Once you have purchased your new property, the hope is to start reaping the rewards of your investment. There are two ways to see your money grow – the ROI or Return on Investment and the Capital Gain.
ROI – Return of Investment
The ROI is generated by rental income. ROI records can be produced on resale property and can be a great indication for potential income. ROI is often predicted for new developments based on current market trends and considering rental records of similar properties. To calculate the ROI, you will need to know the following:
- Total of all rental income for the year
- Total of all expenses for the year
- Purchase price of the property
First, calculate the net income by subtracting the expenses from the total rental income:
Rental Income – Expenses = Net Income
Second, divide the net income by the purchase price:
Net Income/Purchase Price X 100 = %ROI
The capital gain of a property is calculated based on the increase in property value. How much more can I sell the property than what I originally paid? In dollar to dollar transactions, it is very easy to calculate the capital gain. The selling price minus the purchase price equals the capital gain.
In Mexico, when purchases are made in dollars, it is necessary to consider two factors. Not only the purchase price in USD, but also the purchase price equivalent in Mexican Pesos. Although for foreigners, the ultimate consideration is the number of dollars that enters their bank account, the Mexican government is only concerned with the purchase and sales price in pesos. Capital Gains Taxes and other fees are calculated in MXN.
Capital Gains Example
To consider your Capital Gain, you must find the original purchase price recorded on your title deed in MXN and the equivalent sales price in MXN. In the US, you purchase a property for $100,000 USD, and a year later you sell it for $110,000 USD, the final value is easy to calculate.
Selling Price $110,000 USD – Purchase Price $100,000 USD = Capital Gain $10,000 USD
If this same sale occurs in Mexico, you must consider the prices as recorded in MXN.
If you purchased the property on September 30, 2018, for $100,000 USD, it would have been recorded on your title deed $1,867,000 MXN as the exchange rate was 18.67 pesos per USD. The sales price would be recorded if sold one year later as $2,178,000 MXN as the exchange rate is approximately 19.8 pesos per USD. You would calculate the capital gain as:
Selling Price $2,178,000 MXN – Purchase Price $1,867,000 MXN = Capital Gain $311,000 MXN or approximately $15,707 USD
Why is this important if both transactions occur in USD? Capital gain taxes will be based on the increase in peso values; therefore, your capital gain tax will be based on $15,707 rather than the real $10,000 USD increase in the sales price. It is important to consider this difference when determining the value of your investment.
Which is more important – ROI or Capital Gain?
Ideally, we all want to purchase a property that will have a high rental income as well as an increase in value quickly over time. It is more likely that your purchase will increase in one or the other. Units that have great rental income are often in stable communities with little new construction and are close to amenities and attractions. Properties that rapidly increase in value are often in new developments that may not generate as high a rental income.
If it is not possible to find the “Golden Goose” that generates a great ROI and has a high Capital Gain, then it is important to find a balance between the two that you are comfortable with.