Vacation Rentals Done Properly

Along with other economic sectors in Mexico, the vacation rental industry has been hit by the informal character of its management.

Mexico’s hotel industry has specific guidelines related to tax liabilities through legislations, such as the State Hospitality Tax (ISH by its acronym in Spanish). On the other hand, vacation rentals, for the most part, take place between renter and tenant without standardized tax liabilities, a situation that has been an ongoing bone of contention between both industries. G3MEX Group Real Estate founder, Miguel Fernández, shared his thoughts on the matter, along with a few key points to consider in order to achieve fair competition through formal procedures.

Originally from Ciudad Juárez, Chihuahua, Miguel Fernández has been involved in the real estate industry for over 30 years. In 2003 he founded G3MEX Group Real Estate, along with two other partners. The company specializes in real estate audits and legal compliance, thus building a solid reputation and long-lasting relationships with local businesses.

Since the tourism industry has become one of the fastest growing economic sectors in Mexico, and Puerto Vallarta has remained as one of the key players among both domestic and foreign tourists, Miguel shared with us a general perspective on the implications that vacation rentals have in our region.

“In order to operate a vacation property legally, the first step for national or international companies is to register with the Tax Administration Service (SAT, by its acronym in Spanish),whether it is a physical person or business. In such a way, rental incomes will pay the corresponding value-added tax,” he explains. “Vacation rental owners should consider them as a small business with a large growth potential.”

There are websites (such as HomeAway, VRBO and Airbnb) where people can list or search for rent properties all over the world, but “all the transactions are made through PayPal and that money never gets into a bank or any other institution in Mexico.” This is a risk for all of those companies operating outside the law because “if the Secretariat of Finance and Public Credit (SHCP, by its acronym in Spanish) identifies this activity, it would impose penalty charges based on the average of weeks during which the property was rented in all the years it has been active on the market. As a foreigner, not only would your reputation be at stake, but also your continued stay in the country.”

During his professional career, Miguel Fernández has followed up on the formality this industry requires, getting support from lawyers, tax advisors, accountants, notaries and other professionals involved. “In fact, we’ve prepared pre-sale scenarios to determine the most efficient way to develop the business model.”

Given the fact that every house can operate as a vacation property, it will always be advisable to ensure that the condominium’s internal rules don’t restrict its potential. As the owner, you have to take into account your target market. “For example, you can find a beach front villa or a house on the hills and, even though both offer vacation plans, their amenities may not be what your clients are looking for.”

When asked if there is a local or national association that seeks to regulate vacation rentals, he said so far there isn’t one, as most of the industry remains informal. “Unlike the property sale process—which involves more risks, thus encouraging one to turn to a notary in order to complete the process—when it comes to rentals, it wouldn’t be a bad idea to have an organization charged with regulating the industry. However, as long as informality remains, it won’t be possible to create an institution that can generate policies, values and shared goals in order to achieve fair competition.”

When asked about his primary competitors, Miguel is very clear:

“My major competitor is informality and people who are conducting business despite the fact they disregard all possibilities and benefits their properties can produce for them.“

Regarding occupancy, “as much as we want to remove the stigma against the high and low seasons—which I prefer to call foreign tourism season and national tourism season—the truth is, we’ve adjusted prices, promotions and services in order to rent our properties from 25 to 30 weeks a year—that is, for half a year.”

Since every aspect of the tourism industry has to do with enjoying the experience, personalized service provided by vacation rentals make this easier to achieve: “Every time our clients leave, they mention they had a wonderful stay. We’ve taken visitors to the lienzo charro or the town’s fiestas and when it’s time to return home, they leave feeling very happy to have met people from the local community.”

When asked if the vacation rentals industry is experiencing a boom in our destination, Miguel Fernández stated: “I wouldn’t say that. We’ve just emerged from a very serious recession, whose upturn happened just after the biggest developers returned to built new properties and not just reselling. The situation has now stabilized, but if the economic conditions of the country allow—particularly in terms of security—we can expect better times ahead.”

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