TIPS ON LEASING YOUR COSTA RICA CONDO

We finished construction on our first 30 condominium units at The Oaks Tamarindo before Easter, and some of our owners already have begun renting out their units. Out of 30 units completed, 5 units are being rented out on either a short term or a long term basis. We are using the 3 units that we are not selling as model units, a home for our manager of guest services, Ana Lorena, and as VIP units for local dignitaries. One of our owners even has set up his own web site.

First, let’s start by stating the obvious. (It makes blogging so much easier.) Renting is extremely attractive from an economic point of view. Prices are going up while phase two is under construction, making renting an attractive option to cover one’s costs while enjoying the benefits of price appreciation.

We recommend that owners enter into short term rentals whenever possible. Rates are attractive, at $900 per week during the low season, pretty much the same as renting two rooms at the new Best Western Motel one mile down the road. Additionally, an owner can schedule personal and family use during the year, and we can keep a close eye on the unit’s use when it is rented out.

Still, some owners have told us that they believe that long term rentals are more attractive to them, because their income is more stable, and because there is less wear and tear on their units. In our opinion, both beliefs are questionable.

From the point of view of stability of income, the law limits a landlord to only one month’s rent in advance and one additional month’s deposit for damages. As a nice trap for the unwary landlord or lawyer, a tenant can cancel his lease with three months’ advance notice unless the lease explicitly provides otherwise. Moreover, a long term lease really is long term. Under Costa Rica law, every residential lease has a term of 3 years (even if the lease itself says otherwise). So, if you enter into a lease for any term (other than a short term tourist lease), you have entered into a three year lease. Combined with the discussion in the following paragraph, think of this as a form of rent control.

If rent payments are stipulated in a foreign currency, such as U.S. or Canadian dollars, the rent cannot be increased for three years (even if the lease says otherwise). Only if rent payments are stipulated in Costa Rica colones can the rent be increased, once a year, by an amount equal to the annual rate of inflation, up to 15%.

This actually is a pretty good deal for the landlord, since the colon is going up against the U.S. dollar, and inflation is running around 10% per year. So, your lease payable in colones will have two nice annual increases in rent, while your lease payable in dollars is fixed for three years.
What can go wrong? You negotiate a three month lease in October, during the rainy season, for a low rent, payable in dollars. You neglect to register yourself or your company as a tourist establishment, thereby attempting to avoid charging your tenant Costa Rica’s 16.39% sales and tourist tax. You figure, no worries, I am covering my costs, the lease is only until December, and I’ll raise the rent during the high season. WHAMMO. An unscrupulous tenant will stick you with the low fixed rent for three full years, during low season and high. Never mind that the lease says it is for three months. Costa Rican rent control.

What about wear and tear? Isn’t it easier on your unit to have a nice, stable, long term tenant? Well, you own a vacation home, within minutes of the best beaches in the country. So, even though your tenant is a professional architect, engineer or lawyer who lives and works in the area full time,with a wife and no children, he has two parents, six brothers and sisters, and20 cousins, and their families, all of whom want to come visit him at the beach. And there is nothing you can do about that. Do you think one month’s security deposit will cover three years of wear and tear?

KEY POINTS

· You are better off as a short term landlord to foreign tourists, by and large.
· If you decide on short term rentals, you should register as a tourist establishment, publish
notice of your registration and collect and pay your 16.39% sales and tourist taxes.
Want to know more, click here!

WHY COSTA RICA REAL ESTATE PRICES ARE GOING UP

On December 14, the Wall Street Journal reported on a phenomenon that Canadians also are beginning to discover.

According to the article: “The housing slump has sent many Americans shopping south of the border.

Existing-home prices in the U.S. dropped 4.5% in the third quarter from a year ago, according to S&P/Case-Shiller. But they are still climbing in much of Latin America and the Caribbean. Since 2003, annual home-price appreciation has been running at 20% in the Dominican Republic, and could reach 50% in the near future, according to Boomerang Unlimited, a Napa, Calif., real-estate investment advisory firm. In San Pedro, Belize, the average price of a 2,200-square-foot home was $697,500 in September, up 18.6% from a year ago, according to a study by Coldwell Banker; the price of a similar property in San Jose, Costa Rica, was up 20.7%, to $389,900, the study said.

