Rich Real Estate in Costa Rica
Home Hotspots ~ CRE22 Dec 2014
From its political to natural landscape, there are many reasons why Costa Rica is viewed by investors as one of the safest emerging markets in which to expand their real estate portfolio.
Its exports remain strong, tourism numbers are at record levels, and the country has one of the highest levels of foreign direct investment per capita in Latin America.
Historically, Costa Rica has been a profitable region for real estate investment, with between 15 and 20 per cent returns recorded year-on-year from 2000 to 2008. The financial crisis did have an impact on the market, but prices have stabilized in recent years.
Foreign investors have been capitalizing on this particular market of late with purchasing activity already up 14 per cent in the first quarter of 2013 compared to the same period last year.
Economically, Costa Rica's GDP is expected to rise, which will fuel investor interest. The IMF indicates that the GDP will increase by 4.2 per cent in 2013 and 4.4 per cent in 2014.
In the aftermath of the global crisis, overinflated real estate prices dipped to more realistic and fair market values, according to local real estate agents.
"There is definitely a lot more interest in Costa Rica as investors see the long-term potential there, especially with the new airport terminal providing more access and new residential development projects," says David Otanez from Recap Investments. "Prices have levelled off, so now is a great time to consider buying."
Gross rental yields in Costa Rica remains generally healthy with average figures between 6 and 7.8 per cent. "The rental market is quite strong, as Canadian and U.S. snowbirds and tourists continue to flock to the country," adds Otanez. "Investors can get from between $125 to $150 per night on a short-term rental basis. The returns in the long run are just as attractive."
He also says that investors can make a "good return" from buying into a pre-construction development that will appreciate over time. Cap rates, according to Otanez, are at 0.25 per cent.
Costa Rica's hot spots are the Northern Pacific Coast and the southern zone. The former can be accessed by the Daniel Oduber International Airport near the popular Guanacaste Gold Coast.
The southern zone is considered the best place to invest due to advances in infrastructure, including a planned new airport and highway. A number of government-approved projects are expected to drive up property values and boost the region.
Much of the commercial activity is taking place in the Central Valley and the San José greater metropolitan area.
Buying in Costa Rica
It is relatively easy to buy property in Costa Rica with a simple tourist visa. Many foreign investors set up a private business or corporation, as there is a lot of commercial freedom and protection with this method. It is even possible to establish a corporation in Costa Rica without having to obtain legal residency or citizenship. The taxes paid are based on gross income but applied to net income through this method.
Locals and foreigners enjoy the same rights in terms property ownership in Costa Rica. All potential buyers should hire a lawyer to carry out an independent title search and investigation to ensure the title details are true and accurate. When buying Costa Rican property, the title is transferred from seller to buyer by executing a transfer deed (escritura) before a public notary.
But Otanez warns investors to be cautious and practical when assessing potential properties in Costa Rica. "As with all countries, there are a few good and bad projects, so due diligence is essential, especially when you are looking at the title of the land lot," he says. "Look at regions that enjoy positive tourism figures, are near major access routes and [ensure] that the developer is legitimate."
Once a sale has been agreed, a 10 per cent deposit is generally required and it is recommended that the monies be placed in a government-registered escrow account. Final closing can take between 30 and 60 days and it is also recommended to get title insurance to safeguard buyer interests.
Prices in Costa Rica vary from coast to coast. "You can pay anything from $65,000 to $250,000 CAD, depending whether it's a land lot, house or new development," says Otanez. The least expensive properties are more prominent in "up and coming areas," such as the new developments in the south.
Otanez says that there has been a significant increase in residential development in recent years with many investors gravitating towards gated communities.
"With the U.S. local economies improving again, prices in Costa Rica are also rising as Americans are increasingly attracted to the region," says Otanez. "I have seen that in some areas, but there is still a lot of value and return for investment."
There have been an increasing number of Canadian real estate investment companies buying land in Costa Rica to construct eco-developments. Otanez says this type of investment is more suited to those who are more interested in buy-and-holds than flipping.
"The best returns are in the long run, especially as the country is set to continue enjoying increasing tourist and snowbird numbers," he adds.
With more foreigners moving into Costa Rica, demand for high end property has risen in key areas, such as San José.
Costa Rica's tenancy laws are still very much pro-tenant. Rents can initially be freely negotiated between landlord and tenant and the minimum lease term is three years, but the tenant can cancel it by serving a three-month notice period.
If the rent has been agreed in any foreign currency, no yearly increases are allowed. Increases are only permitted if transactions are agreed and paid in the Costa Rican currency (the colones), while unpaid rent can be very difficult to collect.
This article was published in the October 2013 issue of CREW magazine.