Real Estate Without Borders: Comparing US Properties to Mexico & Canada

Episode Release Date: February 26, 2025

Introduction

In this insightful episode of Real Estate Without Borders, hosts dive deep into a comparative analysis of real estate markets across North America and beyond. The focus is primarily on comparing investment opportunities between the United States, Canada, and Mexico, with detailed examinations of cities like New York, Toronto, Miami, Tulum, Los Angeles, Los Cabos, Austin, and Lisbon. The discussion revolves around key metrics such as rental yields, property taxes, financing costs, and cap rates, providing investors with a comprehensive understanding of where to allocate their resources for optimal returns.

Comparative Analysis: New York vs. Toronto

The episode begins with an in-depth comparison between the condo markets of New York City and Toronto. Hosts analyze real estate data to highlight differences in purchase prices, rental incomes, vacancy rates, and property taxes.

• Purchase Price and Rental Income:

  • New York: A Manhattan condo priced at $1.2 million commands a monthly rent of $4,500.
  • Toronto: In contrast, a condo in Toronto is listed for $980,000 with a monthly rental income of $3,800.

• Vacancy Rates and Property Taxes:

  • New York: Vacancy rates hover just below 4%, with property taxes amounting to $1,825 per month.
  • Toronto: Slightly lower vacancy rates at 2%, and significantly lower property taxes at $502 per month.

Dan, one of the hosts, chimed in at [02:21] with a candid remark about the Canadian real estate mindset:

“Canadians are not the brightest folks. So like, they would definitely pile it into real estate market when it's a mess.” [02:21]

Despite the humor, he emphasizes the stability of the Toronto market, especially with first-time homebuyers and those looking to upsize. The discussion underscores that while both markets are robust, Toronto offers a more affordable entry point with comparable rental yields.

Understanding Cap Rates

A significant portion of the episode is dedicated to explaining the concept of cap rates—a crucial metric for real estate investors. Hosts provide a clear definition and illustrate how cap rates facilitate comparison between different property investments.

• Definition and Calculation:
  • Cap rate is calculated by dividing a property's Net Operating Income (NOI) by its purchase price. For example, a property worth $14 million that generates $600,000 in NOI has a cap rate of 4.3%.

Dan elaborates at [05:23]:

“Cap rates are used to analyze properties side by side. It basically tells you what a property is worth relative to its rental income.” [05:23]

• Investor Considerations:
  • A higher cap rate indicates a better return on investment, but it must be weighed against financing costs. Dan explains the relationship between cap rates and interest rates:

    “If you're at 75 or 70% loan to value or 65% loan to value, the cap rate typically has to be higher than your interest rate on your loan to make sense.” [07:12]

This segment equips listeners with the knowledge to evaluate whether a property's yield justifies the investment, considering current interest rates and loan-to-value ratios.

Currency Considerations in International Real Estate

The hosts address the complexities of investing across borders, particularly the impact of currency fluctuations on cap rates and overall returns. They clarify that cap rates do not inherently account for currency exchange rates, drawing parallels to dividend yields in different currencies.

At [09:12], Dan states:

“Cap rate's not going to include anything about that. It couldn't really capture that because it's kind of like a dividend.” [09:12]

However, he notes that currency exchange becomes significant when converting rental income back to the investor's home currency or when realizing capital gains upon selling the property.

Comparative Analysis: Miami vs. Tulum

Shifting focus to the vibrantly different markets of Miami and Tulum, the hosts compare condos in these cities in terms of purchase price, rental income, vacancy rates, property taxes, and maintenance costs.

• Miami Condo:

  • Purchase Price: $750,000
  • Monthly Rent: $3,600
  • Vacancy Rate: 4.2%
  • Property Tax: $656 per month
  • HOA Fees: $750 per month
  • Net Operating Income (NOI): $38,400 per year
  • Cap Rate: 5.12%

• Tulum Villa:

  • Purchase Price: $400,000 USD
  • Monthly Rent: $75,000 MXN (~$3,700 USD)
  • Vacancy Rate: 35%
  • Property Tax: $1,000 USD per year
  • HOA Fees: $200 USD per month
  • NOI: Approximately $1.08 million MXN (~$54,000 USD)
  • Cap Rate: 7%

Key observations include:

• Higher Cap Rates in Tulum: Tulum offers a higher cap rate at 7%, indicative of better immediate returns compared to Miami's 5.12%. This is largely due to lower purchase prices and competitive rental incomes.
• Occupancy Challenges: Tulum experiences a higher vacancy rate at 35%, which poses a greater risk compared to Miami's 4.2% vacancy rate. This is attributed to the region being more reliant on short-term rentals like Airbnb, which can fluctuate seasonally.

