Located on the beautiful Riviera Maya about an hour from Cancun, Playa del Carmen is increasingly known among the digital nomad crowd as a fun, cute, little beach city. It’s reached a point where some people say it is too late to make a real estate investment there.
But is it really?
Personally, I like it a lot and even obtained residency in the Riviera Maya 🙂
In this article we will explore
- The macro outlook for Mexico
- The Real Estate Market in Playa del Carmen
- Key catalysts for Playa del Carmen real estate
- In which neighbourhoods to make a real estate investment in Playa del Carmen, Mexico
- A case study of a rental yield calculation for an Airbnb investment
- A case study of a rental yield calculation for a long-term rental
- Conclusions on making a real estate investment in Playa del Carmen
- Who should invest in Playa del Carmen real estate?
Mexico has attractive demographics
With a fertility rate a bit above two children per woman, Mexico ranks higher than any Western country. It is quite visible when traveling around the country.
People tend to forget that Mexico is an absolute ogre population-wise with its 128 million inhabitants. It is the second most populous Latin American country after Brazil, with 210 million people, and well ahead of the third, Colombia with 50 million people.
A large economy that has been growing steadily, but somewhat sluggishly
The most objective way to look at the country’s growth is on a per capita PPP basis, to capture how much people are really gaining from GDP growth.
These numbers are decent, but in all honesty they are a bit disappointing when taking into consideration the (mostly) free trade agreement with the US and Canada. A massive country with such a surplus of affordable labour, should objectively be doing better.
A slightly disappointing current account for such a large manufacturer
The 2022 and 2023 current account deficits are projected to be between -0.5% and -2% of GDP.
This is in spite of booming remittances
Remittances from Mexicans working in the US represent 4% of Mexican GDP, and are a lifeboat for many families. Uncle Juan in Oakland is more of a safety net than the Mexican government. It also demonstrates the hard work of Mexicans in the US, considering the amount of Mexicans did not grow by such an amount proportionally over time.
Clearly, Mexicans in the US have been gradually moving up the food chain in terms of income.
However, Mexico is a country with very decent government finances
In a world of government debt to GDPs in the Western world of mostly 100%+, Mexico’s figures are quite sobering.
However there are two massive trends that forecasters are not yet taking into account for Mexico
The world is bifurcating between East and West, with a third, more neutral block in-between just as during the Cold War (Mexico is in this latter block).
The inevitable result of all of this drama, is that re-shoring will become a top priority for Western companies and governments. After having outsourced most of its production of goods to China over the past 20 years, the US finds itself in a situation where it must re-shore production, and reduce its exposure to China.
The collective West installed a new sanctions regime – “If we don’t agree with you, we sanction you and seize your assets overseas”, which it did to Russia and its foreign reserves. China now knows how the collective West behaves, and will seek to create massive damage to Western supply chains in case of increased tensions.
Western companies, whether they like it or not, will have to diversify away from China. A lot of this production with go to the likes to Vietnam, etc. But an obvious candidate is just across the border. Mexico will be in a prime position to massively benefit from this de-globalization and re-shoring trend. It is a huge catalyst that is not being taken into account by mainstream forecasters.
In a world of natural resources supply shortages, Mexico is a prime producer
This should greatly bolster Mexico’s current account deficit thanks to exports, and render Mexican industry more competitive.
Mexico is flush with natural resources. It is the world’s biggest silver producer and a top 10 miner of gold and copper, as well as lead and zinc. It is also trying to develop its energy-transition Lithium deposits.
Importantly, in spite of government efforts to increase environmental and regulatory checks & balances on mining operations, Mexico is the 4th biggest recipient of mining foreign direct investment (FDI) in the world.
Mexico’s energy policy is a mixed bag. It is a net crude oil exporter, but net importer of refined petroleum products, and a net importer of natural gas, though it has substantial reserves. It is the world’s 13th largest oil producer and has the world’s sixth-largest technically recoverable shale gas resources.
For many years the oil & gas industry was not prioritized, was not incentivized to explore, and the large state-owned company PEMEX was used for political gain.
