Round Two: Brazil v Costa Rica | Pathfinder International

Wednesday, August 11, 2010

Dear Reader,

When I wrote recently about the real estate picture in Panama and Ecuador, comparing both countries, I received numerous emails from readers asking me to do comparisons in other countries on our radar. They needed help deciding which country to prioritize on their shortlist--and which one to visit before committing to buying a property.

In response to the most-requested, I've selected a few more country pairs. Today, let's look at Brazil and Costa Rica.

Price.This is difficult. Brazil is a huge country, with property in every price bracket--impossible to average. And Costa Rica simply doesn't offer the type of city/boardwalk/beachfront property you see in Brazil. Instead, Costa Rica offers beautiful, elevated, ocean-view property. Generally, you will pay premium prices for a prime city boardwalk property in Brazil, but similar pricing per square meter in both countries for beach or ocean view properties--so we have a draw.

Construction Quality. Both countries are neck-and-neck when it comes to the quality of pre-construction condos (remember, build quality can vary hugely from developer to developer; you should always check out a developer's finished projects).

I'm placing Brazil ahead in this, because Brazilian construction companies dwarf their rivals in Costa Rica. One Brazilian developer classified his company as "small" compared to Brazil's "big" developers--his company had "only" built 80-odd towers. You won't find a constructor with that degree of experience in Costa Rica. Regardless of what they tell you, builders generally learn and improve with each project.

Brazil also crosses the finish line first for cutting-edge, trendy interior design and finishings.

Ease of Buying. Large numbers of Americans and Canadians helped fuel Costa Rica's real estate boom in areas like the northwest Pacific coast from the late 1980s onwards. Many real estate agents, developers and sales staff based in Costa Rica are American, (or English-speaking), catering to this important segment of their market. Their websites are in English, along with their brochures and sales materials. In addition, developers usually offer fly-buys and airfare credits towards property purchases.

Brazilians fuel the property market in Brazil. Along the northeast coast, less than 2% of property buyers are foreign. It's noticeably harder to find English-speaking sales staff, real estate agents, and developers. Websites, brochures and sales materials are normally only in Portuguese. Plus, you need a CPF (a tax ID number) to buy property in Brazil. It's not difficult to get, but it adds an extra step in the buying process.

In Brazil, real estate agents must take a course, and pass an exam, to get their mandatory license from the governing body, CRECI. Foreigners can get a license, provided they have the minimum educational standards required, take the course, and pass the exam--in Portuguese, of course. In Costa Rica, anyone can set themselves up as a real estate agent.

Real estate agent commission rates in Costa Rica average 5%, paid by the seller. In Brazil, again, the seller usually pays, an average of 5-6%.

In Costa Rica, banks such as Scotiabank offer financing to foreign non-residents (up to 70% LTV)...but it's not easy to get. You can get developer financing--usually for a limited period.

Brazil holds the ace card, though, for developer financing. Bank lending policies for both personal and home loans until recently came with exorbitant interest rates in Brazil.

Developers needed to find a way to make their units affordable for Brazilian buyers. Developers offer no-money-down deals, and monthly payments of as little as 1% during the build period (and they deliberately stretch the build period to 3-4 years to keep the monthly payments low). Developers often offer financing post-completion, too.

For the real estate agent licensing, and attractive developer financing, Brazil wins this category.

Property for Residency. A non-category--as neither country offers a specific residency visa through investment in a property.

You may have read that you can form a company in Brazil, and then invest in a property as a means to obtain residency. But this is a very cumbersome and expensive workaround--that incurs lots of annual overhead--so I don't recommend it.

Holding Costs. I've split this into capital gains, annual property tax, and transaction costs. Remember, you may still have tax obligations in your home country.

Capital Gains: In Brazil, you'll pay 15%. In Costa Rica, developers pay capital gains on property, but property owners don't. Costa Rica tops this one.

Annual Property Tax: In Costa Rica, you pay 0.25% of the registered value with the municipality or the national registry, whichever is higher. Plus, there is an additional "luxury tax" for properties valued at more than 100 million colones ($193,442 at today's exchange rate), calculated on a sliding scale. Properties valued at up to 250 million colones ($483,605), still pay the 0.25% rate, however. You pay property taxes quarterly.

In Brazil, the rate is 0.5-2% in urban areas, and averages 0.3-2% in rural areas. For beachfront properties, you may have to pay an additional annual tax of 0.6% if a portion of your property falls within a certain zone, classified as Naval Land (usually within 33 meters of the beach).

In both countries, I'd strongly advise you not to under-report the sale in order to reduce your tax burden. While this is not uncommon, it could result in legal penalties (and you'll pay more capital gains tax in Brazil if you sell).

Transaction costs: In Brazil, closing costs average 5-7% of the purchase price. For beachfront property within the Naval Zone, that figure can reach 10%. In Costa Rica, closing costs run around 3.75%.

Overall, Costa Rica wins the holding costs round.

Property Management. The process is easier in Costa Rica, particularly in well-touristed areas...you'll have a choice of property management companies, many of whom speak English.

Managing a property is more difficult in Brazil, outside of Rio and Sao Paulo...but worth investigating. Brazil's domestic tourism market is huge, and growing.

For example, the top destination for domestic tourists is Fortaleza, on Brazil's northeast coast--which suffers from a shortage of hotel rooms, and short-term rentals. Your property in Brazil should have higher occupancy rates--and Brazil hosting the World Cup in 2014 widens the potential pool of short-term renters in a number of cities.

Moreover, a booming national economy means a strong long-term rental market, too.

While finding a good management company may be harder in Brazil, I'm sticking with the potential yield here, and declaring Brazil the winner.

Investment Potential. Costa Rica's real estate market has slowed, due to the slowdown in the US (a good portion of buyers in Costa Rica are American). There are pockets of opportunity, though, such as the Southern Zone. A new coastal highway road, finished in spring 2010, is opening this area up to property buyers--and a planned international airport should accelerate the process, and push property prices up.

But Brazil's market is driven by local buyers, and backed by one of the world's strongest economies. Prices continue to rise...and Brazil's northeast coast is an area where we expect to see the best appreciation potential, and rentability.

What's more, the superior low-money-down developer financing in Brazil allows investors to leverage their funds in way that's not possible in Costa Rica. I'm giving Brazil the edge for that.

So, Brazil wins in four categories--and the all-important investment potential one. That makes it the champion today.

Of course, if you're buying a second home, you'll need to take other factors into account-- climate, health care, and residency. From a real estate perspective, though, you can't beat Brazil.

Margaret Summerfield

P.S. If you want information on an interesting rental opportunity in Fortaleza--aimed at the long-term rental market--contact Daniel Neves here. Daniel will send you details on units in the heart of a new boardwalk area, close to the city's new aquarium, and Iracema beach, from only 263,000 reals ($92,246)...with developer financing over 100 months. Unsurprisingly, these units are selling fast...so contact Daniel today for your full information package.