Puerto Vallarta is a great lifestyle option.
Puerto Vallarta has unique attributes, and is just so conveniently close to the US and Canada but does that make it a good investment?
Apart from a few, very specific speculations, I feel that this market is more appropriate as a lifestyle play for North Americans. Puerto Vallarta is very close to the US and Canada, is well connected, and offers a lovely lifestyle. From a pure Mexican real estate investment point of view, I still find that Playa del Carmen and Tulum are more interesting.
Earlier this year I made a real estate investment in Playa del Carmen. I’ve been considering increasing my exposure to Mexico as I firmly believe that the flood of North Americans and Europeans moving to Mexico is set to continue.
Before doing so, I wanted to go to the Pacific Coast to check out Puerto Vallarta, which is a foreigner-favourite in Mexico along with the Riviera Maya (Cancun, Playa del Carmen, and Tulum).
I wrote a compressive report on the real estate market in Puerto Vallarta.
Video: Puerto Vallarta House Case Study
When I was there I met Paul, originally from New Zealand, who now calls “PV” home. He took me to a historical house and we sat down to do the ROI numbers for both the long term and short term markets.
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.
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Available services in Mexico:
- How to Obtain Residency in Mexico
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Articles on Mexico:
- 6 reasons against a Real Estate Investment in Cancun
- Full Guide to Investing in Tulum Real Estate
- Making a Real Estate investment in Playa del Carmen – decent diversification in Mexico
- Investing in Multifamily Housing in Playa del Carmen
- Full Guide to Making a Real Estate Investment in Puerto Vallarta
- What is a Lock Off Condo & Crazy Architecture in Tulum, Mexico
- Puerto Vallarta Investment Case Study with Numbers
- We bought a house in Playa del Carmen, Mexico!
Video Transcript: “Is a house in Puerto Vallarta a good investment? Case study with capitalization rates.”
Case study of cap rates for a house in Puerto Vallarta for long term rental
LADISLAS MAURICE: So Paul, let’s do the case study, the numbers for the long-term rental market. So this house is being sold for?
PAUL: $625,000.
LADISLAS MAURICE: $625,000. What are the closing costs, roughly?
PAUL: Around 4% to 6%. It would probably sit around 5%.
LADISLAS MAURICE: Okay. The trust setup?
PAUL: $1,250.
LADISLAS MAURICE: Okay. Now, in terms of revenue, how much could you rent this place out on a yearly contract?
PAUL: It’s rented out for $2,500.
LADISLAS MAURICE: Okay, so there’s actually a contract right now?
PAUL: There’s a contract and they come in next week.
LADISLAS MAURICE: Okay. For one year?
PAUL: For six months.
LADISLAS MAURICE: For six months, of low season?
PAUL: Of low season.
LADISLAS MAURICE: Okay.
PAUL: So it would be at least $2,500 if not more, $2,800 on a 12-month basis over high season.
LADISLAS MAURICE: Okay, so $2,800. Who would be the target market?
PAUL: Because of the accessibility, like, you’ve got through three ways to access it, but two of them are walking upstairs and one is walking downstairs, you’d get the fit young retirees but not the older retirees that are looking for elevators. So that knocks out that market.
LADISLAS MAURICE: By how much?
PAUL: By quite a bit. But there are young couples coming here. Like, there’s a young couple coming here, early mid-30s.
LADISLAS MAURICE: With kids?
PAUL: No. No, just the two of them.
LADISLAS MAURICE: Okay.
PAUL: We nearly sold it, actually, six months ago to a couple with two kids, and the couple was in early forties. So it’s those sort of people.
LADISLAS MAURICE: Cool. Cool. Because, yeah, it is quite niche to be selling a house with, like, zero street access. So when you, like, bring the groceries, like, even if you’re fit, you need to somehow park the car somewhere, bring the groceries, or you could use delivery services.
PAUL: You can do that. Remember, this is a walking neighborhood, so a lot of people go out for dinner in the evenings. So you wander down into town, very relaxed, go and have dinner. And you might go to the supermarket in Costco once a week. And you get an Uber, get over there, Uber back. There’s water filtration systems, so you don’t need to be lugging those big water bottles here. So you can make it not so bad. But yeah, once a week, you’d be bringing groceries in from up the top down.
The other thing is people like, about this house, is a lot of walls for art, it’s very kind of attracts the artist, areas for sculptures and things like that. So it’s a certain type of person that wants to live this Puerto Vallarta lifestyle, with the art, with the breezes coming in off from the ocean, and not necessarily leaving the house that much, you know, just enjoying the space. Every time I get here, you might be puffing coming up the stairs–
LADISLAS MAURICE: [laughs] Yeah.
PAUL: [laughs] but then it’s really relaxing.
LADISLAS MAURICE: Yeah.
PAUL: Like, it’s a lovely space to come. I like it, when I’ve shown it in the past, not one person came in and didn’t say, “Wow, this is a really great space.”
