Why is the Guanacaste real estate
market strong?
The Guanacaste area is
one of the most robust markets in all of Costa Rica.
Every investor knows that market demand increases
with improved accessibility, which is provided by
infrastructure. And in the last four years, important
infrastructure investment has dramatically improved
accessibility.
The most important
event for Guanacaste's infrastructure was the
opening of Liberia's airport to direct international
flights from North America in December 2002. (A
direct flight from Miami is only 2 hours and 45
minutes.) Because the airport is only 48 minutes
away from The Oaks, many visitors fly in directly
from North America, avoiding the drive from the
capital city of San Jose altogether. Equally important,
but not yet showing up in statistics, is the inauguration
of the first direct international flights from
Europe in May 2007. These visitors will start
showing up in the statistics next year.
According to official
government statistics, the number of passengers
going through the Liberia International Airport
has increased six fold over the past four years,
from 56,262 in 2002 to 351,515 in 2006. Over the
last five peak travel seasons, from November through
April, landings and departures have increased
by almost 200,000, from 36,369 during November
2001 - April 2002, to 236,330 during November
2006 - April 2007. Not surprisingly, plans are
now underway to expand the airport to accommodate
future growth.
Most investors do
not realize that the area received its second
infrastructure investment in July 2003 with the
opening of a half-mile long bridge across the
Tempisque River. Donated by the government of
Taiwan at a cost of $26 million, the Friendship
Bridge shortened the driving time from the San
Jose airport to Tamarindo by about 30 minutes,
to 3 1/2 hours.
What is now needed
is a third round of infrastructure investment,
to improve Costa Rica's infamous roads. Visitors
in March 2007 discovered that the road from the
Liberia airport all the way to The Oaks is freshly
paved, without potholes, cutting the drive time
by at least 15 minutes, and making it pleasant.
Other roads await attention, after eight years
of benign neglect under previous administrations.
However, as a frequent driver, I see encouraging
signs of road work throughout Guanacaste and also
on the PanAmerican highway.
There also is an extensive
schedule of daily flights into and out of Tamarindo
on SANSA and NatureAir, for convenient connections
to San Jose (45 minutes), Liberia (20 minutes)
and throughout the country. Thus, it is easy to
take a day trip to the Arenal volcano, or to take
an easy weekend trip to the Carribbean side, the
southern zone or even to Panama.
Is the worldwide financial crisis having an adverse effect
on the Guanacaste market?
Without a doubt, the effects are being felt, but in surprisingly varied ways.Flights and passenger traffic have declined by single digits in 2009 over 2008, less than would have been expected. Rental rates also have declined as vacationers are offered better deals for their money worldwide.Combined with low air fares from places such as Miami, this has led to some real bargains in vacations. Pricing is surprisingly strong for finished construction. (Read below to learn why). Many projects have been stopped in gray work, or have not left the planning stages, because of lack of presales and stalled construction financing. Pricing has declined at some of these projects as developers struggle to restart their projects before interest accruals on their loans eat up their expected profits. The risk in "taking advantage" of these deals is that the buyer´s deposit is junior in priority to the bank´s construction loan, so that there is a real risk of loss if the project does not restart successfully. For quality projects such as Reserva Conchal, Hacienda Pinilla, The Oaks and a few others, pricing has held firm even though sales activity has slowed down, as buyers are willing to pay a premium for safety. Land prices have become a bargain, as weak sellers seek to cash out.
Does
The Oaks have security?
Yes. The Oaks is a gated community that offers security 24 hours a day, 7 days a week. In addition to parking guards and roving external security, each unit comes equipped with an alarm and smoke detector system, and a private safe.
Is there
a rental pool?
No. THE OAKS is primarily a residential community. However, our on-site rental company will use its best efforts to maximize rental opportunities for owners who use our services.
Does The
Oaks offer property management?
Yes. As a service to our clients, The Oaks concierge service offers rental management and property management services for a low 15% of rental income, or on an a la carte basis. We advertise rentals on our roadside billboard and on property rental web sites. Outside agents also offer services at 15 to 20% of rental income.
How is
the rental market for The Oaks?
We originally thought that the rental market in
the neighborhood of The Oaks consisted mainly of
long term rentals, of which very few are available.
Long term rentals here mean more than six months.
Long term rentals avoid the 16.39% sales and hotel
tax imposed on daily, weekly and monthly rentals,
indeed on all rentals of six months or less. As
offered at The Oaks, long term rentals also come
with only a 15% lease commission, sufficient to
cover costs and leave the profits in your pocket.
Most if not all leasing commission rates in the
area vary between 30% and 50% of rentals, a factor
to be considered along with the sales and hotel
tax when calculating your ROI for short term rentals.
Here is my personal
experience. In December 2006, I rented a new 750
square foot, two bedroom, two bath apartment about
one and a half miles from The Oaks, for $950 a month.
The apartment does not have hot water, does not
have internet or cable TV, has a suicide shower
in the bathrooms for hot showers, and has mini-split
air conditioners in the bedrooms, with ceiling fans
in the kitchen and living room to circulate the
air. I tried to negotiate the price down. No luck.
