciation of my real estate
• Value of owning / using a rental home (if you are planning to do so)
I include that second item (annual expected appreciation) in my calculations. After all, it’s great to have a property that’s cash-positive… but factoring in an increase (or decrease if our market was falling – it’s not…) in the value of the property over a period of time can make a difference in the calculation. It’s often an overlooked positive. I’ll discuss the third item later…
Revenue is easy to calculate, but not always quite as easy to predict. One can assume an average price per night (with a lower price during the summer months – we do have tourists during those months, just few than during the high season), multiplied by the number of nights and a percentage of occupancy. Discount that by whatever management fee you’re paying a company to manage your rental (if you are) – say, 20%, for example. One can check rental sites and ask for rental history to get a gauge of how a property or similar properties have rented in the past.
With that said, our tourism has increased substantially year over year. We have an increase in the number of flights, a significant increase in the number of cruise ships (often an individual’s first exposure to our beautiful area), and a road being built from Guadalajara that will dramatically cut the transit time (leading to more tourists). As such, I often look at the prior year rentals, but tend to assume that reality will be a little better as our tourism continues to grow.
Note: Some areas rent better (particularly short-term) than others. Be sure to ask your real estate agent or rental agency for advice on which areas rent best. Also note that past rental revenue may not be an accurate predictor of future rental revenue for a variety of reasons. Some owners market their properties much better than others, some focus on daily/weekly vs. annual rentals (daily/weekly generally yields a higher charge per day), some owners stay in their units a portion of the busiest season for rentals (meaning there would be no income for those weeks), some don’t price their rentals competitively, etc. With regards to expenses, there are a number of items to consider, including:
• Management fees (if you didn’t discount the revenue line earlier by that amount)
• Maid service
• Annual taxes
• HOA fees
• Any applicable taxes associated with rental income
Maintenance of a short term rental does have some associated costs (fixing small items that may be damaged, replacing light bulbs, etc.), painting, etc., but isn’t generally the largest line item. Keep in mind that labor rates here are MUCH lower than those in the US and Canada.
Annual taxes in the area are amazingly low. If a condo costs $300,000 USD, you can expect that your annual taxes will be somewhere around $300 USD range PER YEAR. I only wish that my investments in the US had such low taxes – what a difference that would make for my US investments!
Maid service isn’t generally very expensive – perhaps as much as $20/day for a typical condo. If you just have maid service in between arrivals (or once a week), that number remains rather low. Some rental agencies can help you obtain maid service, as needed.
HOA fees can be a significant number, depending on the building. Those HOA fees often (but don’t always) include water, gas, building administration, security, etc. They often do NOT include electricity. Water and gas bills here in Puerto Vallarta are generally not overly significant expenses. Electricity can be (especially during the warmer summer months) – IF your tenants are utilizing air conditioning frequently. Be sure to know what’s covered, and make some assumptions for those that are not (note that your assumptions will be seasonal – higher electricity during the summer). Another bill to consider is for cable and internet (or phone and internet – they generally come as a package deal). That’s not usually an expensive item. Mine costs around $35 USD per month.
That covers some of the basics of calculating revenue minus expenses, as well as a nod toward the inclusion of including the assumed annual increase in the value of your investment. There’s another point that really should be considered (and is often overlooked), though – the value of having a vacation home.
The value of having a vacation home? Yes. Now this is entirely subjective, but something that I think really should be considered (and indeed was a key factor behind my purchase years ago). Knowing that you have a vacation home to go to has a very real (and challenging to calculate) value.
It’s that escape that you can look forward to while working long hours in your home city. It’s that knowledge that you have a “home” to go to whenever you’d like. It’s the thought that all it costs is a plane ticket (not a hotel) to travel back to your other home. It’s the ability to have a place to offer loved ones (if you so desire) a place to vacation. It’s something to look forward to on a regular basis as the long winter months seem to drag on (or even those other times of the year when you simply want a wonderful change of scenery). There is comfort in that (I know that well!). That has a value!
It’s still a good time to buy in the Bay of Banderas area. I hope that this article provides a bit of insight on some considerations if you’re contemplating the purchase of home (as a rental) in the area that I call “home.” Should you have any questions, please don’t hesitate to contact me.