Back in October I released a video with my agent Luigi analyzing the real estate market in Playa del Carmen. We had decided to do a case study of an average Airbnb investment. The numbers were not amazing but they were typical of lifestyle/Airbnb properties whereby people buy a property that they can use for parts of the year, and rent out for the rest. This time we are looking at investing in multifamily housing in Playa del Carmen which can be much more interesting.
About 2 months ago Luigi called me when I was in Medellin telling me there is this great deal he would like to show me and that he would like to go 50/50 on.
If a real estate agent whose judgement I trust wants to go 50/50 with me on a deal, at the same conditions, I’m all ears.
Needless to say, I flew down to Playa del Carmen for 36h to have a look at it. We decided to buy it. It’s now under contract.
This multifamily unit that we are presenting in this video below is a different building, but it is in the same space.
As I mentioned in my full analysis of the Playa del Carmen real estate market, I find real estate in Playa del Carmen to be interesting diversification due to the flood of people moving there on a permanent basis, the massive infrastructure development happening in the Riviera Maya, and re-shoring away from China to Mexico being in its early stages, which will be a major boost for the Mexican economy.
Not everything is perfect in Mexico as its stagnating economy of the past 20 years demonstrates, but these are three very powerful trends that I would like to have a stake in.
This case study is unique. We’re looking at a multifamily building, in an area of Playa del Carmen that isn’t great for now, with mostly local tenants, and the possibility to add a floor.
High cash-flow real estate with upside for some multifamily housing in Playa del Carmen
On a micro level, such an investment gives decent cash flow, is very cheap, is close to the beach, and offers upside as Playa del Carmen continues to boom.
You can get in touch with my realtor Luigi here.
You can read my whole analysis of the Playa del Carmen real estate market here.
You can read my whole analysis of the Tulum real estate market here.
I’ll probably make a short video of the multifamily unit we bought together next time I go to Mexico in a few weeks time.
To a World of Opportunities,
The Wandering Investor
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Partial transcript of “Investing in Multifamily Housing in Playa del Carmen”
LADISLAS MAURICE: Hello, everyone. Ladislas Maurice from thewanderinginvestor.com. Today, I’m in Playa del Carmen with Luigi. Luigi, how are you?
LUIGI: I’m fantastic. How are you doing?
LADISLAS MAURICE: Good. Good, good. So, Luigi actually called me a few weeks ago, and he was like, “Ladislas, you need to come down here to check out a deal.” Luigi is trying to rope me into a deal–
LADISLAS MAURICE: but also, at the same time, he is like, “You should check out this building because the rental yields, the capitalization rates are very interesting.”
LUIGI: That’s true.
Two types of real estate investors in Playa del Carmen
LADISLAS MAURICE: So when we take a step back, there are essentially two types of investors that come to Playa del Carmen.
LUIGI: Right. There’s the investor that’s coming in to buy condos, apartments, and they want to put it on Airbnb, they want to do a vacation rental. And they say to me, “Well, we’ll use it a couple of months of the year, maybe a month of the year, but we want to just put it in a vacation rental pool.” And that’s okay, that’s great. A lot of people are doing that. And then there’s the other side, which is all of the people working in tourism in Playa del Carmen, and the people who live here also need a place to live, which is more long-term rental. And there’s a market there, and that’s what we’re going to take a look at today.
The investment case for multifamily real estate in Playa del Carmen
LADISLAS MAURICE: Cool, fantastic. So yeah, because a lot of people come here, they say, to your point, “I want to invest in something but I want to spend part of the year here.” These people need to realize and eventually realize that when you go for part lifestyle, part investment, the reality is that your capitalization rate, your net rental yield is going to be a bit lower. But then again, if you want it for lifestyle, that’s perfect, and you have a lot of suitable units for this, and again, you want Airbnb so that you have access to your units. If you’re a pure investor and you’re just looking at just your cap rate, your rental yields, then we’re going to be looking, this is what we’re going to be looking at, an entire building that’s for sale. How many units?