LADISLAS MAURICE: Cool. So yeah, the occupancy rates, roughly, would you estimate?
PAUL: For a long-term, it would always, like, 90%.
Property management costs in Puerto Vallarta
LADISLAS MAURICE: Okay, cool. Property management, roughly?
PAUL: For this, the management of it would be probably a flat fee of about $300 a month to look after it. If you’re getting your property manager to find you a tenant, then they’re going to take about a month rent as commission.
Pool maintenance costs Puerto Vallarta
LADISLAS MAURICE: What about the pool, because that’s always a pain to manage?
PAUL: The pool, about 2,000 pesos a month, so about $100 to manage that.
LADISLAS MAURICE: Wow. Okay.
PAUL: Some would come twice a week, clean it with the chemicals, and so 2,000 pesos a month would, yeah.
LADISLAS MAURICE: Okay. What about the maintenance allowance?
PAUL: For a house, it takes more work than a condo, so I would have about $3,000 a year.
LADISLAS MAURICE: Cool, for painting and whatever issues?
PAUL: Yeah. And especially, painting. There’s the humidity of the summer, you notice at the end of the summer, it needs tender love and care, so painting and things like that is important.
LADISLAS MAURICE: Cool. Then we’ve got the bank trust fee. The property tax, how much would that be, roughly?
PAUL: You’re around $750.
Cap rate for long term rental Puerto Vallarta
LADISLAS MAURICE: Okay, $750 for property tax. Cool. All right. So overall, we’re talking about a net yearly income of about $20,000, which would mean a net rental yield, a cap rate of about, roughly, 3%. All right.
Case study of cap rates for a house in Puerto Vallarta for short term rental and Airbnb
LADISLAS MAURICE: So, again, would anyone come here as a pure investor, buy this to get these rental yields, these capitalization rates on a long-term market? Absolutely not. So then the question is, does it make more sense on the short-term rental market? So we went through, so the price is the same. Now, how much do you think you could rent this out per night, roughly, in high season?
PAUL: Probably around $300 a night.
LADISLAS MAURICE: $300, okay.
PAUL: Because it’s three bedrooms, what you’re going to get is, occasionally, in high season, is groups of people coming here. So you can fit six people could sleep in this place. And over Thanksgiving weekend, so you can definitely hike the prices up through those good weekends. But I’d say, on average, you would go $300 a night.
Occupancy rates Zona Romantica
LADISLAS MAURICE: Cool. And the occupancy rate?
PAUL: Occupancy rate in high season, I’d say it’s more like 70%. It’d be 80%, 85% downtown in the lovely condo buildings with the rooftop pool because it’s easy down there. Here, you’ve got you’re up the hill a little bit, and you knock out the older retirees, so it’s around the 70%.
LADISLAS MAURICE: Cool. Yeah, I can just imagine the check-in instructions on Airbnb on how to get here. And when people arrive with their luggage, and they need to drag all their stuff, like, all their luggage on the stairs, and try to find the place, and they don’t necessarily have data because they just landed at the airport, it’s not easy.
PAUL: Yeah. Keep in mind, and there is a market for this type of property, though, the more traditional, very Puerto Vallarta style, people want that as well.
LADISLAS MAURICE: It’s true.
PAUL: It’s not all about the brand new condos. Yeah, there’s more of a demand there, but there’s people that don’t want that, and they do want to be up the hill, in the quiet, in a place where they don’t really have to leave all day, they can read peacefully, and, you know.
LADISLAS MAURICE: What about the low season?
PAUL: Low season, I would say is around $175 a night, and the occupancy would be a lot less, around 50%. Like, for example, there is air conditioning in just two of the bedrooms at the moment, not in this living space. And this sort of house would be quite hot in low season. So it’d be a certain type of person that would put up with it. Maybe putting air conditioning into the whole house would be a good investment.
LADISLAS MAURICE: Yeah, it’s really hot.
PAUL: But it would be expensive. And so then you would want to go and put in solar panels.
LADISLAS MAURICE: Okay.
PAUL: Yeah.
LADISLAS MAURICE: Cool. Okay. Property management for Airbnb?
PAUL: You’re going to be 20% on the rental income, and then $300 a month flat fee.
LADISLAS MAURICE: Okay. All right, not cheap. So pool, maintenance, the same. Internet?
PAUL: $30.
LADISLAS MAURICE: $30. Electricity?
PAUL: You’re around $150 with the two air conditioners. If you put it into the whole house, it would change.
Cap rates for short term rental Airbnb in Puerto Vallarta
LADISLAS MAURICE: Yeah. Okay, cool. Yeah. Bank trust fee, then the property tax. So overall, we end up with a net rental yield, a net capitalization rate of a bit over 4%. Again, would you come here to Puerto Vallarta as an investor, purely as an investor, just for this? No, because it’s not like the house is really cheap, either. So the thesis really here is, and what you see with 90% of your clientele is people who spend–?
