Down to the Wire: Mexico vs. Uruguay | Pathfinder International

Wednesday, August 18, 2010

Dear Reader,

I’ve had so many emails asking for real estate comparisons on Mexico and Uruguay that I had to cover these two countries. This pits the mighty giant of Mexico—a favorite with American expats, retirees and property buyers since the 1960s…against quiet, unassuming Uruguay, which is starting to gain recognition for its first-world infrastructure—and third-world property prices. Let’s see if new-contender Uruguay can take the crown from the champion…

Before we get started however, let me say that as a place to live or retire, Mexico and Uruguay are about as different as you can get. It would be hard to compare them—and we’re not going to try. We’re taking a close-up look at real estate in both countries, for investment or as a second home.

Price. In Mexico and Uruguay, you’ll pay higher prices in popular tourist and expat hotspots. Outside those locations, you can find properties to suit most budgets.
Both countries offer historic colonials at bargain prices, in Ciudad Vieja in Montevideo (from $390 a meter), and Merida in Mexico (small restored homes from $36,000). For historic city apartments, you can’t beat Montevideo (one website lists 829 apartments here for up to $100,000).

Mexico’s Riviera Maya, from Cancun to Playa del Carmen, commands a higher price per meter due to the level of infrastructure and tourist amenities in the area…and the picture-perfect Caribbean beach and turquoise water. In Uruguay, the glamorous Punta del Este rates as South America’s hippest beach resort. You can still buy houses here for $1200 per meter…but you’ll see plenty of condos and homes with multi-million dollar price tags in downtown Punta and in Jose Ignacio close by.

Beach properties elsewhere in Mexico and Uruguay are much more affordable. On Mexico’s northern Yucatan, you can pick up beachfront lots from $29,000. Uruguay’s Rocha province features miles of white sand beach, backed by dunes, tranquil little beach towns—and beach lots from $20,000.

I’m declaring this round a draw—as each country offers a wide choice of affordable, good-value property.

Construction Quality. Both countries achieve good construction standards overall. Mexico’s developers aim for American and Canadian buyers, while Uruguay’s developers aim at the Latin American market. There is a difference in finishing style. Latin buyers generally don’t favor open plan living spaces, or expansive kitchens, and expect maid’s quarters as standard.

This round is another draw.

Ease of Buying. Mexico’s close ties with the US gives it an advantage when it comes to the presence of English-speaking attorneys, real estate agents, developers and sales staff. They know where their market is—and they see the upside in investing in English-speaking staff, sales brochures, and websites. They’ll offer free accommodation, fly-buys, furniture packages (I even saw one offering a golf cart with gold-plated keys)…whatever it takes to make a sale.

Uruguay’s biggest source of foreign buyers is Latin America. Their real estate agents are well-versed in Spanish, sometimes Portuguese, and even Italian and French. English-speaking real estate agents, attorneys, and sales staff, however, are thin on the ground. But real estate agents here tend to be generally less pushy than their Mexican counterparts—a huge plus in my book.

Uruguay still comes out ahead, though…because you don’t need to set up a trust, or fideicomiso, to buy beachfront property. Yes, a fideicomiso is straightforward…but it takes extra time and paperwork, not to mention the cost.

Neither country regulates real estate agents. In Uruguay, real estate agents must register with the Ministry of Tourism in some coastal areas, and pay a bond. In Mexico, 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, again, both the buyer and seller pay a fixed rate of 3% plus VAT at 22%, totaling 3.66% each.

Although technically available in Mexico through a number of different companies, mortgage financing isn’t easy to get. Indeed, two mortgage companies admitted to me that they hadn’t had any success on the mortgage front for any US or Canadian clients. Bank and mortgage financing isn’t available to non-residents in Uruguay.

Overall, despite its lack of widespread English-speaking real estate contacts, Uruguay wins this category. The country’s typically simple, laid-back approach to life also applies to purchasing property.

Property for Residency. Neither country offers a specific residency visa through investment in a property.

Uruguay has a program under which you can obtain residency via a property purchase. But it’s fairly complex, requires the property be held for a specified time, and makes your visa contingent on continued ownership. I don’t recommend this course for most buyers, especially given that residency here is so easy to obtain otherwise: you can become resident with an income of only $6000 annually, and that can come from rental income on a property, either in Uruguay, or overseas.