LUIGI: Eleven units. So there’s one two-bedroom and ten studios.
LADISLAS MAURICE: Great. And not very expensive at all, it’s going for approximately $500,000 for 550 square meters. So that is roughly $900 per square meter, or $85 per square foot. And it’s a 20-minute walk away from here.
LUIGI: Yeah, if you walk down Fifth Avenue, it’s about 20 minutes. Yeah.
LADISLAS MAURICE: Perfect. And net capitalization rate is over 8%. And we’re going to go to the building right now, we’re going to have a look at the units. And we’re going to do all of the numbers in detail in terms of gross revenue, and then all the line items in terms of costs so that we can really see the whole cost structure and really understand the net rental yields.
So Luigi, thank you very much.
LUIGI: My pleasure. You know I love doing this.
LADISLAS MAURICE: Yeah.
LUIGI: It’s what I do.
Exact gross revenue for this multifamily real estate in Playa del Carmen
LADISLAS MAURICE: So let’s go through Luigi’s specialty, which is going through all the numbers.
LADISLAS MAURICE: All right. So 10 units, 10 studios plus a two-bedroom. So what rental income can one expect, on average, from all of the studios?
LUIGI: From the studios, if we’re looking in dollars, I imagine here you can definitely get $500 a month.
LADISLAS MAURICE: Yeah.
LADISLAS MAURICE: And $500 is a conservative number, to be clear. And how would you find tenants? I mean, you would do that as the property manager or one of your colleagues. But what’s the market like? How do you find tenants here?
LUIGI: You know what, when people use Marketplace, Facebook Marketplace, and then also brokers, there’s just rental brokers that the word gets out really quickly. If you give people a nice place to live at a good price, there’s a lineup.
LADISLAS MAURICE: This city is absolutely booming. When you first came here a few years ago, how many people lived here?
LUIGI: I moved 2005, there was about 20,000, 22,000. The population was 22,000.
LADISLAS MAURICE: And now?
LADISLAS MAURICE: And it’s still booming. I don’t have a doubt that these places would rent out. And what about the two-bedroom?
LUIGI: This two-bedroom is really large, so I would probably do $700 a month for the two-bedroom. And around the terrace right now, it’s a big terrace.
LADISLAS MAURICE: Yeah, it’s a nice terrace.
LADISLAS MAURICE: And furnished, correct?
LUIGI: Everything’s furnished. Furnished everything, as you see it, that’s what you get.
LADISLAS MAURICE: And the building is being sold with furniture?
LUIGI: With everything, as you see it. Yeah.
LADISLAS MAURICE: Cool. So as a landlord, what expenses would I be expected to cover? So in terms of utilities and the like?
LUIGI: Okay, so as a landlord, you would probably want to give people Wi-Fi in the building. So you would cover that. You would cover the water, you would, from the rent, you would cover also maintaining the property. I think it would be a good idea to have a cleaning lady or a cleaning man, someone, a maintenance person on the premises all the time, just making sure that it’s always well-maintained and clean. Also, cleaning the apartments once a month to also ensure that the apartments are always well-kept. So that’s basically the cost. The tenants take care of the electricity.
LADISLAS MAURICE: And that’s actually the big one.
LUIGI: Yeah, that’s the huge one, especially if you’re running air conditioning here.
LADISLAS MAURICE: Yeah.
LUIGI: Yeah. So tenants take care of that. Everyone’s got their own meter.
LADISLAS MAURICE: Cool.
LADISLAS MAURICE: This is big. Cool. So $700 a month for this two-bedroom?
Occupancy rate for multifamily real estate in Playa del Carmen
LADISLAS MAURICE: So essentially, if we do this over a year, so the 10 units of $500 plus the unit at $700, we get to $68,400 per year gross. Would you estimate the occupancy rate would be?
