Responsibilities Of An Owner When Investing In Real Estate

18 March, 2023

Buying a real estate property is the best opportunity to have an owner of them have an excellent and steady return on your investments, both through the passive income generated from the rentals and the appreciation of your home’s value over time.

This is particularly true in a highly touristic location like the Mayan Riviera.

Unlike other forms of investment, acquiring a property generally makes you the sole and effective owner of the property. While this has many advantages, it also comes with certain responsibilities.

These are some responsibilities that you have to take as a property’s owner:

1. Be aware of your investment

First of all, your first responsibility is to be aware that the property you are going to buy is a good option, generally speaking and for your specific needs.

Choose your type of property

Real estate comes in different forms, with risks and benefits associated with each type of property.

If you want to buy a commercial building, you have to know that this type of property typically offers longer rental contracts (3 to 5 years). By the way, this guarantees you future cash flow income. However, if the market is growing rapidly, a long-term contract can take away the opportunity to take advantage of increases in rents.

On the other hand, residential properties with short-term contracts have the benefit that the prices can increase and be adjusted according to the market’s trends; however, vacancy rates can be longer or shorter according to the season, and tenant turnover is constant.

Home’s value and home’s cost

There is no doubt that location impacts the property’s value strongly . This is directly related to the place; or the things can change within the same real estate development, since in the same building one unit may have a sea-view and another one does not provide significant advantages.

Some experts agree that if you are looking to buy in a high-growth area, you should be willing to pay more for your property.

One strategy to determine the value of a property is using a financial formula known as the capitalization rate or cap rate.

The cap rate is calculated by dividing the Net Operating Income (expected income from the property less all operating expenses) by the current market value. The result can be compared with similar properties to find out if your home has an appropriate value.

In the same way, by knowing the average cap rate of the area where you want to buy, you can find a property’s market value simply by dividing the net operating income by the cap rate percentage.

In general, an investor has to know the market where he is looking for the property, or get advice from a real estate expert.

2. Operating Expenses

Ordinary and extraordinary expenses

Properties need constant maintenance, and the problems will inevitably increase over time.

Occasionally, extraordinary expenditure for repairs and renovation (sometimes very high) must also be incurred (for example, a roof repair or replacement of the air conditioning system and / or appliances).

The owner is responsible for all these expenses.

Therefore, it would be a good option, according to an economic-financial point of view, to plan provisions and reserves in order to avoid liquidity problems when these costs are to be incurred, or be obliged to request financing.

Insurance

In the case of residential properties, you will most likely need an insurance, mainly to protect your home from damage, fire and destruction: most banks require this type of policy to grant a mortgage loan.

However, insurance can protect your wealth in the event of an accident occurring to third parties inside your home

Utilities

In vacation rentals, the owner is also responsible for the utilities’ payment.

3. Upfront Expenses

When acquiring a property, the entire transaction involves some expenses, not only the down payment amount.  Among them, the notarial and deed expenses, and the taxes that you must pay when you buy a house.

Notary fees and deed expenses

The purchase and the mortgage loan (if necessary) must be drawn up, according to law, by a notary public and registered in the Public Property Registry of the place where the home you are going to acquire is located: this provides you the legal certainty that you are the owner of the property.

Hence, you have to pay the registration fees, established by each State, and the notary public’s charges.

Appraisal

A property’s appraisal for tax purposes is necessary in order to carry out the buying process; an appraisal is also mandatory when you request a bank mortgage loan. These expenses are financially a responsibility of the buyer.

4. Pay the corresponding taxes

Property Acquisition Tax

The buyer must pay the Property Acquisition Tax (in Mexican, ISAI) at the time of the purchase: it applies to any type of real estate property.

In Mexico, the percentage corresponding to this tax is from 2 to 4.5% on average, depending on the State.

In the State of Quintana Roo, it is equivalent to 2% of the property’s assessed (for tax purposes) value.

Payment must be made within the fifteen days following the ownership’s transfer transaction.

This tax must be paid by the buyer, so you should consider it as an upfront expense when acquiring a house.

Annual property tax 

 This tax applies to any real estate property, and it is an owner’s responsibility to pay it.

The calculation of this Property Tax is made based on the property’s cadastral value, and it must be paid annually.

This tax is collected by each State, which decides the payment methods and options.

Income Tax (ISR, for its acronym in Spanish)

This tax must be paid at the moment of the property’s sale. The ISR is taken directly from the capital gains from sale and/or rental revenues.

5. Make your mortgage payments on time

It is the owner’s obligation to pay the loan monthly installments on time, so as not to breach the contract and falling foul of your commitments:  this could bring financial and personal consequences.

6. Make sure that all the paperwork and requirements to buy your house are in order.

Check the property information in the Public Property Registry

In the Public Property Registry you may control the ownership, possession, use, encumbrance, disposition and other similar acts legally affecting the real estate property you are buying. Once the acts are registered there, they produce “effects against good faith and bad faith third parties”.

Title Deed

You should know that the deed to the property is an important written document to verify the right to convey the property. Only the person who is registered as the owner of the property with the RPP is the one who will have all the rights over it.

During the buying and selling process, the notary requests to examine the title deeds to confirm that the person who sells the property is the current owner of the house in a legal way, and that therefore he/she can sell it to you without any inconvenience. Otherwise, the process becomes much more complex and time consuming.

Encumbrance Free Certificate

The Encumbrance Free Certificate is another important paperwork in the process of buying a home, because it verifies that the property is clear of encumbrances, that is, it is free from any legal or monetary dues such as uncleared loans or mortgages.

Whether you are living in the Mayan Riviera, or out of the State, or out of Mexico, you have to comply with all the points mentioned above.

Lacking just one of these responsibilities can put you in trouble. Because of that, our recommendation is to contact an experienced real estate advisor, who can help you in all the matters related to your property.

Author

Maya Ocean

Maya Ocean Real Estate

We are a company dedicated to the Sale of Real Estate and we also offer the option to Manage, Promote and Rent. Our real estate inventory and area of operations extends to the Riviera Maya mainly in the cities of Playa del Carmen and Tulum...

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