Prices remain low compared with those in the U.S., particularly for waterfront properties. Because Americans generally buy and sell properties throughout the region in dollars, not the local currency, home prices don't fluctuate with the various exchange rates, as is the case in Europe. What's more, the dollar generally buys much more house in these countries than it does in the U.S., because labor and land are less expensive.”

Costa Rica has been popular for years because of its stable democracy, friendly people, beautiful beaches and stunning biodiversity. Starting with the 2003 opening of The Four Season Resort in Guanacaste, along the Pacific Northwest coast, direct international flights to the Pacific Northwest have increased exponentially, driving an investment boom.

What is new in 2008 is a policy change that looks to drive real estate values up even further. Real estate deals are transacted in U.S. dollars. Inflation in Costa Rica traditionally has been high when measured in the local currency, the colon, but low when measured in U.S. dollars.
The reason has been a creeping devaluation of the colon against the dollar. This devaluation ended in 2007; from January through November the colon was virtually unchanged against the dollar. On November 23, the dollar lost almost 4% of its value against the colon. In the less than two months since, the dollar has gradually lost another 4/10 of 1% against the colon, which would indicate an annual devaluation of about 2.5%.
In 2007, according to official government statistics, http://www.inec.go.cr/, Costa Rica’s general price inflation was 10.81%. Construction cost inflation (for construction of houses) was slightly higher, at 11.48%. These trends do not appear to be reversing.

What does this mean for a buyer who pays U.S. dollars? Just this. In order to purchase the same construction one year from now, it is prudent to count on annual construction cost inflation of 13%, plus or minus, measured in dollars. What does this mean for a developer? It is equally prudent to raise prices by 13% during 2008, just to stay even. And this inflation does not take into account inflation in land prices, driven by the same forces, plus supply and demand. No wonder, then, that prices were up 20% in 2007, according to the WSJ article.

Does this make sense? If you are as old as I am, you have been there before. When inflation was roaring in the United States in the 1970s, real estate was your refuge. The consumer price index was going up in double digits annually, and real estate was going up even more. In inflationary times, you want to own hard assets. Like real estate. And since real estate prices move in long cycles, you don’t want to bargain hunt in a falling market (trying to catch a falling knife), you want to buy in a rising market, with the wind in your sails.

What about a buyer who pays Canadian dollars? Economic Nirvana. A Perfect Storm.
The Loonie has risen by about 50% against the U.S. dollar over the past five years, from 65 cents to parity, making this an interesting time to buy Costa Rica real estate- priced in U.S. dollars. Combine this with no capital gains taxes and a ridiculously low ¼ of 1% annual real estate tax rate, and the Canadian investor’s stage is set. Now mix in a price of around $200 per square foot, compared to Canadian prices of around $500 per square foot. If you haven’t planned your exploratory trip, maybe you should. But before you go, there are pitfalls to be aware of. Is it possible to make mistakes in a foreign country? Oh yeah. Don’t leave your brain on the plane.

Ask us. www.millionairesecretscr.com. (The cr stands for Costa Rica).

Costa Rica is South of the Border and HOT!

"The housing slump has sent many Americans shopping south of the border. Existing-home prices in the U.S. dropped 4.5% in the third quarter from a year ago, according to S&P/Case-Shiller. But they are still climbing in much of Latin America and the Caribbean. Buyers are being enticed by the kind of double-digit appreciation that has all but disappeared in the States. In addition, a growing number of new developments are targeting Americans looking for good deals and a lower cost of living. In San Pedro, Belize, the average price of a 2,200-square-foot home was $697,500 in September, up 18.6% from a year ago, according to a study by Coldwell Banker; the price of a similar property in San Jose, Costa Rica, was up 20.7%, to $389,900, the study said..."1

At The Oaks Condominiums outside Tamarindo and Playa Grande, on the Northwest Pacific coast, www.theoakstamarindo.com, prices have gone up 40% in 2007, but are still more than 25% below the lender's appraisal of value when the first two phases are completed in July 2008. For good design and construction (see last comment below), prices routinely appreciate 15% between pre-construction and construction, and another 15% between construction and completion. Inflation in Costa Rica is running about 10% per year.

