The acquisition of real estate as a form of investment is a common practice in Mexico, but many times it is carried out without a deep analysis as to whether it is actually a good business or not. This article summarizes the progress of the thesis research project on the analysis of the profitability that can be obtained when acquiring a property for residential use in the city of Santiago de Querétaro, taking into account the current local economic environment of real estate.
INTRODUCTION
Today, the city of Santiago de Querétaro, and its Metropolitan Area in general (the municipalities of Querétaro, El Marqués and Corregidora), face accelerated growth which is reflected in the real estate supply of housing in the region. This real estate offer is absorbed by buyers with the possibility of acquiring a real estate, either due to economic solvency, or due to their ability to borrow with mortgage loan options, and in several of these cases, acquiring the real estate as a business possibility investment, without evaluating whether or not this option is really profitable. Some of these real estate, when acquired, are used to put them up for rent, since they are not occupied by the same owners, and by popular belief,they assume that this is a very good option so that your money does not lose value over time. However, with the oversupply of homes in the city of Santiago de Querétaro, it is necessary to evaluate whether it is a business or not, taking into account the interest rates on mortgage loans, as well as the real options for purchasing homes in the city.
The housing demand of the last two decades has led the real estate market to raise its prices year after year above inflation, according to what was reported by the Federal Mortgage Society (SHF) in, however, the average monthly rents of homes are still below the average cost of payment of the same real estate loans.
According to the LaMudi company, 53.24% of Mexicans show a tendency to buy real estate (home or apartment), leaving 46.76% with a predilection towards real estate income. This contrasts when seen in its breakdown by state, since in the State of Querétaro the relationship is 23.95% for the purchase against 76.05% who show preference for rent, however, only 11% of the offers in the market are for your rent. If the preference for renting in the State of Querétaro is so high, why isn't there a greater rental offer in the entity? What does the market observe specifically in the city of Santiago de Querétaro, which represents the majority of the volume market,so as not to raise its rental offers according to the demand that it demands? It is then that the question arises as to how profitable it is to invest in the real estate market in Santiago de Querétaro for its lease.
II. THEORETICAL FRAMEWORK
This section presents the basic foundations under which the analysis of the information on real estate offers in the real estate market was carried out.
A. Statistical
For the information analysis, basic statistics were used. The most important thing for this was the determination of the sample (n) as shown in formula (1) that is exposed in:
B. Valuation
In the valuation field there are three basic concepts that we must handle: price, cost and value. Cost refers to the sum of amounts that were necessary to develop or create a good or service. Price is the amount for which a good is exchanged in a free market. Finally, value is a more complex concept, and it is influenced by properties added to the good by each subject as defined in.
There are 3 approaches to estimating the value of a good or service:
- Physical approach Market approach Income approach
The physical approach estimates the value of a good or service based on the costs that were incurred to generate it, or the costs necessary to reproduce it again according to.
The market approach is mainly based on the supply and demand that exists for the good or service, so the value will be estimated based on the values of the same or similar goods or services that are found in a free market as mentioned..
The income approach for its part, analyzes the production capacity of a good or service as it delves into. This approach is the one that is used mainly to estimate the value of a business, since it quantifies the income that a good or service can produce. This approach was also known as the "capitalization of income" approach, a name that makes more evident the way in which a real estate is analyzed, through the income that the income of the same can generate as in.
Each approach has different methods of estimating value. For the analysis of the profitability that is being carried out in this research project, two methods are relevant: the traditional method of capitalization (or perpetual), and the method of discounted flows.
1) Traditional capitalization method
This method, as explained in, uses the following formula:
Traditional capitalization method. Formula.
