One of the first questions any real estate investor should ask is: What is the maximum price I should pay for this property so that it outperforms simply investing my money in Mexican government bonds? A surprisingly useful estimate can be obtained using just four pieces of information The Four Key Inputs 1 Expected Rental Income Short term vacation rental average nightly rate Or long term monthly rental 2 Expected Occupancy Rate Vacation rentals typically range between 50% and 75%, depending on the location, seasonality, and property quality Long term rentals generally maintain occupancy above 90% 3 Expected Annual Appreciation The estimated increase in the property's market value over time For example, 6% per year 4 Current CETES Yield CETES Certificados de la Tesorería are short term Mexican government securities and are widely considered the Mexican equivalent of U S Treasury Bills T Bills They provide a useful benchmark for the minimum return an investor should expect before taking on the additional risks associated with real estate Step 1 Calculate Expected Monthly Rental Income For Short Term Vacation Rentals Gross monthly income is calculated as: text Average Nightly Rate × 30 × Occupancy Rate Example Average nightly rate: MXN 2,500 Occupancy: 65% text 2,500 × 30 × 0 65 = MXN 48,750 Next, deduct operating expenses such as: Property management Airbnb or OTA commissions Cleaning Maintenance Reserve for furniture and equipment replacement HOA fees and administration Assuming total operating costs equal 35% of gross revenue: text 48,750 × 65% = MXN 31,688 net monthly income For Long Term Rentals Example Monthly rent: MXN 25,000 Expected occupancy: 95% text 25,000 × 95% = MXN 23,750 expected monthly income Operating expenses are generally much lower than for vacation rentals Step 2 Calculate Annual Net Rental Income Simply multiply: text Net Monthly Rental Income × 12 Example text 31,688 × 12 = MXN 380,256 per year Step 3 Add Expected Appreciation Real estate returns come from two sources: Rental income cash flow Capital appreciation If a property is expected to appreciate by 6% annually , that appreciation should be considered part of the total expected return Step 4 Compare the Expected Return to CETES Suppose: CETES yield = 8% Expected appreciation = 6% The rental component only needs to provide: text 8% − 6% = 2% If rental income generates at least a 2% annual return , and appreciation contributes another 6% , the total expected return matches the current CETES yield The Simplified Valuation Formula Let: NI = Annual Net Rental Income A = Expected Annual Appreciation C = Current CETES Yield Then: text Property Value = Annual Net Rental Income / C − A Where C and A are expressed as decimals Example Annual Net Rental Income: MXN 380,000 Expected Appreciation: 6% CETES Yield: 8% text 380,000 ÷ 0 08 − 0 06 = MXN 19,000,000 If the property can be purchased for less than MXN 19 million , its expected return is at least equal to the CETES yield Another Example Annual Net Rental Income: MXN 300,000 Expected Appreciation: 5% CETES Yield: 8% text 300,000 ÷ 0 03 = MXN 10,000,000 Asking price: MXN 12 million → likely overpriced Asking price: MXN 9 million → potentially an attractive investment Why This Formula Works Unlike simple capitalization rate calculations, this approach recognizes that investors earn returns from both: Ongoing rental income Long term capital appreciation In fast growing markets like the Riviera Maya, appreciation has historically represented a significant portion of total investment returns Practical Guidelines for the Riviera Maya Vacation rental occupancy: 55% 70% Vacation rental operating costs: 30% 40% of gross rental income Long term rental occupancy: 90% 98% Expected annual appreciation: 4% 8% CETES yield: Use the current market rate as the baseline return for a low risk investment A Note on Risk Premium Professional investors generally require a risk premium above the return offered by government secur