Investors looking to diversify their portfolios into land or rental properties -- that are still gaining in market value -- ought to look south of the border.

But they should focus their shopping on the top "fly in" resort locations in Mexico -- and avoid "drive in" locations close to the U.S. border.

That's the advice of Seattle investor and author Tom Kelly, who put his own self-directed IRA money into development lots in Manzanillo on the Pacific Coast several years back.

Had he left his retirement dollars concentrated heavily in U.S. mutual funds, he would have lost a bundle in the past six months -- like a lot of us.

Instead, Kelly owns Mexican resort real estate that -- at least by his calculations -- gets more valuable every year.

Kelly says that well-chosen rental condos in cities like Mazatlan have appreciated an average of 10 percent a year for the last 10 years, and are still rising -- despite the recession and credit crunch up north.

A key reason is basic affordability: Building costs typically are much lower than in the U.S., plus you often get superb locations on the Sea of Cortez or the Pacific, where tourists from Canada, the U.S., and even Europe continue to flock for the sun, golfing and fishing.

Investors can pick up a two-bedroom, two bath fourteen hundred square foot condo unit with a golf course or water view in Mazatlan for $180,000, according to Kelly. Rental demand is strong enough in "fly-in" resorts -- those with convenient jet connections to U.S. cities -- that investors can see positive cash flows if they're prepared to make a 30 percent downpayment.

Major U.S. banks extend mortgages on Mexican real estate, and U.S. title companies such as Stewart and First American insure property titles as they do up north.

There are some important differences in buying property in Mexico, however:

First, on properties located within "restricted" zones close to the ocean or national borders, non-Mexican buyers need to operate through a Mexican bank trustee rather than receiving fee-simple title.

Second, more so than in U.S. investing, you need experienced local guidance and counsel to help you do your due diligence. One firm that specializes in what Kelly calls "soft" introductions to Mexican real estate for investors is MexicoAlive, based in Puerto Vallarta.

But let's be frank here: There are no sure bets in real estate investing. Mexican property has no immunity from global economic problems.

So only invest after you've done a lot of background digging.

Published: December 5, 2008

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consumer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.