Investing in Costa Rica Real Estate
Also see: 10 Things to know about purchasing real estate
We recommend to keep a long term investment time horizon to truly benefit from this down turn in the global economy in a risk adversly manner.
Land Investment can be interesting with current downward pressures on prices and low operating expenses such as real estate taxes are very minimal . Just make sure you have someone look over (property manage) your properties on a continuous basis, due to Costa Rica squater rights.
For Sole Leasing Properties we recommend to choose a professional local long term property management company to ensure the proper maintanence of your real estate.
Get a feel for the local and regional real estate market to not make hasty decisions lease untill you are comfortable to make an educated offer.
Use professional services like a qualified real estate agent, lawyer and / or title insurance to assist you in the purchasing and closing process to ensure the transfer of title is handled with care.
Purchase the property in a legal entity not your personal name
10 questions a Costa Rican Real Estate Investor should ask.
- Why Costa Rica
- Type of Investment Strategy
- Exit Strategy
- Highest and best use
- What tax consequences do foreigners face
- What expenses should be expected
- Type of Ownership
- Property Management
1. What are the main reasons that speak for an investment in Real Estate in Costa Rica?
- Monetary Security
- Costa Rica’s stable economy
- Inviting investment laws
- Retirement Aspect
- Standard of Living
2. Type of Investment
When Investing in Real Estate one generally has two options:
1) Commercial Real Estate
Commercial Real Estate in Costa Rica comprise property like office buildings, shopping centers, and warehouses.
With investing in commercial property, normally the gains can be considerable higher than from residential Real Estate, however, it also bears a higher risk. Entering into commercial Real Estate can be recommended for investment capital of $1,000,000 and higher.
2) Residential Real Estate
Like with any Real Estate investment, the location of a residential property is the most important criteria. Residential Real Estate differs considerably between homes, condominiums, and apartments.
For investment purposes, most homes achieve better gains than condominiums or apartments. Condominiums and apartments are generally operated at higher costs, e. g. for maintenance of common elements, pool service, landscaping, thus generating a lower cash flow.
3. Define your Exit Strategy
Resale of Real Estate
- When is the right time personally and that this time match with the projections of the investment to reach its peak price.
- Who will help me conduct this transaction correctly
We recommend to consider a long term investment horizon to be able to reap the greatest return with the lowest possible risk. The market has ups and downs, Right now is a down and there is no guarantee that it will go up any time soon, especially to price levels like just seen in the recent real estate boom. Any short term gains will be eaten up by a closing and transfer fees by reselling the property in a short time horizon. As long as a professional property management continues to properly maintain and lease your property to the point of net positive cash flow, One should relax to truly benefit from evaluation increases to pre 2007 price levels in years to come, then sell high or simply continue living off of the rental income or owner occupy at a later date. Whatever ones preference should determine, the location and type of real estate to invest in.
4. Highest & Best Use
All residential Real Estate properties distinguish between their usage:
Someone who is looking for a property in Costa Rica for his own usage, should actually look at the property and buy that property which matches his personal criteria. Everyone has a different taste! If desired, CostaLisitngs. can assist you to locate a suitable lot to build your dream or rental home on. Costa Listing is a online property search service that develops tools for professional real estate agents. Customized searches allow you to find the Real Estate Professional in the area of interest to customize planning and execution to your needs.
It is not recommended to put a "property-designated-for-own-use" up for rent since the gain is mostly modest. Effort and annoyance are often higher than the anticipated benefit. Therefore, a Real Estate property should either be determined for "own use", or serve as an investment for the highest possible yield.
Real Estate investments are supposed to generate high yields from leasing and appreciation. Such properties distinguish in use as follows:
- 2.2.1. Short-term Leasing
Short-term leasing or vocational leasing can, subject to high occupancy, generate high yields, however, it also bears high vacancy risks. To be attractive to vacationers, the short-term lease property must have a prime location, e. g. on or near the beach. It should be considered that such properties are more expensive to purchase.
Furthermore, such properties require a high effort to accomplish and maintain a high occupancy rate, whereas reality often proves to be different: Fully rented during season, they suffer long vacancies during off-season.
Additionally, these properties must be turnkey-furnished. If damages occur, it is especially annoying when the precious personal property is affected, e. g. when the property is periodically used by the owner as well (thus mixture of usage). Many properties along the beaches may only be rented two or three times per year, which is intended to restrict short-term leasing to a minimum.
Therefore, a Costa Rica property either for "owner’s use", or for "sole leasing" (investment).
- 2.2.2. Long-term Leasing
The most secure and profitable use of a Costa Rican real estate as an investment is its long-term leasing. Also, a property which is being leased for several years, and then being owner-occupied is an attractive investment alternative.
Therefore, Costalisting will refer you to property management companies that specialize in long-term leasing in your area of interest. If personal use is desired and seasonal property management is preferred the same applies. Costalisting is a real estate service for professional real estate agencies and therefore no charge of any kind is applicable to you.
Due to very low operating expenses Costa Rica is also known for passive property investment opportunities by simply buying and holding un-developed land. Especially on the coastline this is has been a very profitable investment market and with current downward price pressures offer repeat "great buy" scenarios.