The government is now trying to heavily encourage oil & gas exploration. This is undoubtedly the right decision, but it will take time for results to be visible. The current energy crisis will absolutely be a catalyst for faster action.
Mexico has an economy that will muddle along, but with pockets of excellence
I believe that Playa del Carmen and Tulum are two such areas of excellence. But before digging into the driving forces, I must say a few words on the mortgage market.
The mortgage market in Mexico is primarily for homeowners who live in their homes, rather than investment properties as the rates are really high (almost 9% and going up).
The advantage of investing in a market with a lot of leverage is that when times are good real estate values goes up a lot, but when times are bad, they descend with a vengeance.
This is a core advantage of making a real estate investment in Playa del Carmen these days – prices are less likely to go down than in Phoenix, Vancouver or Paris. Both locals and foreigners who invest in this market are mostly cash investors.
H0wever prices are already relatively high
Playa del Carmen is not cheap if you want to buy an interesting apartment in one of the walkable areas. It’s more expensive than Mexico City, and together with Cancun and Tulum is the second most expensive area in Latin America after Punta del Este in Uruguay.
But unlike these other Latin American cities, prices are much more heavily linked to the North American market, as this is the main target market, as well as Mexican industrialists who are themselves very tied to the American economy.
So yes, absolute prices are expensive relative to the region, but it’s a completely different market.
Overall, I don’t feel that Playa del Carmen is a market to seek substantial capital gains. I rather see it as great diversification, a potential lifestyle play, a residency play in some cases, and mostly a cash flow play. One can get decent rental yields.
I also believe that structurally, this market has a lot less downside than most Western markets due to its cash nature, and the many catalysts.
4 key catalysts that make a real estate investment in Playa del Carmen interesting
1. Staggering development in the Riviera Maya
The government has made it a key national priority to develop this whole region. I don’t need to elaborate too much on Cancun airport, which is Latin America’s 4th largest by passenger volume (after Mexico City, Bogota, and Sao Paulo). Almost 15 million (mostly tourists) flock through its terminals every year. Cancun Airport is even better connected to Europe than Mexico City for example.
Let’s not forget that originally, Cancun was nothing. It was just a stretch of pretty coast. In the 1970s the Mexican government decided to create a resort city there and national funds were used to develop infrastructure and hotels.
So yes, the Mexican government can be rather inefficient in many regards, but it pull this one off as Cancun is now one of the world’s top beach destinations.
The Mexican government is now doubling down. It is building a whole railway system linking Cancun to the rest of the Southern coast and Yucatan. People call it the “Maya train” as it’ll cover all the main tourist attractions such as nice beach towns, airports, Maya ruins, and colonial cities such as Valladolid and Mérida.
It’s not just a far-fetched plan; it’s actually happening. I saw some of the construction and building myself. There are some hiccups due to environmentalists wanting to stop the economic development, but the first stations will be operational from late 2023.
Importantly, Playa del Carmen will be one of the key stops. As it stands, one must take a one-hour taxi or bad public transport to get from Cancun to Playa del Carmen, a turn-off for many people. In the future they will be able to easily zip between the two cities.
One of the drawbacks of Playa del Carmen is that is sometimes feels a little small, so once the train link is established, people will be able to get to Cancun very easily to do what they need to do there. This extra accessibility is a major catalyst.
Additionally, the government is working on a second international airport in the region, in Tulum.
The airport should be operational from 2024, and will be an hour’s drive away from Playa del Carmen. There will be direct flights to Chicago, Dallas, Panama, Mexico City, etc.
Henceforth, Playa del Carmen will not just be an hour away from one major international airport, but two, and connected to both by rail.
2. Digital Nomads
The reality is that a few hours flight away from Playa del Carmen is a massive market of high-earning Americans who simultaneously realized a few things:
- They can work almost entirely remotely.
- They can work from abroad, thus leaving behind an increasingly toxic environment. This perception of toxicity applies to Americans of all political stripes.