In the middle of January, available for the middle
of February, a two bedroom, two bath apartment in
Tamarindo central came up, 1100 square feet, fully
air-conditioned, partial bay view, hot water, cable
TV and high speed internet. I jumped. They asked
$2,200 a month. I offered $1,900 a month, cash up
front for six months. They accepted. I renewed the
lease for three months in August, taking advantage
of the slow season to lower the rent to $1500 a
month. I renewed the lease again for three more
months, mid-November through mid-February, $1500
a month for November, back up to $1900 a month for
the high season months.
So, two price points.
(The same unit shown on the internet is listed
at $4,000 per month, so take that listing with
a huge grain of salt.) Putting The Oaks in the
middle produces a long term rental rate of about
$1,400 a month. We'll see.
At $1,400 a month,
a long term lease will produce rental income of
$16,800 a year, minus a 15% commission, for $14,280
net. The equivalent income on a weekly lease,
assuming 60% occupancy, or 31 weeks, a 35% commission,
a 16.39% sales and tourist tax, and 7% for credit
card processing fees and extra wear and tear,
would require a weekly rental rate collected from
the renter of $925 a week. And that is break even.
Recently (September
2007) we commissioned a rental survey from an independent
agent who is active in the market. His survey recommended
price points of $2,000 a week during the three holiday
weeks at Christmas, New Year and Easter, $900 a
week during the high season from December through
April, and $700 a week during the low season. He
did not have good data points for long term rentals
(just as I suspected). Once again, we'll see. More
flights create greater demand for lodging, with
The Oaks being one of the few new options available
this year. The Oaks also is one of the few options
available that offers easy access to Tamarindo and
at the same time easy access to the best surfing
and swimming beaches, such as Playa Grande, Playa
Pirata, Avellanas, Junquillal and Negra. With each
new year, the situation will depend on the balance
that year between supply and demand.
Is financing
available?
We have worked closely with a major international
bank to offer 25 year mortgages with interest rates
fixed for the first five years to U.S. and Canadian
residents at an 80% loan to value ratio. Recognizing
the outstanding value of The Oaks, the bank has
appraised The Oaks units over 30% above current
offering prices. Why? Partly because values are
rising as each phase of buildings nears completion,
and partly because the developer's marketing strategy
rewards earlier buyers through systematic price
increases, leading to higher prices in phases three,
four and five. What does this mean to an investor?
For about $35,000 down, an investor can finance
his purchase during construction for interest only,
and on completion will pay under $1300 per month,
including principal, interest, insurance, taxes
and maintenance.
What about
closing costs?
The conventional wisdom, taken from the Table of
Registry Rights, Stamps and Taxes, and the Fee for
Lawyers and Notaries, is that closing costs, including
title insurance, total about 4 1/2 % of the purchase
price, consisting of about 1% for documentary stamps,
1 1/2 % for a real property transfer tax, between
1 and 1 1/4% for the lawyer/notary fee, and 1% for
title insurance.
There is a better
way, and at The Oaks we help you find it.
At The Oaks, we have
placed the title to each of our 96 condominium
units into a separate corporation. If you are
from the U.S., you are well advised to form your
own personal Costa Rican corporation in addition.
By negotiating on your behalf, we have lawyer/notaries
who will do this for you for a cost between $300
and $400, depending on the lawyer, instead of
the "customary" $600 to $1,000.
We then transfer the
shares of the corporation owning the title to
your unit to you or your personal corporation
at closing, avoiding real estate documentary stamps,
transfer taxes and so-called "mandatory" minimum
fee schedules for lawyers/notaries. We also negotiated
the cost of title insurance on your behalf, reducing
the cost by 30%. As a result, total closing costs
are merely 1% of the purchase price including
title insurance. We did not subsidize these costs
and hide them in the purchase price. We simply
structured an intelligent transaction, then negotiated
the prices.
How much
are annual real estate taxes?
Real estate taxes in Costa Rica are ridiculously low, 1/4 of 1% per year read more on a property's declared value, which changes only once every five years. Costa Rica's new President has proposed an increase in this tax to 1/2 of 1% annually, to fund low income housing.
How much
is my maintenance fee?
Your initial maintenance fee is $172.50 per month, which includes 24 hour security, a concierge service, maintenance of the public areas, and insurance on the common areas.
Is there
a capital gains tax on
the sale of my unit?
In Costa Rica, there is no capital gains tax. Compare:
Panama 10%, U.S. 15%, Mexico 32%. When you sell
your unit, you can make a transfer of shares of
the company owning your unit. Unless you are in
the business of selling shares, you should qualify
for capital gains treatment, no tax.
Anything
else on taxes?
Yes, actually. If you form a Costa Rican holding
company, the sale of the shares of the company directly
owning your unit (in effect, the sale of your unit),
will not be subject to U.S. tax until you return
the proceeds of the sale to the U.S., as a distribution
from your holding company to yourself. At that time,
they will be taxed at ordinary rates.
Tip No. 1: Make a
loan from yourself to your Costa Rican holding
company, and return up to 90% of your investment
to the U.S. virtually tax free, while retaining
the profits in your holding company for further
investment.
Tip No.2: Think of
your Costa Rican property purchase, properly structured,
like an unlimited retirement account. You can
contribute any amount you want and defer taxes
until you make withdrawals. One advantage. You
don't have to wait until you're 65 to make withdrawals.
Normal disclaimers
that our lawyer loves:
Please consult your tax attorney and accountant for personal tax planning, as individual circumstances may vary, and need to be taken into account. We do not offer legal advice.
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