In the case of the net annual income for real estate, it is calculated by discounting from the gross annual income, all the expenses incurred that are related to the same asset. These expenses, as stated, are:
- Administration expenses Maintenance expenses Empty periods For the case of Mexico: * Property * ISR * PTUD Tax depreciation Insurance Other expenses
Maintenance costs are calculated using the formula:
Maintenance calculation formula
The percentage of deduction for empty periods is calculated using the formula:
Formula for calculating percentage of deduction for empty periods
2) Discounted flow method
This method is the basis for the traditional method, and is constructed by adding the Present Values (PV) of the income streams discounted over time as explained in. That is, it takes into account both the income and future expenses that the property may have. For this, a certain period must be taken into account, and at the end of that period a Residual or Redemption Value of the asset (S) is taken into account, mathematically represented as follows:
Discounted income stream formula
Formula (5) is useful when Rn will have a variable value over time, either due to expenses or income (income). However, if R n is constant during period n, (5) can be synthesized as follows:
Simplified discounted flow calculation formula
C. Legal
The State of Querétaro is one of the states in Mexico with the greatest regulatory control in the field of real estate valuation. This research project takes into account these regulations, which are contained mainly in, which stipulates not only the taxes attributable to the management of real estate such as the property tax and the transfer of ownership, but also contemplates the tariffs under which the valuation work must be charged.
III. METHODOLOGY
To carry out the analysis, it was necessary to establish the parameters under which the study would be carried out. Taking this into account, the following was defined:
A. General considerations
For the values to be comparative, they were transformed into Monetary values per m 2 ($ / m 2). Regarding real estate values, the information from. These values were updated based on the Housing Price Index in the Municipality of Querétaro, exposed by.
TABLE I: INDEX OF PRICE OF THE REAL ESTATE IN THE MUNICIPALITY OF QUERÉTARO
| Year | Index | Annual growth | |
| 2008 | 83.14 | ||
| 2009 | 89.24 | 7.3% | |
| 2010 | 92.81 | 4.0% | |
| 2011 | 94.82 | 2.2% | |
| 2012 | 98.94 | 4.4% | |
| 2013 | 101.28 | 2.4% | |
| 2014 | 108.35 | 7.0% | |
| 2015 | 113.44 | 4.7% | |
| 2016 | 119.76 | 5.6% | |
| 2017 | 129.19 | 7.9% | |
| 2018 | 140.69 | 8.9% | |
| Average | 5.4% |
The rents were obtained from the investigation of offers in, and were also transformed to values per m 2 ($ / m 2).
The applicable values for the calculation of the Property Tax and the Domain Transfer Tax were obtained in accordance with the applicable law in the Municipality of Querétaro, as explained in and, including the notarial expenses according to the fees provided in.
For the exercise of the discounted values, only the concepts for administration, for voids and for maintenance based on.
B. Simulation scenarios
For the analysis that was carried out, the minimum expenses that can be incurred were discounted, which are only maintenance and administration expenses, the estimation of empty periods and the property. In order to evaluate different possibilities of real scenarios, 6 simulations were carried out, based on 3 possibilities of discount variables relative to expenses, combined with 2 different cases:
- The acquisition of real estate under a cash scheme The acquisition of real estate through a mortgage loan. The credit considerations were for a period of 15 years, with a down payment of 20% and a rate of 11.74%, resulting from the average of the rates of the main mortgage credit schemes in Mexico exposed in.
The 3 scenarios applied were:
- Optimistic: 1 month unoccupied every 8 years for voids, 1% budget for a conservation every 5 years for maintenance and 1% for administration expenses Average: 2 months unoccupied every 4 years for voids, 3% of budget for one conservation every 3 years for maintenance and 5% for administration expenses. Pessimistic: 3 months unoccupied every 1 year for empty spaces, 5% budget for one conservation every 1 year for maintenance and 10% for administration expenses.
IV. RESULTS
After carrying out the information analysis, the following results were obtained
A. Conformation of the real estate market in the city of Santiago de Querétaro
Based on Fig. 1, it is observed that the market acquires real estate of medium and social interest mainly in the city of Santiago de Querétaro, adding 92.2% of the total operations, and that they define the average of $ 12,240 per m 2 that shown in Fig. 2.
Fig. 1. Comparative of the acquisition of real estate by socioeconomic level in the city of Santiago de Querétaro in 2017 by the SHF.
Comparison of the acquisition of real estate by socioeconomic level in the city of Santiago de Querétaro in 2017
Fig. 2. Comparison of the price per m 2 of the acquisition of real estate in the city of Santiago de Querétaro in 2017 by the SHF.