LUIGI: When we do our numbers, you know I like to use 90%. However, because these are long-term leases, when you know that a lease is about to run out, I’d say two months prior, I would put it on Marketplace and let some agents know, some of the brokers know, and you would have someone waiting to take over the lease once the current tenant vacates. And so you would have maybe one or two-day downtime just to clean, turn it over, and do any maintenance. So really, 90% is a good number, but you can run it probably a little higher.
LADISLAS MAURICE: Cool.
LADISLAS MAURICE: Let’s run with the–
LUIGI: 90%, yeah.
Property management, cleaning, water, internet, maintenance fees for multifamily real estate in Playa del Carmen
LADISLAS MAURICE: 90% to be safe. Property management fees?
LUIGI: I’d say probably around 10% for a building like this.
LADISLAS MAURICE: Cool, 10%. You were mentioning the cleaning person. How much would that be per year? Because it’s, what you’re doing is quite– like in all the markets I invest, this is quite a new concept for me, of having a cleaning person not just take care of the common areas, but also going into every apartment and cleaning the apartments once a month. This is your recommended approach.
LUIGI: I recommend it just because, as an owner, you want to make sure that the places are being cleaned so when you get the key after a year, there isn’t too much maintenance to be done. And that’s a way for also for the owner to keep an eye on each unit. So I would say a salary– (laughs) What?
LADISLAS MAURICE: Yeah, I’m just thinking of a landlord like you, I don’t know, (laughs) sending spies into my unit.
LUIGI: No, it’s just fine. But it would be in the contract that, once a month, you get a cleaning, and it’s included in the rent. And so, you would have someone on salary, and you’d give someone work every day. So that would cost approximately about $3,000, $3,500 a year to have someone here.
LADISLAS MAURICE: Cool. And I think this is really interesting because, ultimately, labor in Mexico, especially for that sort of labor is really affordable.
LUIGI: But then also you treat them nice, you give them bonuses at the end of the year. As a landlord, you want to make sure that they have work every day and you want to make sure that they’re happy and they’re able to pay their bills, too. So yeah.
LADISLAS MAURICE: Yeah. So you help give someone a job and then, at the same time, to your point, you’re making sure the apartments are clean and well-maintained.
LADISLAS MAURICE: At the end of the day, paying three-and-a-half thousand to have your entire building clean all year round and being aware of what’s happening inside of your units is very positive. I mean that’s very affordable when you take a step back and you look at that.
LUIGI: It is affordable. And you can even increase it. Like I said, as an owner, you want to treat your staff well.
LADISLAS MAURICE: Yeah.
LUIGI: You give them the salary for three months, see how they work out, and if they do a good job, you can increase that.
LADISLAS MAURICE: Cool.
LADISLAS MAURICE: All right. What about water? You said the landlord needs to cover this?
LUIGI: Yeah. And the water is so cheap here. What do we put there? Let’s see, probably around maybe under $2,000 a year for water.
LADISLAS MAURICE: Cool. What about the internet?
LUIGI: So for internet, if you do high-speed internet here, most packages are about 500 pesos per line, per modem. So I would probably put maybe three, maybe four in here.
LADISLAS MAURICE: Yeah. One per floor?
LUIGI: One per floor so everyone can hook up to it. You’re looking at probably around $1,000, maybe $2,000 max, if you wanted to increase the lines, if you want to put on the rooftop and add another one, it’s about $1,000.
LADISLAS MAURICE: Okay. So about a thousand a year?
LUIGI: A thousand, yeah.
LADISLAS MAURICE: And in terms of maintenance, when there’s, I don’t know, some tiles that are broken, or an issue with the roof, or some plumbing, how much maintenance per year?
LUIGI: I like to run with about a $2,000 a year, have that account always with $2,000 to make sure that anything needs to be replaced. You know, parts at the hardware store, things like that, are pretty cheap, so it’s just a little labor. I wouldn’t have someone fulltime on payroll, but you bring them in whenever you need the job done. So $2,000 should cover it.