PAUL: Yeah, it’s people that they want the lifestyle, they want the breezes and the views, they’ve got a connection here, so they’re coming here, but then they’re going to rent out when they’re not here.
LADISLAS MAURICE: Cool.
PAUL: Yeah.
LADISLAS MAURICE: All right. And I think this is very important to understand because I had this discussion a few times with Paul, and with a bunch of other agents here. And you meet agents, and they’re like, “Yes, you can make great ROI on Airbnb, lots of money, $300 a night, blah, blah, blah, blah.” But once you actually do all of the numbers, in the vast majority of cases, it’s actually hard to get good capitalization rates or rental income here in Puerto Vallarta. So it’s people who come here to buy, they just need to understand that they’re making a lifestyle decision with a bit of cash flow on the side. Like, ultimately, that’s what it comes down to. If people come here, and they’re hoping for great cash flow with two weeks of lifestyle a year or a week as a little added bonus, a lot of people try to do this, you’re not really going to get this here. It’s really the primary focus is lifestyle, being in Mexico, diversifying your assets, investing in a different jurisdiction.
Catalysts for real estate in Puerto Vallarta
LADISLAS MAURICE: You can also, if you structure things properly, and if you invest enough money, you can get residency in Mexico, and then you have a little bit of rental income on the side and you can spend time here. So this really is the core thesis for, as I see it, real estate in Puerto Vallarta. Though there are catalysts. So we were discussing, in the other video, the airport that’s expanding, the big highway that is being built to Guadalajara, a city of over 5 million people, that will be less than three hours away. So there are definitely catalysts in place for this region. Personally, I don’t think the prices are going to go up massively, but I also don’t feel that prices are going to crash, because it’s mostly a cash market here, so no one really needs to sell. People are increasingly moving here. And there are all these catalysts that will ensure that the value of the properties maintain themselves.
Do you have any anything to add, Paul? What are your thoughts? Because I mean, you know better. You’ve been here for a few years. You’re here full-time. I’m just coming here just for two weeks, looking at the market, trying to see are there any plays for me, specifically. I haven’t quite found any.
PAUL: Yeah. I think the prices have gone up so much in the last two years that we’re not necessarily going to see that kind of jump again. But yeah, being a cash market, and there’s enough reasons for people to come here, like we talked about in the other videos, that it’s going to stay strong. I think it will keep going up gradually. And I think PV, the whole bay is we’ve really been in a boom now for maybe seven years, but the last two years or two-and-a-half have been particularly strong. So I think there’s still a lot of growth happening here all the way around the bay. You know, we’ve just been talking about certain neighborhoods, but there’s something for everyone. But you’re right, lifestyle has got to be the priority with, yes, you are investing, you’re putting your money somewhere else, it’s safe, but it’s not, like, kind of [gestures high]. Yeah.
LADISLAS MAURICE: Yeah. I did find, I mean, we were discussing this yesterday, there are little villages along the coast that we believe will see very interesting capital gains in the years to come. They’re little villages that still look like crap, I hate to say this, but they don’t look good. But because of this new highway, because of, in many cases, they’ll be just two-and-a-half hours away from Guadalajara, I would expect that there will be a lot of growth in these little villages in the next decade. So I think they’re still very interesting speculative plays. You’re not going to get cash flow in those places for now. But it’s really just buying, holding, and hoping for these capital gains, which I really think will come. So we were discussing, there are a few villages, even towns like this that have good potential.
PAUL: Yeah.
LADISLAS MAURICE: So, Paul can help you with this, but this would be a pure, pure speculation. From a lifestyle point of view, these villages, if you like being on your own, a bit in the middle of nowhere, without any expats really around, these villages are perfect for you. But, otherwise, it’s just purely a speculation.
PAUL: Yeah, you’re not leaving the house walking around the corner to a nice restaurant.
LADISLAS MAURICE: Yeah, yeah.
PAUL: You’re five years away from that.
LADISLAS MAURICE: Yeah. Even, potentially, less, I’d say, in some cases. Because, like you’re saying, it’s developing so fast. And when things develop fast, they really develop fast. I see it in Playa Del Carmen, each time I go back every six months or whatever, it’s just like entire streets have been completely redeveloped. And suddenly, there’s a Starbucks, and this, and that in places that were, before, really not attractive. So I have no doubts that these areas will grow over time, but it’s a pure speculation on capital gains.
Great, fantastic. So I wrote a whole article on the real estate market here in Puerto Vallarta and the region in terms of areas that are potentially interesting for investments, the areas not to invest in, etc. So it’s a really good overview. And also, if you want to get in touch with Paul, so Paul can help you along the whole coast with your real estate investments, or if you’re looking purely for lifestyle, or a combination of both. So there’s a link below with more information.
Great. So Paul, thank you very much. Really appreciate your time.
PAUL: You are welcome. Thank you.