In Mexico, you have to show a minimum income level…$1000-1500 a month. Residency, and using the property as your primary home, can help avoid capital gains tax. When comparing Uruguay’s “not for everyone” scheme with Mexico’s plan—which may offer a capital gains advantage—I’d have to call this category a draw.

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%, but there are 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 purchase price (the rate varies according to different appraisal values in different areas) for municipal property tax and street tax. There is an additional public schools tax of 0.1-0.3% of the purchase price. If your property is valued at more than $400,000 for a couple, or $200,000 for a single owner, you pay asset tax, which is currently being phased out, dropping to a flat 0.1% by 2017.

In Mexico, the rate is 0.275-1.35%, based on the assessed value of the property, which is usually lower than the actual market value.

I’d strongly advise you not to under-report the sale in order to reduce your annual property tax burden. While many owners do this, it could result in legal penalties, and you’ll pay more capital gains tax if you sell.

Transaction costs: In Uruguay, closing costs average 5% of the purchase price (plus an additional 3.66% if you use a real estate agent). In Mexico, they run from 4%-7%.

Uruguay’s capital gains advantage shines through here, so I am declaring Uruguay the winner of the holding costs category.

Property Management. Mexico’s strong tourism focus and proximity to the US means that property management is well-advanced in established locations like Puerto Vallarta, the Riviera Maya, San Miguel de Allende, Lake Chapala, and Merida. You’ll have a choice of management companies, and won’t have a problem finding a manager who speaks English fluently. Some development companies offer management as an additional service. Your occupancy rate for a good property in popular areas should be high enough to cover some of your costs.

Outside Punta del Este (which is aimed mainly at Latin renters), Uruguay’s property management market is just getting started. In Punta del Este, thanks to a well-developed property management infrastructure, managing a rental is easy. But returns have fallen in recent years to around 6% on a good property…not bad, but not remarkable either.

Despite Uruguay’s increasing tourist numbers, and the limited number of short-term apartments on the market in Montevideo, occupancy usually runs at 50% tops. Relatively moderate short-term rental rates cuts your rental yield, too. However, there are opportunities in long-term rentals in Montevideo, in commercial office space, that make sense, and can generate decent yields.

While the pool of renters is large in the locations in Mexico I’ve talked about, and rental rates good, you have a lot of competition from hotels, posadas and bed and breakfasts to factor in.

Tax on rental income in Uruguay is 12% (which can be reduced to 10.5% with deductions). In Mexico, non-residents pay 25% tax on rental income (no deductions allowed).

I’m declaring this round for Uruguay, too—that lower rate of tax on rental income wins the day.

Investment Potential. Mexico’s closest neighbor, the US, provides a good chunk of Mexico’s real estate buyers. When the US economy faltered, Mexico’s followed suit, along with her real estate market. 2007, 2008 and 2009 showed declines in both sales volumes and prices in coastal properties aimed at overseas buyers.

Uruguay’s real estate market, on the other hand, continues gaining speed. This year looks like another record year, with an increase of 14.2% in construction permits, mostly for single family homes, in the province of Maldonado. Average apartment prices in Montevideo increased 3.3% in 2009. A record price was set for a coastal land parcel in June this year, of $15m.

An unassuming country, Uruguay is attracting interest from a growing number of expats and property buyers. In addition, Argentine and Brazilian buyers see it as a good place for holding assets—mostly property—outside their home country.

Mexico’s closeness and familiarity to the US gives it an edge. Plus, outside of Punta del Este, the real estate market in Uruguay is not very liquid—it can take 12-24 months to sell a property.

For long-term investment potential, my money’s still on Uruguay, though—with historic apartment prices currently starting at just $700 a meter in downtown Montevideo, I’m looking for a property here myself. And beachfront land in Rocha offer investment upsides, along with gorgeous beach and ocean views.

Mexico gave this little country a good run for the money, but Uruguay emerges as our country champion today, with good prospects for long-term appreciation and investment, and reasonable rates for capital gains and rental income taxes. Don’t forget, if you’re buying a second home, rather than an investment property, you’ll need to consider other factors—climate, health care, and residency. For investment, though, you can’t beat Uruguay.

Margaret Summerfield

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