LADISLAS MAURICE: And it’s one of the advantages of investing in markets like Mexico, where labor is affordable and generally competent as well to do such jobs, is you have low maintenance costs. So it’s not like when you have a plumbing issue in New York or in Paris, where you immediately have four months of rent that’s like gone. (laughs)
LUIGI: Or, it’s like $200 to $300 in Canada, you still get the plumber to come to your house. And then after that, it’s everything else to repair.
LADISLAS MAURICE: Yeah, just him coming is that.
LADISLAS MAURICE: So maintenance is very low, which really helps with your rental yields and your capitalization rates. So, look, this building is $530,000. Let’s run with the assumption that we can negotiate it down to $500,000. You were saying you think you can bring it down more?
LADISLAS MAURICE: Yeah, okay.
LADISLAS MAURICE: Let’s run with the assumption 500K.
LUIGI: I think I can, yeah.
LADISLAS MAURICE: 500K. Closing costs, we have to say, in Mexico, are high. That’s one of the disadvantages of buying in Mexico. So 7%?
LUIGI: Seven percent, yeah.
LADISLAS MAURICE: Right? So we’re at $535,000. And then you were saying you do a bit of fix up a few things, the common areas, some lighting, the whole laundry area as well. So you estimated how much in renovation works?
LUIGI: I’d say I put down about $30,000.
LADISLAS MAURICE: Yeah, and to improve some of the furniture pieces and all that?
LUIGI: Maybe, yeah. And that’s not including building another floor, that’s just to take the building as is. I would do an exterior paint job, maybe update a little bit of the furniture, make it a little nicer. But yeah, $30,000 should be more than enough.
Rental yield and capitalization rate calculation for multifamily real estate in Playa del Carmen
LADISLAS MAURICE: Cool. Fantastic. So essentially, we come down to, when we look at the net amount that we receive on a yearly basis, before income tax, and divided by the total purchase cost with the closing costs, etc., we’re at a net yield of over 8%. And to be very clear, all these numbers are pretty conservative.
LUIGI: They’re conservative. I mean, I like to leave room for improvements. If the deal makes sense like this, there’s always ways to make it better and maybe decrease costs, increase revenue. But just as is, I think it’s very promising.
LADISLAS MAURICE: Yeah, very doable. And then there’s, again, the upside of building that extra floor, which is huge, I mean, you can have five studios up there at $500 a month. That’s an extra of $30,000 of gross cash flow a year, just by having that extra floor, which is, again, we were doing the numbers earlier, is pretty cheap to build. So building that extra floor, roughly, how much would that cost, do you think?
LUIGI: If we could build about 180 square meters, probably about $110,000, if we’re using $600 a square meter. But $110,000.
LADISLAS MAURICE: Cool. And you could generate about $30,000 in revenue from that. So your net yield would definitely go up. And then if you, on the rooftop, then you actually make it nice and put a little barbecue area, some seating area, maybe a little pool, though you need to check with a static engineer.
LUIGI: Yeah, I need to make sure that it can support a little pool. But even a plunge pool, even just put a jacuzzi, like a cold jacuzzi, which is a big thing here, right? People think Jacuzzi, it’s like Caribbean, why would you use it? No, but they fill up cold water, put the jets on, and it’s nice to sit up there. But you can definitely do something.
LADISLAS MAURICE: Yeah. And then the overall, the rents would maybe go from, especially if you have like the wash area, would go from maybe $500 to $530 a month.
LUIGI: Something like that, yeah.
LADISLAS MAURICE: Something like that, a little increase to 7%, 8% that’s justified by a nice rooftop, and again, your profitability increases.
LUIGI: My idea here is just to give people a good place to live, make it better, give them a nice place to live, and that justifies the rent. Even though you increase the rents a little bit, if you compare it to living in the downtown, which we’re just a few minutes outside of the downtown area, it’s very affordable. And that’s what we’re trying to do, we’re trying to give affordable housing to the local, but give them a nice place to live.
