Friday, January 22, 2010
Dear Reader,
If you have been following these dispatches, you will know that I'm bullish on Fortaleza. Brazil is booming and is now an investment-grade middle-class country. As soon as a Brazilians can afford to, they want to visit the beaches around Fortaleza. Fortaleza is Brazil's #1 domestic tourism destination, hosting 3m Brazilian tourists in 2008. Soccer's Confederations Cup comes here in 2013, followed by the World Cup the following year. 9.8 billion reais ($5.5bn) will be spent in the state of Ceara (Fortaleza is the capital of Ceara) improving infrastructure and tourism amenities in the lead up to 2014. There's oil offshore, bringing in revenue and high income jobs. Best of all, there is a hotel and condo shortage in the area where most tourists want to stay--the boardwalk. There is practically no more development land. This is where I have been investing for the last twenty months.
The best way to maximize your return on investment in this market is to buy pre-construction condos with a low down payment (1%) and monthly payments of 1% during the build period.
Twenty months ago when I started investing here, I set out my strategy for my personal investments. I told members of Real Estate Trend Alert about my plans. As investors, we need a clearly planned exit strategy and a clear view of who the ultimate end user for our property will be.
The strategy I set out is as follows. I took profits from pre-construction investments in Panama and ring fenced them to use for pre-construction investments in Fortaleza. I'm only interested in low-money-down deals that are competitively priced and with at least a three-year build period.
My goal is to have accumulated a portfolio of income-generating rental properties in the city of Fortaleza in three to four years. I'll continue to buy more units than I expect to ultimately hold. This means I expect to do some flipping along the way to help fund other purchases or to pay outstanding debt on purchased units. However, at no point will I have to flip to make payments. I'll have a cushion at all times. Flipping is for replenishing the pot, not paying the bills.
The best time to flip units will be in the months coming up to completion or when you get the keys. I've made sure I'll have the resources to carry the units I buy to this point. Given the current interest rates from developers offering financing, I will keep my debt levels as low as possible. If I enjoy the levels of capital appreciation I expect, my units will be debt-free, as debt payments will be made from profits on units I have sold.
While developer financing is expensive, the high cost of capital is one of the reasons that rental yields can be high. I expect to net 15% yields on completion of the city units I have purchased. A great yield if your unit is debt-free...not so exciting if you are paying 1% per month on the outstanding balance on your condo while also repaying the principal.
The units I have purchased are in prime locations and will have broad rental appeal to businesspeople visiting the city: oil executives and young professionals, as well as vacationers, and retirees from southern Brazil, Europe, or North America. While choosing a location with broad appeal, I also have to bear in mind that although some people would like to rent a 250-square-meter condo right on the ocean, the market for these bigger units will be extremely limited and rental yields much lower than you can command on smaller units.
The units that I have bought offer the prospect of capital appreciation. I got in early at pre-release pricing, with the pick of the best units--while paying less than other buyers. The units are located in prime areas and the developers have an established track record.
I expect to see a strong resale market for these units...the same people that will rent here will also be interested in buying. The same logic applies...you need to aim to appeal to as many market segments as possible.
Any strategy should be flexible to allow for circumstances to change. My strategy is flexible, but I've had no cause to change course so far. Last week a realtor I know wrote to me saying that the first two units I bought for 180,000 reais ($101,000) each would sell quickly for 270,000 reais ($157,000) each. These are units I always planned to flip as they neared completion. They are beach condos 35 minutes outside the city in the Beach Park area. Rental yields will be stronger in the units I bought in the city than in this area. Beach Park is a huge tourist attraction, but visitors still prefer to stay in the city and visit Beach Park. Selling now would mean selling a year earlier than planned. But, realizing a 57% capital gain is difficult to turn down. (Remember, to buy these condos I make monthly payments of 1% of the purchase price. My return on capital invested is in the region of an annualized 300%). I'm going to mull it over this weekend. If I do sell, the proceeds will used to follow the strategy I set out twenty months ago...accumulate a portfolio of rentals in Fortaleza that are as close to debt free as I can manage.
There have been no major project pre-releases over the past five months in this area. A new mayor in Fortaleza replaced most of the permitting officials and decided to review pending project approvals. This has given the market a breather. Real Estate Trend Alert members should stay tuned, though. Over the next few months these pending projects are set to be approved. We'll be getting in early at special member pricing and terms...and we'll be back on the road to Fortaleza.
Ronan McMahon
You might also be interested in:
This is the Best Short-term Rental Play I Know
Do You Want a Piece of Cid’s $5.25 billion?
Profit from Fortaleza’s Booming Tourism Industry
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