The Corridor, which is the highway connecting the city of Cabo San Lucas to the artsy town of San José del Cabo, is dotted with high-end hotels and resort real estate, along with construction sites where more resorts are currently being built. The most exciting part is that Los Cabos’ growth and development does not appear to be slowing down anytime soon. For this reason, we must know the important metrics that help us evaluate resort developments and understand if they are a strong opportunity for a real estate acquisition.

Operating Expenditures in Commercial Properties in Los Cabos, Mexico

When evaluating a commercial opportunity, it’s very important to understand commercial real estate operating expenses since they impact both costs for the tenant and net operating income for the landlord/owner. This metric is important to determine, whether you intend to buy a piece of commercial property and become a landlord or lease a commercial space for your own business.

“OpEx” are ongoing costs incurred in the operation and maintenance of the commercial property. In most countries, this expense is tax-deductible in the year the expenses are incurred. Expenses from the day-to-day operation of the business include wages, maintenance, utilities, office expenses, insurance, equipment, repairs, and even rent. Typically, when referring to real estate, OpEx is directly related to Operations and Maintenance (“O&M”).

Cabo has been a popular destination for many Americans and Canadians during the pandemic, with hotels and resorts having as high occupancy rates as possible (the state of Baja California Sur restricted occupancy levels based on results of Covid-related hospital cases in 2020 and mandates set forth by the Certified Health Organization).

While rentals and hotel bookings experienced a steady flow of returns, Opex also increased. Rental revenue and Opex generally have a parallel correlation as more rentals and/or hotel bookings will also equate to more A/C being used, more housekeeping, an increase in maintenance and staff.

First, determine the sum of all annual expenses

As a basic example, let’s look at a simple vacation home, nightly rental investment. A modest one or two bedroom condo in Cabo will cost around $250,000 USD. A fair market price for nightly rentals will be in the ballpark of $150 USD/night or $1,050 USD/week. Based on a 70% occupancy, the investment will yield a gross annual income of $38,220 USD. Foreign investors are entitled to pay a minimum of 25% government tax on the rental income, reducing it to $28,665 USD. Let’s look at the Opex:

• Property taxes (annual) | $250
• Fideicomiso (annual) | $500
• HOA – $250/mo. (Varies by development) | $3,000
• Management (Varies depending on service provided) | $3,000
• Miscellaneous (Utilities, repairs, insurance, etc.) | $2,000
• Total annual expenses | $8,750
• Subtract the total annual expenses from your annual income $28,665 – $8,750
• Net Profit of | $19,915

$19,915 USD Net profit / $250,000 USD Cost of Investment / 8% ROI +

And many investors would stop there. I hear often from investors that they can earn better returns “investing in the S&P.” Then we have to ask ourselves, ‘when we invest in the S&P, do we still get to take vacations?’ And if so, how much do we spend on those vacations? Since we’ll use our Cabo vacation home for vacations, this amount will also need to be factored into the assumptions to delineate the value as a direct comparison.

Bottom Line

Owning hotel or resort real estate in Mexico can have a significant return on investment. However, one’s actual ROI is dependent on the various factors related to the investment, where we tend to find that each operation is unique. The important point to glean from this hypothetical scenario is your real estate investment in Cabo can generate substantial cash flow, if the investment is adequately organized.

In addition to the income produced, you will benefit from gradual and steady increase in value of the real estate over time. Keep an eye on the Opex and see how these numbers impact the investment throughout the life-cycle of the asset.