Wednesday, January 18, 2012
When buying a second home overseas, you start with a shortlist of countries, and then research each one to decide which is best. That’s not always easy, even with all information available on the Internet.
So I’m often asked by readers to apply some on-the-ground experience, and compare different countries. It helps them decide which one to focus on.
Today, we compare Mexico with Uruguay. Mexico is a huge country that’s home to the largest U.S. expat population. Uruguay is a small country, but it packs a powerful punch. Let’s see which country takes the crown for best second-home destination.
Ease of Access. Mexico wins this round, no contest. It shares a border with the US, making it easy to drive to Mexico from the southern states in the US. Mexico has dozens of international airports with nonstops to the US, that connect with their broad network of domestic airports…so getting to and traveling around this huge country is relatively easy.
It takes much longer to get to Uruguay. From New York to Cancun takes just over 4 hours and costs around $400. From New York to Montevideo takes at least 13 hours and costs almost $1000.
While Uruguay is limited by its distance to long stays, Mexico makes sense for both short vacations and longer visits. It’s also easier and cheaper for family and friends to visit while you’re in residence.
Climate. Mexico covers more than 760,000 square miles. You’ll find a variety of climates, from warm beach weather year-round in the Yucatan to cool spring-like weather in the highlands. Uruguay’s climate is seasonal. Although you won’t see snow or ice, you won’t want to swim in the ocean for at least 6 months of the year, and you’ll need heating in your home. Although parts of Mexico come with a hurricane or earthquake risk Mexico wins round two for giving you a choice of climates, and the option of enjoying the beach all year.
Beaches. Uruguay’s beaches close to the border with Brazil are pristine. You won’t fight for towel space on this coastline. Yet it’s a gorgeous mix of white sand beaches, giant dunes, pine forests and the sparkling blue ocean.
But Mexico’s beaches around Tulum are spectacular, and warm and inviting all year. White powder beaches fringe the turquoise Caribbean Sea. Offshore, the world’s second-largest barrier reef means endless diving and snorkeling. Mexico steals the crown in this category.
Ease of Buying. Mexico’s close ties with the US give it a clear advantage in this section. You’ll find it easy to find English-speaking attorneys and real estate professionals. Real estate developers invest extra time and effort to produce sales materials in English. And they offer a range of goodies to seal the deal: Low cost fly and buy trips, discounted furniture packages or free appliances.
In Uruguay, property buyers are either local or from neighboring Brazil or Argentina. It’s much harder to find English-speaking real estate professionals or attorneys. But real estate agents in Uruguay are generally less pushy than their Mexican counterparts. That’s a huge plus in my book.
Uruguay licenses and registers real estate agents. In Mexico, there’s no regulation. Membership of AMPI, the trade body for agents, is voluntary. Real estate agent commission rates in Mexico run from 3%-10%, paid by the seller. In Uruguay both the buyer and seller pay a fixed rate of 3.66% each.
Mortgage financing isn’t available to non-residents in Uruguay. In Mexico, mortgage financing isn’t easy to get even though it’s offered. Two companies I spoke with admitted that they hadn’t managed to get a mortgage for any of their North American clients. But some Mexican developers offer their own attractive financing, making property purchases more affordable. You can buy condos in a 5-star resort from $995 a month, for example.
Uruguay comes out ahead in this round because you don’t need to set up a trust, or fideicomiso, to buy beachfront property. It isn’t complicated, but it takes extra time and paperwork, and adds a significant cost to the purchase price.
Property Prices. In Mexico and Uruguay, you’ll pay higher prices in popular tourist and expat hot spots. Outside those locations, you’ll find properties to suit most budgets.
Mexico’s Riviera Maya, from Cancun to Playa del Carmen, commands a premium price per meter due to the level of infrastructure and tourist amenities in the area. But at the end of the Riviera Maya, Tulum offers lower-priced properties with good appreciation and rental potential.
In Uruguay, the glamorous Punta del Este rates as South America’s hippest beach resort. You’ll see plenty of condos and homes with multi-million dollar price tags. But in Piriapolis, between Montevideo and Punta del Este, your real estate dollar buys a whole lot more. You’ll pay 30-40% less for a similar property in Piriapolis compared to Punta.
I’m declaring this round a draw—as each country offers a wide choice of affordable, good-value property.
Holding Costs. I’ve split this into capital gains, annual property tax, and transaction costs. Remember, you may still have tax obligations in your home country.
Capital Gains: In Uruguay, you’ll pay 12%. In Mexico, it’s 30%, with allowances for inflation and improvements. Still, no competition here—Uruguay wins, hands-down.
Annual Property Tax: In Uruguay, you pay 0.25-1% of the municipal value for municipal property tax and street tax. There is an additional public schools tax of 0.1-0.3%. If your property is valued at more than $400,000 for a couple ($200,000 for a single owner) you pay asset tax, although this is being phased out by 2017.
In Mexico, property taxes average 0.275-1.35%, based on the assessed value of the property (usually lower than the actual market value).
Transaction costs: In Uruguay, closing costs average 5% if you buy direct from the owner. You’ll pay an additional 3.66% if you use a real estate agent. In Mexico, close costs run from 4%-7%. Setting up a fideicomiso trust, a requirement for beach property, costs around $2,650, with an additional annual fee of roughly $550.
Uruguay’s capital gains advantage plus lower transaction costs for beach property shines through here, making it the winner of this round.
Rental Potential & Property Management. Mexico’s strong tourism focus makes property management easy in established locations such as Puerto Vallarta, the Riviera Maya, San Miguel de Allende, Lake Chapala, and Merida. You’ll find a choice of management companies who speak English. A decent property in popular tourist areas could cover its costs and generate a nice profit.
Outside the resort town of Punta del Este, Uruguay’s property management market is not well-developed. You’ll struggle to find an English-speaking rental manager. Seasonal weather means low short-term occupancy rates. Even in Punta del Este, a rental hot spot, returns have fallen in recent years to around 6% on a good property. That’s not bad, but it’s not remarkable either.
While the pool of renters is large in tourist locations in Mexico and rental rates good, you face a lot of competition from hotels and bed and breakfasts.
Tax on rental income in Uruguay is 12% (allowable deductions can cut that to 10.5%). In Mexico, non-residents pay 25% tax on rental income (no deductions allowed).
It’s easier in Mexico to find a company to manage your property and you should get good occupancy rates and a strong yield. But competition from hotels, and a higher rate of rental tax, gives Uruguay some points. I’m declaring this round a draw.
Mexico takes the crown in today’s country comparison. It wins three rounds and ties with Uruguay in two.
Mexico is a great place for a second home. It feels familiar and comfortable, it’s easy to get to, and it’s home to some of the best beaches on the planet.
P.S. There’s an easy and low-cost way to see Mexico’s picture-perfect Caribbean coast…and luxury resort condos with developer financing. On this three-day chill weekend, you’ll see Mexico’s best beaches, drink cocktails under the stars, and find out how you can buy a condo in this stunning location from as little as $995 a month. The chill weekend costs $180 per person and includes accommodation and all meals. The next trip runs March 8th-11th. Click here to find out more.