LADISLAS MAURICE: What would be the potential exits for this investment? Is it possible to like chop up the studios into different title deeds?
LUIGI: Well, you would have to apply for what they call a [recomendar condominio 00:25:24] to be able to split and give each unit a title. I don’t know if I would do that, I would on. If this is cash flowing, I would hold on to it as long as I could, until all of the growth gets closer, and then usually you get the knock on the door, “Hey, we want this land. We want to build something that’s seven floors with a rooftop,” maybe even eight floors by then as the permits– every few years, they add another floor, the permits add another floor. So I would wait until someone knocked on the door.
LADISLAS MAURICE: Cool.
LUIGI: Absolutely. And I don’t think it would take that long. You see just a few blocks away, when we were on the rooftop, all the buildings that are getting closer and closer and closer. Just so everybody understands, there’s only one way you can grow in Playa del Carmen if you want to be on the beach side, and that’s north. And that’s this direction. And so it’s just a waiting game, I think, at that point. And you can wait because you’re getting cash flow.
LADISLAS MAURICE: Yeah.
LADISLAS MAURICE: Yeah. And when you just look at the raw numbers, we’d be buying here at about $900 a square meter, so about like $80 per square foot. And the new buildings that are closer to the center, they’re being sold for $3,500 a square meter?
LUIGI: They’ve gone up, it’s $3,800. Sorry, there’s almost a $4,000 a square meter.
LADISLAS MAURICE: So it would justify, kind of down the road, tearing down the whole building to build something brand new with all the luxuries and the amenities, because that’s where the market is headed.
LUIGI: That’s where it’s going.
LADISLAS MAURICE: Cool. Okay, fantastic. Great. And I mean, is this unique or are there other opportunities like this?
LUIGI: No, there’s more. There’s more. This neighborhood is very large, we’re in the Colosio. And it goes, we’re on 68th, it goes all the way to 108th. There’s a lot more opportunity and that’s, I’ve got my eye on it.
LADISLAS MAURICE: Yeah.
LADISLAS MAURICE: So I’m here in– I mean, you made me fly over here, because we’re checking out another one.
LUIGI: (laughs) I didn’t make you.
LADISLAS MAURICE: Yeah.
LUIGI: You– I mean, I kind of did make you.
LADISLAS MAURICE: (laughs) Because the numbers are even better. So we’re going to look at that. That one would be for me.
LUIGI: And I appreciate, he came into town just for 36 hours to do this with me. So that’s awesome.
LADISLAS MAURICE: Cool. And so like, overall, that’s the investment thesis. I see it’s you invest in Mexico, you diversify away from your Western markets, you invest in a market where a lot of people are moving to. I mean, the flood of people moving here to Mexico on a permanent basis, especially to the whole Riviera Maya area is absolutely astounding. Tons of North Americans, tons of Europeans, they’re moving here for lifestyle, they’re moving here because they want to get away from toxic politics, they’re moving here because they feel a bit more freedom. They’re moving here for, just so many people from so many backgrounds–
LADISLAS MAURICE: Cost as well. People are just moving here for a lot of different reasons. So if you’re interested in making a real estate investment here in Playa del Carmen or in Tulum, so in such buildings, or just in normal condos, etc., Luigi has a real estate agency here. You really focus on helping investors as opposed to only lifestyle people. You do both.
LUIGI: I do both, absolutely. But yeah, if you’re investment-oriented, if you’re really looking for ROI, then I can definitely help you with that.
LADISLAS MAURICE: Cool, fantastic.
LUIGI: This is an example of it.
LADISLAS MAURICE: Yeah, yeah, this is a very good example. There is a link below with more information on Luigi’s services. Luigi, thank you very much.
LUIGI: Thanks for coming down, I appreciate it. Bye, everyone.
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