- They can live a quality life for less money abroad and in many cases can save on taxes if structured properly (feel free to get in touch with my tax consultants here)
Millions of Americans have either reached these conclusions, or soon will. Europeans too, but the main market in Playa del Carmen will be North Americans as they are closer, the time zones are the same, and they earn more than Europeans so are inherently more interesting target customers.
First-time American digital nomads will stick to the name brands in terms of travel destinations, which is bullish for making a real estate investment in Playa del Carmen
Playa del Carmen is one of the world’s top digital nomad destinations, along with places like Chiang-mai, Bali, Budapest and Medellin.
3. North American political and cost-of-living refugees
The influx has already started, and is bound to grow. I am not referring to digital nomads who move here for a few months or a year before bouncing off somewhere else. I am referring to people, of all political stripes and ages, who move down to Mexico full-time. They sometimes have online businesses, but often they still have businesses back home which someone manages for them, they are retired, they live off passive income, or start actual businesses in Mexico.
I have met a few types of such people:
Liberals who fear a right-wing dictatorship in America
I’ve met a few of those. They fear that they are gradually losing their rights in America (recent supreme court rulings) and that the country is just waiting for a radical turn to the right.
Conservatives who fear a left-wing dictatorship in America
They feel the federal government is after them, that the IRS will persecute people, and that their rights and freedom of speech are under attack.
Apolitical Americans who are sick of all the politics in America
They just want to live in peace away from all the nonsense. The beach in Mexico is a good destination for this.
People who don’t want to get vaccinated and who feel they have more medical freedom in Mexico. Of all political stripes. Conservatives, health practitioners and hippies. Lots of Canadians.
Europeans who flee conflict
Playa del Carmen has a lot of Ukrainians who fled the conflict, and Russians who relocated to flee the sanctions. Increasingly, forward-thinking Western Europeans are preparing Plan Bs outside of Europe as they feel their governments are behaving too aggressively. They fear that their governments will draw them into yet another war as they did in WW1 and WW2.
Cost of Living refugees
As inflation eats away people’s savings in Western Europe and North America, and as the healthcare systems gradually fall into decay (Europe and Canada) or become too expensive (America), many people will move down South where the cost of living is lower.
Granted, Playa del Carmen is not the cheapest destination in Mexico, let alone in Latin America. But it is conveniently located, English is relatively widely spoken, and it is nevertheless affordable and comfortable. We can expect tens of millions of such Westerners to leave the West in the coming decades. Playa del Carmen will attract quite a few of them, especially as obtaining residency in Mexico is easy.
Investors must understand that not all such people are “cheap”. If you earn $70,000 in Illinois you can live a decent enough life, but in Mexico you will live extremely well.
Same thing with Europeans, €30,000 per year in Belgium will afford you an average existence, but in Mexico life will be more than comfortable.
4. Walkability is a true competitive advantage for the real estate investment market in Playa del Carmen
This is one of the key selling points of Play del Carmen compared to Tulum and especially Cancun.
If you live in the center or near the center, Playa del Carmen is very walkable. You can lead a bit of a village life without having to buy or rent a car. In an age of inflation and high petrol prices, this makes a difference. Also, for people who just want to stay a few months, or plan to stay for a week on holidays, walkability is a key factor to avoid hassling with taxis. Playa del Carmen is also bicycle-friendly.
Why I did not mention tourism
Tourism is obviously the number one target market for your real estate investment in Playa del Carmen with the millions of travelers landing at Cancun airport and that will land at Tulum airport in the future.
However, we must not ignore the macro environment. The reality is that we are entering a world of expensive energy, which will mean much more expensive flights and of squeezed real incomes due to surging inflation all over the Western world.
This will not be without consequences. People that could once afford to go on vacation, might not next year, or might go on vacation to Mexico for one week instead of two weeks. Such a macro environment is inevitably a net negative for tourism in most places in the world. I believe that Europeans tourists especially, will see their numbers drop as inflation in Europe and a low Euro take their toll on people’s wallets.
This being said, domestic Mexican tourism is gradually waking up to the Riviera Maya, and there are these other catalysts that should help make up for a loss of organic tourism growth. The new infrastructure will attract people who would not have come, and all these digital nomads and refugees of various types will help fill the properties of real estate investors in Playa del Carmen.