Comparison of the price per m2 of the acquisition of real estate in the city of Santiago de Querétaro in 2017
In relation to the rental offers in the city of Santiago de Querétaro, the investigation of online offers yielded the following information:
TABLE II: DESCRIPTIVE STATISTICS OF RENTAL OFFERS IN THE CITY OF SANTIAGO DE QUERÉTARO
| s | 1,563 | |
| Sample | 318 | |
| $ / m2 | Average | $ 98.75 |
| Minimum | $ 33.33 | |
| Maximum | $ 307.69 |
B. Analysis by perpetual or traditional method
For the analysis by the traditional method, the 3 possible scenarios were taken into account, applied to the two possibilities of acquiring the property: without mortgage credit and with credit. In both cases, the expenses incurred for the Transfer of Property of the property were taken into account, since it is an important expense that must be taken into account if the information is analyzed in order to determine the feasibility of the business. The results were the following:
TABLE III: PROFITABILITY OF THE ACQUISITION OF REAL ESTATE BY THE TRADITIONAL METHOD OF THE APROACH OF INCOME
| Scenario | |||
| Best | Average | Worst | |
| Without loan | 7.31% | 6.41% | 2.71% |
| With mortgage loan | 5.50% | 4.82% | 2.04% |
It is evident that, when acquiring a property through a mortgage loan, profitability is sacrificed, because the financial cost of acquiring a property is above the average profitability that renting that same property can give you.
Likewise, if this is compared with the rates of return offered by the 28-day CETES, and with the 28-day TIIE obtained in, we can see in Fig. 3 that, the expected returns on investment in real estate in the City of Santiago de Querétaro, are below them. Additionally, in the same Fig. 3 we can see a comparison with one of the most recent investment instruments: Real Estate Crowdfunding, which can provide up to double the performance of the best scenario of the research that was carried out.
The weak point of this analysis is that it assumes the perpetuity of the income for the real estate, when in reality it can be assumed that the same asset will physically become obsolete in the future after a few decades, both due to the wear and tear generated by time such as functional obsolescence that it may have with the advancement of construction and architectural techniques. That is why it is important to carry out a second analysis by the discounted flow method, which will allow us to devalue the construction and obtain a Residual Value in a considerable period of time.
Fig. 3. Comparative profitability of the acquisition of real estate against other financial instruments in Mexico by the traditional method.
Comparative profitability of the acquisition of real estate against other financial instruments in Mexico by the traditional method.
C. Analysis by discounted flow method
For this analysis, an investment horizon of 60 years was used, at the end of which 100% of the construction was depreciated, leaving the value of the land as Residual Value, which was decreased by 1/3 to consider demolition expenses and debris removal. The results were:
TABLE IV: PROFITABILITY OF THE ACQUISITION OF REAL ESTATE BY THE TRADITIONAL METHOD OF THE APROACH OF INCOME
| Scenario | |||
| Best | Average | Worst | |
| Without loan | 6.46% | 5.55% | 1.85% |
| With mortgage loan | 3.98% | 3.35% | 0.78% |
Fig. 4. Comparative profitability of the acquisition of real estate against other financial instruments in Mexico by the disccounted cashflow method.
Comparative profitability of the acquisition of real estate against other financial instruments in Mexico by the discounted cash flow method
As seen in Table IV and Fig. 4, although a better profitability result could be expected by having a Residual Value, the reality is that it does not exceed the profitability obtained by the traditional method in any of the scenarios.
V. CONCLUSIONS
The importance of an analysis like this one, allows us to see that the belief of business opportunity of investing in a property for residential use in the city of Santiago de Querétaro for its lease, is overvalued, since if there is enough capital to Investing today in a real estate in the city of Santiago de Querétaro, it would be a better option to look for other alternatives such as real estate crowdfunding, or in low-risk instruments that allow the investor to be calm regarding the profits that they will obtain for their money. As the next step in the investigation, it will be analyzed whether these scenarios have the same result according to the socioeconomic level of the property.
The current valuation methods according to the income approach for real estate in Mexico recognized by the valuation procedures manuals, such as those of the National Assets Administration and Appraisals Institute (INDAABIN) or the National Banking and Securities Commission (CNBV), estimate the capitalization rate in a range between 8% and 12%, the same rates that, with the results of this study, we can see that they are out of reality, at least within the city of Santiago de Querétaro, so it is necessary recognize new methods like the one exposed by.