"He snapped up the home on the advice of a gym buddy, who said his own Costa Rican properties have quadrupled in value over the past four years. Although Mr. Deitrick isn't looking forward to the daylong flight to Dominica when he visits for the first time in February, he says he's glad he bought the property: "It just doesn't make sense to buy in the U.S. right now"."2

Buyers need to ask the right questions, and to inspect the property.

"There are additional downsides to buying in this part of the world. The weather can be violent and unpredictable: Last month Hurricane Noel slammed the Caribbean, causing floods and mudslides, and leaving 147 dead. And insurance to protect against natural disasters, including earthquakes, may be impossible to obtain."2

Costa Rica is south of the hurricane paths. In Costa Rica, insurance is available through the INS, a government monopoly insurer. Insurance includes coverage for earthquakes and hurricanes. Regulated rates for condominiums vary from a high of $0.6215 per $100 on an individual policy to a low of $0.452 per $100 on a policy purchased by the condominium association.

"In addition, many foreign real-estate brokers are unlicensed and don't necessarily adhere to the business standards that Americans expect."4

Does the broker have an "exclusive listing" for one or more properties at a higher than normal commission? Is that why the broker is showing you that property? Is there a sales contest going on, where the winning agent gets a free unit or cash bonus? Ask the same questions of brokers in at least three different firms, and note the different answers.

"Seasoned real-estate brokers say that to be successful, developments need at least some amenities and should be within an hour's drive of an international airport."1

Amen.

This means, for beach properties, the Guanacaste region along the Northwest Pacific coast. High scale development was opened up by The Four Seasons Resort four years ago.
Thanks to direct international flights from the U.S., Canada and the U.K., beach communities from Coco to Tamarindo are within an easy one hour drive. Tamarindo is the social hub of the area, within easy driving of lesser known and even better beaches such as Playa Grande. An apparent exception to the one hour rule is the booming beach town of Jaco, where a proposed highway from San Jose promises to bring the driving time from San Jose down from two hours to one hour. This new highway is promised for completion within three years. A word to the wise. This promise first was made thirteen years ago. Each year the promise remains unchanged.

"Estimated buyer transaction costs: 3.8%"6

If the developer structures the sale properly, closing costs can be as low as 1%, including title insurance. How? The seller transfer shares of individual corporations set up for each unit, avoiding transfer taxes, side stepping "minimum" attorneys' fee schedules, and easing the opening of bank accounts.

There are no capital gains taxes in Costa Rica (except in the case of "habitual" sales, in which case a 30% rate applies).

Do not assume that North American construction and environmental standards apply, or that developers accurately or consistently describe the number of square feet contained within a condominium or home. Remember, the market is basically unregulated.

According to Wikipedia, only about 15% of waste water in Latin America is treated before it is released into rivers and bays. Insist on compliance with environmental standards. Ideally, insist on tertiary waste water treatment systems that clean waste water to 95% or better purity, sufficient for reuse for irrigation purposes. To begin in Costa Rica, check www.greensealrealty.com and www.theoakstamarindo.com.

Robert Irvin

info@millionairesecretscr.com

1. June Fletcher, “South of the Border,The Market's Still HotAmericans Find Second-Home Boom Endures; Wildlife in the Neighborhood,” Wall Street Journal, December 14, 2007, W12.
2. Ibid.
3. Ibid.
4. Ibid.
5. Ibid.
6. Ibid.

Does Anyone Else See the Arbitrage?

