Invest in Land or a Small 3-unit Apartment? Details inside

My cousin in Mexico is looking to either buy a small apartment, or invest in land (to build on in 5 years). She asked me for my advice, but I thought it would be best to to post this question to the community to get your opinion. Which would you choose? (all amounts below in USD).

A) The Apartment ($75,000 + $15,000 in renovations. 1,300sq ft)

-3 loft units (1 br / 1 bath each) + a commercial storefront

-Each loft can be rented out for an average of $300 a month (she mentions there wouldn't be much tax to pay on this income).

-The storefront she can rent out for $150 a month (she mentions there wouldn't be much tax to pay on this income)

-She will pay a $10,000 down payment 

-Loan from the bank (for $65 of the $75k) is at a 8% interest rate, 20 year mortgage. 

-located close to city center. it's an ok part of town. ~15min walk to the historic center but also it is 10-15min from a poorer rundown area

B) The Land ($40,000 total price / 3,229 total sq ft ÷ 2 = 1,615sq ft for her)

-Will split the the land with a close friend, 50/50

-Of the $20,000 she's responsible for, she will pay out of pocket $7,500. Dad will loan her $2,500

-For the remaining $10,000, she will get a loan from the bank (to pay for the amount she can't pay in cash): 36 months to pay, 22% is the apr. She can pay this off early in 18 months. 

-This is in a very good area. A lot of projected growth over next 10-20 years, high income area, across the street from a new private school (k-12) 

-Withinn 5 years she would like to build a house (to live or rent out), or 2-3 apartments on the space. This project would be between $50,000 - $75,000. The bank will loan her 70% of the total project price, at 10%. 

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Comments (7)

Oct 14, 2021 - 8:22pm

To really answer the question you would need additional info. What condition is the Option A building in? Is the $15K renovation cost accurate, and will there be expensive ongoing capex? How would she manage the building? What are local vacancy rates and cap rates like? Etc.

That said, it seems like the Option A building would generate positive cashflow, so that appears to be a better bet on paper. Not sure why she'd buy land that she intends to leave vacant for a few years- committing herself to interest payments, property taxes, and tied up equity that's not generating a return. It's basically speculation on land appreciation. If she wants to build something in 5 years, she would be better off investing her money in an index fund until she's ready to build. Unless she's getting an amazing below-market deal on the land.

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Oct 21, 2021 - 2:24pm

Thanks for the reply. 

Since I posted that, the bank offered her a pretty good deal on a loan to build (between 8-11%, same as the apartment), so she plans to build in the next year.

The price of the land is a pretty good deal, owner is strapped for cash and selling for below market value.

She's going through the buying process now and hopes to finalize on the land soon. 

Oct 21, 2021 - 2:54pm

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