Find out what's going on in the world of investing. Regular posts by the Entrust experts. Visit now...
Get the latest from Entrust emailed right to you. Sign up now...
This is not an unusual number, considering that interest in off shore real estate.
The real property investment opportunities for the small investor outside of the United States have become more available. Coupled with availability and market conditions of the real estate market in the US in 2007, investors are clearly looking elsewhere.
An increase in investments in cash flowing and appreciating real estate in Mexico, Panama, Costa Rica, Nicaragua, and other central and south American countries has risen over the last few years, in particular. The popularity of these areas appear to be related to proximity to the United States, and what seems to the US investor reasonably priced and sometimes inexpensive property which may be used for investment, and perhaps second or vacation homes. Panama, for example, ties it’s currency to the US dollar, and in fact the dollar is the medium of exchange. Costa Rica, sometimes noted as the “Switzerland” of the Americas is considered by many to be a pleasant climate investment and vacation home opportunity. Mexico is closest geographically and many fine communities exist where North American visit and look as potential for their retirement portfolio.
As Spain became the opportunity for Germans to have a second and potentially a retirement venue, some believe that Mexico, Central and South America present a similar advantage. The numbers of investors have to yet reached the over 1 million German investors investing in Spanish property, the numbers are growing, in our experience and as noted above our survey indicates significant interest.
The issues of reality in making such investments and the rationale behind them are more complex than a nice property in a nice climate being reasonably close by. The US investor must be clear about his or her objective. One can become enamored on a vacation trip and talk themselves, or be talked into, a purported investment property. Vacation is often an escape from reality, that escape also includes not performing the due diligence and analysis needed to meet the targeted objectives. This is one of the most overlooked parts of the vacationer/investor.
In each venue, whether Mexico, Costa Rica, Panama, Nicaragua, Belize, or Ecuador, for example, the language is Spanish. Regardless of the local seller’s population capability in speaking English, the language of law is Spanish. Competence in the language of law and expertise in local law is essential.
Mexico and every other country in central and south America has different laws regarding real estate and taxes. The vesting of property varies from one country to the next, and so does the method of title transfer. For example, recently there was a real estate developer in Panama who had begun to grade roads, and subdivide property and take deposits of $6,000 per parcel, and to be sold for $80,000 for single family homes. The investors were told that all that was needed was the consent of local officials to proceed with the development. In Panama the legal ownership must be registered properly with a central authority. The builder had “purchased” the property from local inhabitants who farmed the land. The title to the land had never been perfected by the local inhabitant who had right of possession. When the builder bought the land, he failed to follow the proper procedure of securing title. His time line for completing the process of building and selling suddenly became much longer. The farmer continued to farm the land, and the developer continued to work with local lawyers to actually purchase the property. The builder also had do work with cultural issues. The inhabitants are San Blas Indians, who have a culture of their own, just like many peoples in other countries.
The mayor of the village who had veto power over most everything was not in the right frame of mind to go along with some of the revisions to the building plan. The builder’s “hill to climb” became even steeper. The investors had all their deposits returned, without loss, as deposits remained un-cashed at the lawyer’s escrow handing the purchase.
This example is illustrative of some of the issues one must explore and ensure that they are dealt with in advance. Planning and fully understanding the objectives the investor has, along with language, cultural and legal issues are among the first to be considered. Then there are whether the investment makes sense. We have found that the demand for properties in some Mexican and central American countries has driven property prices to the point where Net Operating Income targets could not be met. In other cases, there are many properties which not only cash flow, but also appreciate, in popular locations in every country. It is essential that the numbers support your objectives. Beach properties in Costa Rica and Mountain Properties in Panamanian highlands are still available as vacation, second, home or income properties. It is just a matter of making sure what the real economic situation is.
One of the most overlooked issues which may affect the popularity of buying investment property are the tax issues. Tax issues are not just local, but also for the US taxpayer, the requirement to report and pay tax on worldwide income. In our experience many investors overlook the reporting requirements to the IRS, and the ordeal of expatriating, if one wants to do that. The matter of designating beneficiaries varies from country to country. It is essential to pay attention to these details with local counsel along with your US counsel.
The numbers of investors in Mexico and Central America has been increasing, as real estate markets there appear to be better for investors in certain circumstances. As beach front property is more of a premium, the prices are certain to increase as are property values. Cash on cash returns will also be decreasing as prices continue to be bid up. The more due diligence and planning that is performed the better. As everywhere, caveat emptor is the rule.
Remember that while Entrust provides excellent educational resources, we do not endorse or sell any investment products. The Entrust Group respects your privacy. Please read our Privacy Statement.
Attend seminars, workshops and classes on self-directed IRAs in your area.
site design, development & e-marketing by 
FUZE