Dan provides context at [14:38]:

“The problem in Tulum is that when they build, the developers are building everything for the thought of an investor purchasing it. So everything is like lots of bedrooms, minimal living space just to maximize Airbnb returns.” [14:40]

This highlights the differing market dynamics and investment risks between established markets like Miami and emerging ones like Tulum.

Comparative Analysis: Los Angeles vs. Los Cabos

The discussion moves to comparing luxury condo markets in Los Angeles and Los Cabos, focusing on high-end investments.

• Los Angeles Condo:

  • Purchase Price: $850,000 USD
  • Monthly Rent: $4,000 USD
  • Vacancy Rate: 3.5%
  • Property Tax: $885 per month
  • HOA Fees: $150 per month
  • NOI: $41,800 per year
  • Cap Rate: 4.92%

• Los Cabos Condo:

  • Purchase Price: $8.5 million MXN (~$400,000 USD)
  • Monthly Rent: $150,000 MXN (~$7,000 USD)
  • Vacancy Rate: 40%
  • Property Tax: $1,400 MXN (~$70 USD) per month
  • HOA Fees: $200 USD per month
  • NOI: $1.08 million MXN (~$54,000 USD)
  • Cap Rate: 6.85%

Notable points include:

• Higher Rental Income in Los Cabos: Despite higher purchase prices in Mexican pesos, Los Cabos offers a substantially higher rental income, leading to a superior cap rate.
• Special Assessments Risk in Miami: The conversation touches on issues like special assessments in older Florida condos post the Surfside collapse, emphasizing the importance of due diligence in high-risk markets.

Comparative Analysis: Austin vs. Lisbon

Lastly, the hosts compare the booming market of Austin, Texas, with the historically rich market of Lisbon, Portugal.

• Austin Properties:

  • Purchase Price: $550,000 USD
  • Annual Rent: $29,000 USD
  • Cap Rate: 5.35%

• Lisbon Properties:

  • Purchase Price: €480,000 (~$550,000 USD)
  • Annual Rent: €21,000 (~$24,000 USD)
  • Cap Rate: 4.5%

Key takeaways:

• Growing Market in Austin: Austin's real estate market is experiencing significant growth, with an increase in both home sales and Airbnb listings, driven by migration from colder climates and the rise of remote work.
• Lisbon's Golden Visa Changes: Portugal's reduction in its golden visa program has introduced new variables for investors, potentially impacting property demand and cap rates.

Market Trends and Observations

Throughout the episode, hosts observe several overarching trends:

• Shift Towards Investment-Oriented Developments: Especially in emerging markets like Tulum, where properties are designed primarily for investor returns rather than long-term living.
• Impact of Economic Policies: Changes in visa programs and structural regulations can have profound effects on real estate markets, as seen in Lisbon and Florida.
• Currency Exchange Considerations: While cap rates provide a foundational comparison, investors must account for currency fluctuations when investing internationally.

Future Directions for the Podcast

The episode concludes with plans to continue such comparative analyses on a quarterly basis, intending to adapt to the dynamic nature of global real estate markets. Hosts express interest in introducing segments like "Deal of the Day" to feature specific investment opportunities, further enhancing the podcast's value to its audience.

Notable Quotes

• Dan on Cap Rates:

  “Cap rates are used to analyze properties side by side. It basically tells you what a property is worth relative to its rental income.” [05:23]

• Dan on Canadian Real Estate Mindset:

  “Canadians are not the brightest folks. So like, they would definitely pile it into real estate market when it's a mess.” [02:21]

• Hosts on Tulum's Investment Landscape:

  “The problem in Tulum is that when they build, the developers are building everything for the thought of an investor purchasing it. So everything is like lots of bedrooms, minimal living space just to maximize Airbnb returns.” [14:40]

• Dan on Currency and Cap Rates:

  “Cap rate's not going to include anything about that. It couldn't really capture that because it's kind of like a dividend.” [09:12]

Conclusion

This episode of Real Estate Without Borders serves as an invaluable resource for investors looking to navigate the complexities of international real estate markets. By comparing key metrics across diverse cities and delving into the nuances of cap rates and currency considerations, the hosts provide listeners with the tools needed to make informed investment decisions. Whether you're a seasoned investor or just beginning your journey, the insights shared in this episode offer a roadmap to expanding your real estate portfolio beyond borders.