I talked with a guy that owns 20 properties in Penasco...he is now doing great on rental income but thinks small timers...one to five .. Just can't make a buck long term..
Advice...from San Carlos Forum
Ok...Illegal??? Or just plain stupid??? Both!!!
The hoops to jump through to legally rent out a casa are costly and encombering. Most who rent out are doing it illegally and the others are nonexistant.
The Risks of Buying Investment Property in Mexico
Suggest reading the whole thing before purchasing rental property.
The Risks of Buying Investment Property in Mexico
With its stunning beauty, warm climate, friendly people, and low prices, it is very tempting to buy real estate in Mexico. We know it is risky, but it is hard to know exactly what the risks are and how to avoid them. I have bought five condos now in Mexico and have learned something new on each deal. Americans are accustomed to a high level of legal protection for transfer of title but this does not exist to such an extent in Mexico.
There are number of common risks areas to look out for and the following list is my no means exhaustive.
The agents are not licensed or bonded. Many agents, though members of the local MLS, do not know the market very well. Some do not know or even care if properties they are selling have title problems. If you send a down payment to an agent, the agent could disappear with your money. This has happened before. Even if it is a U.S. name franchise, if there is a problem, they will likely claim it is a different entity in Mexico.
Escrow agents are not bonded. It has been known for Escrow agents to empty out their escrow account and flee.
You are well advised to use a U.S. escrow. Fidelity Title in New York and Stewart Title in Houston offer escrow services. They will hold your money in a U.S. account until funds are to be disbursed based on the terms of your offer. Many Mexican escrow agents or real estate agents have U.S. accounts, but they can easily transfer funds into associated Mexican accounts.
A large percentage of the properties have title problems. You need to get title insurance. Even if you ask for title insurance and pay for it, you might not ever receive a policy. It is possible for a seller to sell a "promise to make a promise" and you'd never know you are getting a property with title problems. The escrow agents are recommended by the real estate agents, and have every incentive to make sure your cash gets disbursed.
The closing process is complicated and expensive. Foreigners buying near the coast or border have to obtain a foreign investment permit, and are required to hold title through a bank trust Fideicomiso.
There is an annual fee for the services of the trustee, about $300-500 per year.The amount of the annual fee is set in your trust documents so make sure your closing agent shops around. There is a big transfer tax. Expect to pay at least US$7,000 in closing fees which is non recoverable when you sell.
If you have any title problems it can take years to get it cleared. Make sure you hire an attorney to help you get clean title. Ask the seller if they have U.S. title insurance and if they have their Fideicomiso.
If the seller doesn't have a Fideicomiso, there is a reason why, usually some title problem. If the seller has a Fideicomiso, that is not a guarantee that they have clean title.
Don’t underreport transfer values. People used to under-report values so the seller could pay less capital gains tax, and buyer could pay less transfer tax. But the government has caught on.
If you do this, or allow the seller to do this, you will find yourself liable for the seller's capital gains. If the seller doesn't pay their capital gains, for any reason, you have to pay it. So you have to modify the contract to state that the seller doesn't get any money until they pay their capital gains taxes. You need an attorney to do that for you.
There is a rich history of re-socializing property. Watch out for Ejidos (communal farming land). In case of any dispute, the agrarian judge always rules in favor of the Ejido. In the Puenta Banda story in Ensenada, there were rumors of corruption, maps being redrawn, etc.
If you stay 183 days, you are a Mexican resident for tax purposes and subject to Mexican income tax on your worldwide income.
If you do have income in Mexico, you are supposed to pay estimated taxes every month. It is a nuisance, and the tax hurts your cash flow. You don’t get the deductions you get in the U.S. Tax is based on gross rent.
Mexican tax laws change all the time. Capital gains taxes weren’t too bad if you were a resident for a couple of years before you sold. But that exemption is no longer there. Capital gains taxes are huge. Your capital gains taxes go down the longer you own a place.
Now that you have a foreign trust, you have to file special documents with the IRS that no accountant knows about, forms 3520 and 3520A. If you don't do it in time (and it isn't the normal tax deadline),the penalties can be drastic.
It is hard to get money out of Mexico. One way I've figured out to do it is via an ATM card. Bank drafts are too expensive. Their mail system is too slow and not trustworthy. But there is no problem getting money from the U.S. to Mexico using Western Union.
To open a Mexican bank account, you first need an FM3 visa and a Mexican light bill. You can get the FM3 (365 day visa) from a Mexican consulate with three month's of bank statements showing above some amount (around $1000) deposited each month. You also need photos without glasses, and you need to pay in cash. You also technically need the FM3 to own real estate in Mexico. And if you are going to rent out your property, you need a “lucrativo” FM3 which has additional requirements (hire a lawyer to help you upgrade your FM3). The FM3 makes it easier to enter Mexico (you can use the Mexican citizen line) but more difficult to leave (you have to get permission to reenter from immigration at the airport, and they will ask you what you have been doing in Mexico).
You have to repeat the FM3 process when you arrive in Mexico and register with local immigration. You basically need the same documents all over again.
You have to renew your visa in the exact same town year after year. There is a lot of corruption in the Immigration department. The easiest way to renew a visa is to hire a lawyer and pay them a fee to help you renew the visa.
To get the utilities changed to your name (which you need to do to open a bank account), you need a full copy of your trust documents and the photo page of your FM3 and an old light bill from the previous owner (or at least their name or the address).
If you want to actually use the condo yourself, you will need to find a manager who is willing to do short term rentals. Good managers can be hard to find.
You have to bargain. Asking price is not necessarily close to true market value. There are MLS "sold" books but the agents do not report any data. You could hire an escrow agent to search public records for neighboring properties, but you will have to pay for the service. You will have to convert pesos into dollars using the exchange rate in place at the time. Also, many values are underreported. Make low offers and be patient. You'd be surprised. A lot of owners want out badly for whatever reason (e.g., high condo association fees, inherited property).
Standard real estate commission is 10%. There are big savings to be made by avoiding properties that are on the MLS. But you need the advice of someone who knows the market. And you need a lawyer.
Be aware that it can be hard to sell in Mexico. Because agents often set the asking price too high, pendencies can be long.
Make other owners, property managers, and condo association managers your first source of information. Don't waste your time with agents who don’t know the comps(use agents with lots of experience). The managers can sometimes help you find a condo at a reduced commission. The real estate agents are not legal experts and will not guarantee you clean title. Other owners will give you candid advice and can be found on
VRBO® is Vacation Rentals By Owner.
Don’t use a short “offer to purchase” form supplied by a real estate agent. Those typically only protect commissions. Get a lawyer to draft a “pro-buyer” offer for you. Make sure to address that U.S. escrow will be used, that the recorded value will be the actual contract value, that no funds will be disbursed until your attorney is satisfied with the commitment for title insurance, that no funds will be disbursed to the seller until capital gains taxes have been paid, and that unit will be sold as shown, with no furniture removed.
Edited to remove duplicate language.
Last edited on Sat Jan 26th, 2013 04:12 pm by bartmanaz
, my mother was also a broker in AZ.