In many cases tourism is a zero-sum game. A tourist has only X number of days to spend every year. You must remain attractive to stay ahead of the competing destinations.
In which neighborhoods to make a real estate investment in Playa del Carmen
This is crucial to understand. As much as I love Playa del Carmen, there are only a few areas that I would view as a good investment. There are many great lifestyle options, but few are also good as a pure investment.
5th Avenue, at the core of the real estate investment market in Playa del Carmen
The first thing to know is that everything revolves around 5th avenue in Playa del Carmen. It’s a long stretch close to the beach where all the tourist shops, restaurants, bars, cafes and clubs are located. It’s in many ways the heart of Playa del Carmen life. People generally want to stay close to 5th avenue, but not directly on it due to noise.
A formerly high-end gated community that is walking distance to the center of town, making it unique among gated communities that are farther away. There is golf, a mall, and a number of dining options. When walking around the community one can tell that it is past its prime but overall, it is a very decent option for people who are looking to live somewhere long term. It’s very pleasant.
As an investment I find the prices a little too high for a gated community that is fully developed and getting a little old. I don’t see much upside, and the yields won’t be as good as in the center of town.
This is the area with the most restaurants, bars, clubs, shops, etc and where first-timers will typically look to book an Airbnb. If you buy in this area your occupancy rate will be very high. Bear in mind that unlike Europeans, Americans have 2-3 weeks of vacation per year, so when they go overseas they splurge. They want to be in a nice building in the best area and can afford it.
Europeans on the other hand have much more time, and less money, so they tend to spend less on accommodation. For Europeans and future growth, you should rather invest in this upcoming area.
I like this area from an investment perspective. It’s certainly not the prettiest, with some low-income housing and bars around, but it has the advantage of being a mere ten-minute walk away from the beach, and is still mostly underdeveloped. But clearly, development will happen here.
Also, people who want to stay for a few months in Playa del Carmen don’t mind staying in this area as it is close enough to the entertainment area and the beach, and right around the corner from all the malls, Walmart, etc which are important for daily life.
One can find older apartments between 10-20 years old for about $1400 per m2 ($130 per ft2) and then renovate them. These would do well on the mid-term market as they are much more spacious than new units and have a lower rental price points. Gross yields of 9%-10% can be reached with such investments.
This area is just as expensive as “core center” yet there is less rental demand as it is not too known yet. This leads to lower rental returns, however it is a much nicer area than the “core center”. I firmly believe that over time people will gradually prefer to stay here than in the traditional core center. The urban planning is better, it’s prettier, and it feels more premium. I’d say this is a good area for people who want a mix of great lifestyle without compromising on location and quality.
Personally, this is my preferred area to hang out.
“Future 5th Avenue Development”
Fifth avenue can only go North. For now this area is still rough but new luxury buildings have started popping up, and more will come for sure. 5th avenue is the beating heart of the city, so expansion in this direction is all but inevitable
This area is still very rough around the edges, and without the benefit of immediate access to the beach. Prices aren’t significantly different from south of CTM avenue, but it is worth less. Generally speaking, north of CTM is rough, while south of CTM is a lot more investable. It will change over time, but I feel it’s still a bit too early.
Forget about investing anywhere past the highway. It is vast, there is literally endless land for further development. If you buy something here, four years later there will be a new development that will be much nicer for the same price. It’s not a bad place to rent especially if you have a car, as it’ll be cheap, but don’t expect to make your capital work hard for you there.
Case study of a real estate investment on the long term rental market in Playa Del Carmen
This 2-bedroom, 2-bathroom condo is in an older building in the core center of Playa Del Carmen, a three-minute walk away from the beach. It is currently being sold with long term tenants that are paying $1,500 per month. Here is a breakdown of the numbers.
|Closing costs (+-6% notary + $2,600 for local trust)||$18,200|
|Total purchase price||$278,000|
|Yearly rental income ($1,500 per month @ 90% occupancy)||$16,200|
|Administration / Property management ($200 per month)||$2,400|
|Yearly HOA / Common charges ($100 per month)||$1,200|
|Yearly property tax||$200|
|Yearly trust renewal costs||$600|
|Total yearly costs for a long term let||$5,000|
|Net pre-tax income||$11,200|
|Net rental yield ($11,200 / $278,000)||4%|
Can you do better?