5. Which tax consequences do North Americans and Europeans face investing in Costa Rica
This is case by case dependent and we recommend you to consult with a lawyer that specializes on both tax and investment laws both in your country and Costa Rica. Contact us for help attaining professional advise
6. What expenses should be expected
Short term Expenses:
- Property transfer
There is a tax of 1.5% of registered value for the transfer of property. Total government tax, registration and stamp fees will run about 3.5% of the registered value of the property. When a property is purchased, unless specified otherwise, it is assumed the buyer and seller will split the cost of legal and transfer fees. If the purchase is cash, the purchaser has the right to choose the lawyer. If the vendor holds a mortgage on the property he has the right to choose the lawyer.
Legal fees and costs will be around 2% of the property-selling price bringing the total transfer cost to approximately 5.5% of the price.
- Permitting and infrastructure improvements
- Construction expenses in form of time delay, and import tarrifs on construction materials from which the majority is imported. Due to labor costs being lower than in the North America or Europe lets say, the total bill should be lower than construction costs in most developed nations. Work with professionals in construction / development as otherwise costs may escalate.
- Property Tax
The municipality collects municipal government property tax. It is 0.25% of the registered value of the property.
- Mandatory Employment Benefits
7. Type of Ownership
What does an investor need to consider when he/she acquires the real estate in ones personal name or in the name of a judicial person?
-- If one acquires real estate in its own name one can most likely go with a title insurance!
"'We however recommend to invest in the form of an entity"'
Legal Entities in which to purchase real estate in:
- off shore Company.
One would first of all purchase a Costa Rican or Panamanian Shelf cooperation which then in turn purchases the property. There are additional options to include layers of companies that own one another to increase the asset protection further.
Options are for example a Belize Trust or a Cayman Island cooperation that owns the shelf cooperation which in turn owns the real estate.
8. Understand and Manage Risks
Pre closing risks
Most land in Costa Rica is titled. One can check to ensure the estate has good title, for a minimal fee, at the ARCR office in the land registry electronic database. Land that has not been sold in many years may not be titled. If the title to the property is not registered, registration can be very complicated, expensive and lengthy; as the buyer may spend years in court clearing claims to the title/land.
If a piece of land is titled and registered for the first time (this includes a previous undivided interest registered as a separate parcel for the first time) claims may be made against the title for ten years. It is therefore dangerous to purchase or to accept as security land that has been registered for less than ten years.
The Central Registry for land in Costa Rica is computerized and similar to most places in North America. Top law firms and the Casa Canada Group have computers connected directly to the Central Registry and can search the title of land instantly from their office. Registry of mortgages and liens are much the same as in North America.
Title insurance to guarantee the title of properties can be arranged with Stewart title at a special price through the Association of Residents of Costa Rica.
We advise for dully due diligence when choosing a legal representation. Escrow accounts are not as secure as in the United States lets say, but those risks are easily managed if a qualified and trusting lawyer handles the closing.
A very good way to be risk adverse and instead attain some social protection is if one truly
treats Costa Ricans (Ticos) with respect, the more harmoniuos your relationship with Costa Rican neighbors the more they will protect and respect you and your personal property.
How to Represent yourself?
Do I want to handle everything myself or do let a professional familiar with the market and laws regulating Costa Rica Real Estate handle the ongoing duties of property management, etc.
Especially in the purchasing process we recommend to use professional services. An absolute must in our eyes is a qualified lawyer to ensure one does not become a vicitim of a scam artists, and or legal disputes due to clout in title. The use of a qualified and knowledgable real estate professional (someone that is very familiar with the area, real estate market you decide to purchase in) can be very beneficial to assist you for getting a good deal and not be fooled into a overprized purchase. This is mainly due to general lack of transparency as property appraisals are not conducted on a regular basis. Real Estate taxes are based on arbitrary low values to keep that expense to a minimum with n one to adjust to real market values.
Post Closing Risks
Leases and Rental of Property
Great care must be taken when entering into a lease agreement in Costa Rica, as improperly drafted agreements may make it difficult or impossible to increase rents, and it can be very difficult to remove tenants from a property.
Regardless of the term specified on a rental or lease agreement, the terms and conditions will apply for a minimum of three years. If rental increases are not specified in the agreement it will not be possible to raise rents without the agreement of the tenant.
Rental increases may be included in a lease agreement, and may take place every six months. Rental increases of more than 10% in U.S. dollars each 6-month period may not hold up in court as legal.
These laws exist in one form the other in most countries, but are rarely an issue as the time period in most countries is longer (example USA 7 years). Squatters rights are not favorable, as people who move onto somone's property and live there for only one year, and improve the property by working the land and/or constructing, may attain a legal right to live there as they attain a “right of possession”. Once acquired, this right of possession can be sold to others.
If large parcels of un-occupied land is purchased it is essential that properly property managed or it is advisable to hire watchman to report any squatters to the police before they become settled. We strongly recommend to do so with care and ensure to consult with a lawyer in forming the employment agreement to ensure no negative future suprises.
Attaining an experienced Property Mangement company with a good local track record is key when considering purchsing real estate as for an investment only. The rental market is seasonal in demand and pricing. But we strongly advise to develop a network of locals that help you maintain and manage your properties.