One of the most important aspects of investing in Mexico real estate is determining how much profit you can make. The cap rate is one of the easiest ways to do this.
How to Determine Cap Rate
Cap rates are a measure of the return on your investment. To calculate a cap rate, divide the net operating income by the property value.
Let’s assume you buy an apartment condo unit in Tulum, Mexico for $300,000 USD. It generates $200 USD per night on average. It has a 65% occupancy.
Which generates an income of $40,450 after expenses. Cap rate= $40,450 divided by $300,000 = 0.1348
Move the decimal point two spaces to the right, this gives us a cap rate of 13.48%
This Tulum property has a cap rate of 13.48% per year.
The higher your cap rate, the better your return on investment will be on each dollar invested into the property.
What Is A Good Cap Rate in Mexico?
Cap rate, also known as capitalization rate, is the ratio of net operating income to the price of a property. The higher the cap rate, the better.
A cap rate in itself doesn’t tell you whether or not a property is worth buying – but it does give you a good idea about its profitability and risk profile.
A typical U.S. cap rate ranges from 4% – 7%. In Tulum Mexico, we have seen cap rates as high as 7% to 13%.
Most Airbnb owners expect a cap rate between 5% to 8%.
In Summary
Once you have determined the cap rate, it is important to look at whether or not the property has a positive cash flow.
If it does, then you are looking at a good investment opportunity. If not, then there may be an issue with management or maintenance costs that need to be addressed before purchasing this property.
Are you looking for a rental property in Riviera Maya Mexico?
If you are looking for a short-term rental property in Tulum, Playa del Carmen, Cancun and through our Riviera Maya then our real estate agent advisors can help you find and close on your property. At no extra cost and at no obligation.
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