Arbitrage: the practice of taking advantage of a price differential between two or more markets…Arbitrage has the effect of causing prices in different markets to converge. Wikipedia.
I got back to Costa Rica last week after spending over three weeks in Virginia, New York and Florida, and had the chance to look at some familiar things afresh. I’ve been thinking about these things for some time, but never quite got them where I wanted them in my head.
News item from the Costa Rican papers. General price inflation over the last 12 months is 10%. This appears to be continuing. Since January 1, the U.S. dollar is unchanged against the Costa Rican currency, the colon, meaning that inflation also is 10% in terms of U.S. dollars. Of course, in terms of Canadian dollars, pounds sterling and Euros, there is price deflation. But for the moment, I’m concerned with prices in U.S. dollars.
In construction, things that are bought in the U.S., or on the world market, such as appliances, have inflated much less than 10%. But, the cost of labor, and things purchased locally, such as cement, iron rebar, concrete blocks, the basic local materials, oh yeah.
In Florida, the real estate market looks pretty bad. (Slow would be an exaggeration.) South Florida condos are being offered at $600 a square foot, but prices are frozen or going down. The New York market looks a little better, certainly higher priced.
In Costa Rica, the market varies by region, but on the booming Pacific coast, $300 a square foot should get you an ocean view, at least if you shop around, and $200 a square foot should get you good construction and amenities. And yes, prices are rising, by at least 10%.
Aside from price, Costa Rica real estate taxes are one-quarter of 1%, say $1,000 on a $400,000 condo in Costa Rica. In Florida, more like a little under 2%, or $7,000. Long term interest rates are 4%, so if you capitalize the tax differential at 4%, you get a value difference, at the same price, of $150,000 (25 x $6,000). Capital gains taxes don’t exist in Costa Rica; 15% in Florida, higher in New York.
Does anyone else see the arbitrage? Say for a second home or investment property? Arbitrage: the practice of taking advantage of a price differential between two or more markets…Arbitrage has the effect of causing prices in different markets to converge. Wikipedia.

Strong Costa Rica Colon!

Add the Costa Rica Colon to the list of strong currencies: Colon, Euro, Pound, Loony!

This week Costa Rica's national currency appreciated almost 4% against the U.S. dollar, for the first time in over 20 years. One dollar now buys 496.6 colons. Three days ago it bought 516.8. From a price series provided by the Central Bank of Costa Rica, the dollar has appreciated between 4% and 13% annually over the last ten years, in a "creeping" devaluation orchestrated by the Costa Rican government. This has had the effect of negating local price inflation over that period for investors spending dollars.

No more. For all of 2007, the dollar is now unchanged against the colon.

What does this mean for real estate investors in this hot market? If this week's price movement is a trend (want to bet it's not?), then construction costs are going to go up by an amount equal to annual inflation in local prices, around 9% for 2007, plus (or minus) changes in the dollar/colon exchange rate.

To find out whether there is a trend, consider the following changes in the exchange rate: 2003, dollar up 10.5%; 2004, dollar up 9.5%; 2005, dollar up 8.3%; 2006, dollar up 4%; 2007, dollar unchanged; week ending November 23, dollar down 4%. Hmmm.

At our premier real estate condominium development along Costa Rica's booming northwest pacific coast, The Oaks Condominiums, we had the foresight (luck?) to buy our cedar wood, concrete and iron rebar in advance for the first two phases. Our luck did not extend to phase three. Prices will be going up soon.

Do You Think Currency Matters?

The Canadian market has proven that currency exchange rates do matter!

Our clients from Canada, congratulations, prices in all our Costa Rica real estate developments have gone down by about 4% in the last two weeks.

For our clients from the U.K. and the Euro zone, prices have gone down about 2% in the last two weeks.

What happened? Currency movements. Costa Rica real estate prices are measured in U.S. dollars, so as the U.S. dollar falls and the Canadian dollar, Pound and Euro rise, real estate investors from Canada, the U.K. and Europe benefit, even when prices in good developments in Costa Rica are still going up in U.S. dollars.

Let’s go back to January 2, 2007 and look at a real life example. On January 2, the lowest available price of a two bedroom/two bath luxury condominium in our premier ecological project, The Oaks Tamarindo, was U.S. $102,500. According to the Bank of Canada, the Canadian dollar at that date was worth 0.8584 U.S. dollars. So the price in Canadian dollars was $119,402.25.