SAW. REFERENCES
- Sociedad Hipotecaria Federal, «Current state of housing in Mexico,» CIDOC Foundation, Mexico, 2016. LaMudi, «Report of the real estate market in Mexico 2017,» 2017.. Available: https://www.lamudi.com.mx/informe-mercado-inmobiliario-2017/. Camacho-Sandoval, "Sample size in clinical studies," vol. 50, nº 1, 2008.Antuñano, The Real Estate Appraisal, Mexico: Editorial Limusa, 2005.INDAABIN, «PT-TC Technical PROCEDURE for obtaining capitalization rates for the valuation of real estate,» January 12, 2009.. Available: http://dof.gob.mx/nota_detalle.php?codigo=5077205&fecha=12/01/20 09.. Sanjurjo and M. Reinoso, Business Valuation Guide, Madrid: Pearson, 2003.M. Salas-Tafoya, "The Real Estate Valuation Model in Mexico," RIDE Ibero-American Magazine for Educational Research and Development, vol. 5, no. 10, pp.1-25, January-June 2015. Caballer Mellado, «Appraisal and valuation. Current situation and future perspective, »Studies of Applied Economics, vol. 25, no. 1, pp. 25-48, 2007.GA Álvarez Frías, Thesis: Risk rates for income capitalization by the GALFRI method, Santiago de Querétaro, Querétaro, 2003.G. Herosillo Morales, Thesis: Descriptive study of the methods used in real estate valuation to determine the homologation factors in market research, Moterrey: Universidad Autónoma de Nuevo León, April, Fifty-eighth legislature of the State of Querétaro, Income Law of the municipality of Querétaro, Qro., for fiscal year 2018, Santiago de Querétaro: La Sombra de Arteaga, 2017. Federal Mortgage Society, «SHF Index of Housing Prices in Mexico,» 2018.. Available: https: //www.gob.mx / cms / uploads / attachment / file / 324139 / Indice_SHF _1er_Trimestre_2018.pdf.. Fifty-eighth legislature of the State of Querétaro, Income Law of the municipality of Querétaro, Qro., For fiscal year 2016, Santiago de Querétaro: La Sombra de Arteaga, 2015. The fifty-eighth legislature of the State of Querétaro, Law of the Notaries of the Querétaro State, Santiago de Querétaro: The Shadow of Arteaga, 2009.Mora, «Rankia,» 10 12 2018.. Available: https://www.rankia.mx/blog/creditos-hipotecarios/3801991-mejorescreditos-hipotecarios-tasa-fija-2019..Banco de México, «Banxico,». Available: http://www.banxico.org.mx/Indicadores/consulta/Instrumentos.action..for fiscal year 2016, Santiago de Querétaro: La Sombra de Arteaga, 2015. The fifty-eighth legislature of the State of Querétaro, Law of the Notaries of the State of Querétaro, Santiago de Querétaro: La Sombra de Arteaga, 2009.Mora, «Rankia, »10 12 2018.. Available: https://www.rankia.mx/blog/creditos-hipotecarios/3801991-mejorescreditos-hipotecarios-tasa-fija-2019..Banco de México, «Banxico,». Available: http://www.banxico.org.mx/Indicadores/consulta/Instrumentos.action..for fiscal year 2016, Santiago de Querétaro: La Sombra de Arteaga, 2015. The fifty-eighth legislature of the State of Querétaro, Law of the Notaries of the State of Querétaro, Santiago de Querétaro: La Sombra de Arteaga, 2009.Mora, «Rankia, »10 12 2018.. Available: https://www.rankia.mx/blog/creditos-hipotecarios/3801991-mejorescreditos-hipotecarios-tasa-fija-2019..Banco de México, «Banxico,». Available: http://www.banxico.org.mx/Indicadores/consulta/Instrumentos.action..Banco de México, «Banxico,». Available: http://www.banxico.org.mx/Indicadores/consulta/Instrumentos.action..Banco de México, «Banxico,». Available: http://www.banxico.org.mx/Indicadores/consulta/Instrumentos.action..
