I am considering possibly starting my investment portfolio in Guayaquil, Ecuador. Housing and labor is cheaper there, which will allow me to start investing relatively quickly. My in laws live there and I trust them to maintain and help with projects.
My question, what do the taxes look like for international real estate? And are there any procedures that I should carefully follow to limit risk in third world countries?
I personally just think you add a big layer of risk when you invest someplace where you are not there to oversee things, know the market well, know the economy well, know the law well, have boots on the ground. Plenty do it and plenty to it successfully. What are the eviction laws there like for example? Is the local government landlord or tenant friendly? Is there good property management?
Also do you plan to use leverage? That's the key driver to much of the real estate success here on bigger pockets....so are bank loans available for out of country, non-citizen investors?
Just some things to think about.
I can understand why you're looking at the opportunity given your connections on the ground. However, low costs don't make a locale a good place to invest by themselves. Aside from the risks, you might ask yourself the most fundamental question before investing: what are you going to invest in and most importantly how you're going to make money.
Personally, I wouldn't invest in Ecuador. Housing and labor are pretty cheap in all of Latin America and many other countries are great places to invest but Ecuador isn't part of the club. Specifically, I'm looking for a (mass) tourism market, an emerging middle class and/or an economic and political climate that isn't unfavorable. Ecuador scores very low on all counts.
Regarding taxes, you'd first have to pay all the applicable taxes in Ecuador, including the income and capital gains taxes. Assuming you're an American tax resident, you'll have to pay income and capital gains taxes to the US as well. However, the US has signed treaties for the avoidance of double taxation with many countries but I fear Ecuador might not be one of them. So, you need to check if such a treaty exists and if it covers real estate income and capital gains taxes. If the answer to both questions is yes, you can credit the income and capital gains taxes paid to Ecuador against your US income and capital gains taxes. In that case, you'd end up paying taxes at the highest rate between the two countries. In the absence of treaty, you'll be double taxed.
When it comes to the risks, the main way to limit them is to know what you're doing, have the right connections on the ground and make an investment that stacks up. The only way to protect yourself against the political risk would be to get political risk insurance but that would only make sense for large projects. Finally, you can't mitigate the risk of a bad economy.
Have you only looked into Ecuador? The personal connections do make it appealing and have lead me to look at certain countries in South America more than others, but ultimately it is a variety of factors that affect if it is a good market. I was curious about if you would be financing any of these projects and what that process might look like for foreigners. @Kyle James Horstmann
@Kyle James Horstmann Congrats on the overseas adventure. I always say start small and make your big mistakes early. Especially in a new business environment.
We are investing in Belize, with a few different investment objectives; thus we have had to go through the analysis also.
a. As someone mentioned, "interest" rates 9% average. Be careful in South America countries, it can escalate very fast if there are issues with the government and economy. Can you deal with 9% currently? Can you deal with 30% next year? Don't think in terms of long term loans. And no financial institution in the US will finance down there.
b. 25% rental tax rate for Non residents rental income, plus 25% capital gains tax. Compare this to other countries.
c. Citizenship and Property ownership. Looks straight forward, you have the same rights on paper.
d. If this is a standalone property, you will need an onsite caretaker. See picture below. This is on our land. This was a fully built/lived in property, three stories. This is about 1/3 of the footprint. They left no caretaker on site. The first thing we did was to build a house for our caretaker and his family.
e. Currency fluctuations. Where do you keep your money.
f. Labor is cheap. For that reason, none of our revenue will be based on selling to locals. Two carpenters and two laborers for BZD $33 per hour total, roughly USD $16 per hour. They loved it. Good money and work for them.
g. Keep one thing in mind, coming from the US. Your not human anymore, your a piggy bank. View that relationship with all people you deal with down there. Even the wealthy. Its both uncomfortable and also spending power. When you get to know them and more importantly, once they know you are "there" for good, then the walls will come down.
h. Flight time. This will determine how much attention you pay to your investment. Compare to other countries.
Realize the above are basic, but these are the thought processes we went through. And yes, Belize is ranked in the top 10 deadliest countries in the world and we recognize that.
Ecuador's benchmark interest rate as set by the central bank is 9.12% so mortgage rates are probably much higher. That is if you can get a mortgage. Even for Ecuadorians, real estate is mostly a cash market. Good luck to get a (long-term) mortgage as a non-resident and, if you ever can, it'd be at a very high interest rate.
There is no currency risk for Americans as Ecuador uses the US dollar as its currency.
