Real Estate: How to Read a Rental Yield

“Buy property, rent it out” is the default Mexican wealth plan — and it can work, but almost nobody who says it has computed the yield. This module gives you the four numbers that turn a property from a story into an investment you can compare against anything else, including the ETFs from Module 6.

The four numbers

1. Gross rental yield — the headline:

A $2.5M MXN apartment renting at $14,000/month grosses $168,000 a year: 6.7% gross. As global context, Global Property Guide’s July 2026 data puts Mexico’s average at 5.79%, with Mexico City at 6.77%, Puebla 6.12%, Mérida 6.08%, Monterrey 5.82%, Guadalajara 5.58% — and Cancún at just 4.60% (tourist-market prices, long-term-rental rents). Central CDMX neighborhoods do better: Miguel Hidalgo ~8.2%, Cuauhtémoc ~7.7%, Roma Norte ~7.5% for one-bedroom units — smaller apartments in dense areas yield more. Worldwide, anything under ~4% is thin, 5–7% is respectable, 8%+ is high.

2. Net yield (cap rate) — the honest version. Rent is revenue, not profit. Subtract vacancy (a month between tenants is ~8% of the year), maintenance, management (a placement fee of one month’s rent is standard in Mexico), insurance, and predial, and you get NOI (net operating income); NOI ÷ price is the cap rate. GPG’s rule of thumb: net runs 1.5–2 points below gross. The US “50% rule” (half of rent goes to expenses) is deliberately pessimistic and partly US-calibrated — Mexican predial is famously tiny (commonly on the order of a tenth of a percent of market value per year, versus 1–2% in the US), so a well-run Mexican rental might keep 65–75% of rent as NOI.

3. Price-to-rent ratio — the same number upside down: price ÷ annual rent. CDMX at 6.77% gross ≈ 15 years of rent; Cancún at 4.6% ≈ 22. The standard reading: under 15 favors buying, over ~21 favors renting. (The famous US “1% rule” — monthly rent ≥ 1% of price, i.e. a P/R of 8 — is essentially extinct in both countries’ major cities.)

4. Cash-on-cash return — the number that matters when you borrow: annual cash flow after the mortgage payment, divided by the cash you actually put in (down payment + closing costs).

Try it live

The leverage problem, Mexican edition

Here’s where Mexico differs sharply from the US textbooks. Leverage amplifies returns only when the property’s net yield exceeds the loan rate. In mid-2026, Mexican bank mortgages ran roughly 10–11.5% fixed (CAT 12–14%) against net rental yields of ~4.5–5.5%. That’s negative leverage: every borrowed peso costs about twice what the property earns, so a financed rental typically consumes cash every month and the investment case leans entirely on appreciation (running ~8.7% nominal, ~4% real in early 2026). Mitigating factors: Mexican mortgages are fixed-rate in pesos — inflation quietly shrinks the real payment — and Infonavit credit is subsidized for lower salaries. But the base case stands: in Mexico, rentals mostly make sense bought with cash or heavy down payments, unlike the US, where ~6.5% mortgages against ~5.5% cap rates make financed rentals roughly self-carrying.

Two more Mexican specifics worth knowing before signing anything: transaction costs are heavy — ISAI transfer tax of 2–5.7% depending on the state, plus notario, appraisal, and registration for an all-in ~5–8% of the price, which takes years of yield to earn back. And rental income pays ISR, with a pleasant surprise: individuals can take the deducción ciega — a flat 35% deduction, no receipts needed, plus predial, instead of itemizing.

Property vs. the portfolio

The long-run evidence says housing and equities have delivered similar total returns — the landmark “Rate of Return on Everything” study (16 countries, 1870–2015) puts both around 7% real, with about half of housing’s return coming from rent, not appreciation. The catch is that index-level numbers hide what an individual owner actually holds: one asset, one neighborhood, one tenant, months to sell, 5–8% round-trip transaction costs, and unpaid management labor. A single property is a concentrated, illiquid, leveraged bet — sometimes a great one, but it should be compared honestly against the diversified alternative, not against nostalgia.

The practical synthesis for most people: house yourself sensibly first (run rent-vs-buy on the same yield math — if your rent is well below 5% of the home’s value per year, renting and investing the difference is defensible), get the boring ETF core compounding, and treat a rental property as a business you choose to run — bought by the numbers above, with a real vacancy and maintenance budget — rather than as the default place savings go.

That closes the personal finance track’s first arc: budget (1), envelopes (2), balance sheet (3), debt (4), the retirement target (5), and the two engines that get you there (6, 7).

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