On November 2, the lowest available price of a similar luxury condominium at The Oaks Tamarindo was U.S. $142,500. The value of the Canadian dollar at November 2 was 1.0702 U.S. dollars. So the price in Canadian dollars was $133,152.68.

At this premier ecological real estate project in the booming Guanacaste area of Costa Rica, U.S. dollar prices were up on the year 39%! But for Canadians, thanks to the booming Loonie, prices were up only 15%. Would a Canadian have been better off buying at the beginning of the year? Yes, by 15%.

For U.K. and European clients, currency movements show similar but less pronounced results with a 31% price rise in British Pounds and a 27% price rise in Euros.

Why does this matter now? Because the rainy season is about to end. We anticipate price rises again this high season as the best projects continue to have strong sales.

General price inflation in Costa Rica, measured in U.S. dollars, is running about 8% per year. Add to this an imbalance between supply and demand at prices under $300,000 U.S., and you do begin to sense that this is a good time to consider investing in Costa Rica.

If your forecast is that the U.S. dollar will continue to slide, then the best way to invest is to put down a small deposit on future development, paying the bulk of the price later, in cheaper dollars and dearer Canadian dollars, Pounds or Euros. This means a pre-deposit at phase three at The Oaks, or a pre-deposit at Sea Breeze Mountain, or other structured investments that we can help you with.If your forecast is that the U.S. dollar could reverse its downward course, then the best way to invest is to buy something close to completion, where you convert your investment into U.S. dollars now, such as a resale at phase one of The Oaks. And if you want to hedge your forecast, then the best way to invest is in a construction project where you convert about 40% of your investment into U.S. dollars now, and invest the balance over 6 to 9 months.

In all cases, invest in quality. And for us, quality includes sound environmental practices. Call US 1.888.502.6519 Help Costa Rica stay green. Visit here to receive updates.

Did you miss our private Costa Rica real estate seminar after the Trump/Learning Annex Wealth Expo in Calgary October 14? Check out this news article about our featured development, The Oaks Tamarindo, in the Calgary Sun. Put Down Some Roots In Costa Rica.

Well, the good news is that we will be back, in January. And the bad news is? Did you know that real estate prices are seasonal in Costa Rica? That the rainy season is the time to buy? Makes sense, doesn’t it? The rainy season is about to end. In January, this year’s bargains will be taken. True, Costa Rica real estate is in a long up cycle. There will still be good opportunities. But, if you know what to look for, and also what to look out for, you can find amazing bargains now. Bargains that will be sold by January.
Why contact us? For fair, transparent, common sense advice. Our founder, Robert Irvin, has been an American lawyer, banker and real estate specialist for over 30 years. He moved to Costa Rica three years ago, and lives both in the Tamarindo beach area and in the Central Valley mountains outside San Jose. In 45 minutes each week, he goes from cool mountain views to warm, sunny beaches. He made over $1 million on his first Costa Rica real estate investment, cash in, cash out, tripling his money in two years, by buying a low risk developed lot that met every outstanding investment criterion that we list in MillionaireSecretsCR. He has an outstanding ecological development outside Tamarindo that offers value for money from under $140,000 Canadian. And he has an ocean view development outside Samara that is breathtaking.
But that is not all. Frustrated by developments that disregard Costa Rica’s natural beauty, its animals and its amazing biodiversity, he founded Green Seal Realty, devoted to two principles. We only work with people we trust and respect. And we only work with environmentally sound projects. That’s it.
We do not take exclusive listings with special sales incentives for agents, we disclose our commissions to you, we pay Costa Rica’s sales tax on the commissions, and we only recommend projects that we have seen, reviewed and would live in ourselves.
We strongly recommend visiting before you decide anything. You will have a fantastic time in Costa Rica, but more important, you should always look for yourself. We can show you what in our opinion are the outstanding values near where we live and work. And if you are interested in someplace else, we will recommend someone else to work with you.
There is no substitute for focus. There is no substitute for experience. Ask for the Green Seal team, and invest in Costa Rica with the Green Seal of approval.

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