My wife is from Brasil & we have considered for years about buying a small beach condo in Brasil, Just to have a place to always go & be by a great beach & family could use it. But I think most of South America would not be a great investment & some countries would be very risky. As Mike Lambert said, most countries don’t even offer mortgages. I know with the continual increase of the dollar against the Brasilian Real it is very powerful for us here in the US. But once you buy it’s like you are getting off the upward moving elevator. You are now invested in the Real & even though the dollar is increasing, your property might increase but is actually losing ground to the dollar.
South America is actually a great place to invest. I would just not invest in Ecuador. But countries like Colombia, Brazil or Uruguay are top of my list of countries too invest in.
Buying a beach property in Brazil is an awesome idea, especially given your situation. Even if you buy 100% cash, you can get a 20% annual ROI on a beach property in the Fortaleza area. This is much better than buying pretty much any property in the US with a mortgage.
The risks are actually way lower than you think. The Brazilian real has lost 70 - 75% of its value over the last decade but it grew a lot before that, as a result of the huge economic expansion then. The drop was partly caused by the self-inflicted economic crisis in Brazil and accelerated with Covid. At this stage, the odds are much higher than the BRL will appreciate rather than depreciate against the USD. So you have a huge currency appreciation potential with a limited depreciation potential. The appreciation has already started as the USD has been dropped sharply against most currencies over the last few months.
Moreover, Brazilians invest in real estate as a store of value. Brazilian real estate was booming in 2007-09 when US housing was crushing. And, because of the low availability of mortgages, the Brazilian housing market isn't inflated by a huge amount of cheap debt like the US market is so you could argue that the Brazilian market is actually less risky.
In my humble opinion, there's never been a better time to invest in real estate in Brazil. On the one hand, thanks to the currency and Covid crisis, you could find great deal and then you have a huge potential capital appreciation potential with the currency kicker.
Finally, whatever happens to the currency and property prices, do you really care when you make a 20% ROI through rental income. You double your money every 3.6 years! Unlike some other international holiday destinations, your clientele will be mostly Brazilians so you won't be much affected by border closures. And I don't think Brazilians are gonna give up their beach holidays anytime soon.
We want to buy a beach casita/condo up in the Natal or Sao Miguel do Gostoso area. Then we rent our beach/golf Villa in the hot/humid Florida panhandle during the summer from Memorial Day until October & live in the cooler Natal weather. Then rent the Natal house out from October to May.
@Kyle James Horstmann
Too everybody, may I say that you guys know your stuff! At the very least, you sound like you do. Thankyou for opening my eyes to many aspects of foriegn investment. I am definitly going to have to study up before getting involved with Ecuador. My beautiful wife is from Ecuador, and when she talks about the political turmoil and strife... it would appear that it isnt the best idea.
Thanks for all of your help!
I just know how to buy houses with cash & fix them myself. Haven’t tried it yet in Brasil, but will probably learn early next year if not sooner. I’ve visited almost every country there. Even Venezuela before the socialists destroyed it.
I went on a lecture tour to Ecuador right before the pandemic. A couple of things that give me pause:
1) There are currency controls in Ecuador: you will pay a substantial tax if you try to move money out of the country. So, your profits come with some significant strings attached.
2) The political situation is very volatile, and they have a presidential election coming up with some very problematic candidates. This means that there's the very real risk of a economic collapse, and as a foreigner owning property there would be additional risk for you.
3) Corruption is a way of life in most of South America, Ecuador included. You will have to pay bribes--and you will be taken advantage of when doing so. Need to do some construction? That's a bribe. Your contractor will probably tell you he needs X dollars for the bribe, which is probably double what he will actually pay. So you'll be paying an inflated price on a bribe in order to get permission to fix your property's electrical problems.
I know some expats who live in Ecuador, and they like it. They rent their house, and they keep all of their money in the United States, transferring small sums to their account in Ecuador when they need it.
I'm not opposed to high risk, high reward investing, but you should know what you're getting into. The risks are very high, and you should expect significant rewards for taking those risks.
I agree with what you're saying about Ecuador and I'd never invest there. There is no serious tourism and the economics and politics of the country aren't favorable.
I totally disagree with your generalization to other countries Latin American countries though; it depends which ones you're talking about. I've been investing in real estate in Latin America for a few years now and I can assure you I was never asked for a bribe and never paid any. This being said, there are things that look like bribes but aren't. I haven't been asked to pay any of those either but sometimes, they make sense. Let's assume you're developing a new area and the electricity is supposed to be brought to the area within a year. You could pay the municipality to have it done within 3 months for example. Is that a bribe? No, as long as it's legal. Everybody benefits. You give money to the city which can put it to good use to the collectivity and you can go ahead quicker with your development and help bringing jobs and tourists to the community. I don't think anybody has a problem with that.