Yes. At about $2,000 per m2 ($180 per ft2) it is much cheaper than new developments due to the age of the building and lack of amenities such as a pool. However, the location trumps it all. On Airbnb such a unit would do well, and you’d probably end up with about 6% net yield after all deductions.
If you want to get higher yields for long term rentals, it is possible to earn 5%-6% net if you aim for renovating older units in the area that I tagged as “Future Development”. I heard of condos going for $1,300 – $1,400 per m2 (+-$120 per ft2). Such units invariably need a renovation job done, but then do well on the long-term market as the price points are affordable, the condos are spacious, and the location is close to all the shops and stores. Foreigners on slightly lower budgets prefer renting in this area due to the good value and short ten-minute walk to the beach and 5th avenue.
A video Case Study of an Airbnb real estate investment in Playa Del Carmen
My real estate buyer’s agent Luigi and I did a full case study of an investment in an Airbnb studio in core Playa del Carmen. We broke down all the numbers in detail, including occupancy rates, monthly income, costs, etc..
You can watch the Youtube video here.
Who should make a real estate investment in Playa del Carmen?
People who want to spend part of the year in Mexico would do very well making a real estate investment in Playa Del Carmen
People who want to mix lifestyle and a place they can rent out. Playa del Carmen is an amazing beach destination, there is a lot to like about it, and it is absolutely possible to spend a few months of the year there as a tourist, or even obtain Mexican residency, and then rent out the apartment on Airbnb for the remainder of the year. If people want to maximize their ROI, I recommend they list the condo on Airbnb from mid-December until end April, which is the peak season.
A real estate investment of a minimum of $175,000 using the right structure qualifies the investor to residency in Mexico, and there are many other ways to qualify. More details here.
Westerners who want to diversify without taking on too much geopolitical risk, in a very established destination
People who want to diversify away from Western countries, without taking geopolitical risk. Mexico is unlikely to get involved in any war, and investments are welcome from all over the world. In many ways it is a bit of a safe haven. Granted, Playa del Carmen is not the cheapest of destinations, but it is very established, and importantly comes with minimal currency risk on rental income as rents are set in USD, not in Mexican Pesos. The yields are lower than in Medellin for example, but the risk is much lower.
The fact that it is mostly a cash market also offers downside protection compared to Western markets and their rapidly rising interest rates.
Conclusions on making a real estate investment in Playa del Carmen
Overall I view the Playa del Carmen real estate investment market as relatively safe diversification with decent cash flow and a great lifestyle component. Investors should not expect massive capital gains, as the city is already well-established and it is priced in.
I particularly like older properties, and off-plan/pre-construction real estate. I believe that this is where the best value is to be found. I would tend to avoid properties that were completed in the past 5 years, as they are fully priced; the upside is gone, and they offer less value compared to the older properties.
Make sure to get in touch with Luigi to make a real estate investment in Playa del Carmen
Luigi, originally from Montreal, has been living in Mexico for many years and even obtained Mexican citizenship. What I like about him is that he is extremely numbers and investment focused, which is very valuable. Most realtors in Playa del Carmen think only lifestyle, but Luigi is more interested in finding good investments for his clients. You can find out more about his buyer’s agent services here. Alternatively, you can send him an email: email@example.com. Include your Whatsapp number if you use it as he is a keen user 🙂
If you want to read more such articles on other real estate markets in the world, go to the bottom of my International Real Estate Services page.
Available services in Mexico:
Articles on Mexico:
- Easy 4 year residency for past tourists in Mexico
- Full Analysis of the Tulum Real Estate Investment Boom
If you want to discuss your internationalization and diversification plans, book a consulting session or send me an email.