The Ultimate Guide to Investing in Real Estate in Colombia
Medellín is the second-largest city in Colombia and is situated in a narrow valley with a skyline reaching for the heaven, filled with high-rise apartments & modern office buildings with spectacular views of the green mountains which surround it. Medellín is known for its pleasant climate which gives rise to its nickname – “The City of Eternal Spring”. It’s a city full of life with the locals known for their hospitality and genuine curiosity about newcomers. The city has strong industries; including manufacturing, commerce, textiles, and exporting flowers. Increasingly, foreign companies are moving their operations to the city due to inexpensive labor and a favorable quality of life for their workers – call it a win-win.
A Transforming City
Just like your home country, investing in real estate abroad is also all about location, location location. A great location can change an entire neighborhood seemingly ‘overnight’ – as we have seen happen with the neighborhood Cristo Rey in La Comuna Guayabal. Just a few years ago, this was an impoverished, low strata neighborhood filled with decrepit brick buildings, hole in the wall stores and without a tourist or international student in sight. Now, however, as El Poblado has gotten expensive to the point of pricing people out of the area, many have turned to nearby Cristo Rey and the area has undergone an impressive transformation.
Nowadays, you can enter the neighborhood through one of Medellin’s landmarks, El Puente de la 4 Sur, that connects Guayabal with El Poblado – far and away the most well known expat hangout in the city. Part of the transformation is owed to municipal investments in infrastructure, which wouldn’t have happened without its strategic location. This amazing transformation has helped the neighborhood to increase significantly more in value than other surrounding areas and there are still areas with huge potential left untapped. At Premium Propiedades, we see some major appreciation still to happen in parts of this sector in the next decade.
Investing in real estate overseas can be the most exciting and interesting way to diversify your portfolio beyond your home market. A foreign real estate investment can be an extremely profitable long-term venture and is an excellent option to generate passive income.
SEE ALSO – 15 Spanish Terms You Should Know to Deal in Colombian Real Estate
A common mistake we have seen investors make when they add foreign properties to their investment portfolio is the lack of experience investing in Colombia, and failing to account for customs and norms that are different than their home markets. It’s very difficult to take everything necessary into consideration. It is crucial to understand what external factors can affect real estate prices and values, such as tourism, which we clearly can see now during the pandemic. But there is so much more. Things like infrastructure, culture, laws, municipal planning and zoning, can all pay a crucial part in determining which parts of the city grow and which stagnate. These factors can greatly influence the return on one’s investment. In order to help with this process, we’ve put together SIX RULES FOR INVESTING ABROAD.
1 . Keep it legal
Before investing in a foreign country, it is critical to understand the legal guidelines for doing so. Each country is different and it’s important to know if there are any restrictions as to the type and location of the property you can buy. For example, when you buy a property in Colombia, it is crucially important to conduct a proper title search to make sure there is no mortgage or liens against the property. If liens exist, they need to be factored in during the negotiations or properly dealt with by the seller before agreeing to a final sale price. If not fully accounted for, the buyer may have to assume these additional financial burdens and the price of the property goes up. For example, imagine a situation where a buyer pays $200K, only to find out months later that a claimant has a lease or mortgage for $25K that wasn’t discovered during the negotiation.
The buyer will assume that. While they will have a strong counter-claim against the seller for this amount, it is not the type of legal battle one wants to enter in a foreign country. Understanding the law in the country you are going to invest will help you to avoid missteps in securing a foreign property investment. This is easier said than done – real estate laws and concepts can be a bit convoluted even in your home country – so trying to wrap your head around it in a foreign jurisdiction and language can be all the more complicated. Taking the advice of a trustworthy, profesional local lawyer with a career’s worth of experience in these matters could be the best money you spend towards securing your overseas property. We have the right people in mind to help you in this way – just send a message and we’ll hook you up.
2. Minimise cultural shock
To invest in a foreign country without understanding the geography, culture or customs could easily lead to a rude awakening since not all cultures share our beliefs and values about what we think is normal, acceptable, right or wrong. Culture shock, which is the disconnect between what you expect and what you experience, exists to varying degrees depending on the foreign land one visits. Underestimate culture shock at your own peril, as some vacations can turn into nightmares. Learning to identify culture shock and to understand why it is experienced can have you better prepared and have an easier time overcoming it.
One great way to minimize cultural shock is to learn a bit of the local language. Imagine the following scenario: You are in Medellin; you have no car and don’t want to take a cab so you head to the subway and you know the final destination: the famous cable cars by Santo Domingo. You arrive to the Santo Domingo station, but the doors won’t open and the train continues to the next station without letting anybody out…You are worried – what’s happening? Well, what you don’t know is that they announced over the loud speakers that the last two trains won’t let people off on this station because it is under construction. This is precisely what happened to a couple friends of mine during their first day in Medellin. It made them feel helpless and frustrated to not understand anything and it took them awhile to figure out what had happened. Perhaps if they had picked up a few keywords and phrases in Spanish before arriving, they might have avoided the confusion.
3. Weigh financing options
Although real estate prices in Medellin are generally cheaper than most North American and European cities, you will still need a chunk of change to close your transaction. To finance a property in Colombia can be tricky since it is extremely rare for foreigners to get a local mortgage in Colombia, and even if they do, the interest rates are an unattractive 9-12%. This type of financing option can really eat into the ROI of your investment. So if an all cash offer is not in the cards for you, it’s important to be creative and explore the different options out there. Thankfully, loans for overseas property can often (but not always) be used for situations like this – check with the local bank where you have a banking relationship. Some people may choose to use their retirement accounts, and while it may be unsettling to tap into them for his type of venture, you have the potential to grow your portfolio in a way that traditional investing can’t necessarily match.
Remember, there is a specific set of rules when it comes to tapping into your retirement account with the purpose of buying a property overseas. If you have funds in a 401 (K) account, the limit is set at $50,000 and also requires 50% of your account balance. In practice it means that if your balance is lower than $100,000, then you can’t take a loan on the entire amount. It’s important to keep any possible withdrawal penalties in mind – so do your homework before digging in to your savings. Another very popular way to finance an overseas property is to borrow from your home equity. There are some advantages that come with this type of financing – most notably, the interest rate can be very favorable. In Sweden recently I was paying just 1.29%. Additionally, in this scenario, you become a cash buyer in the eyes of the country/seller where you are negotiating which can help you to secure a lower final price.
4. Gauge the impact
To add foreign real estate to a portfolio can potentially add new wrinkles at tax time when reporting investment gains. Therefore, it is smart to have a crystal-clear understanding of the tax implementations concerning the investment itself. In particular, in terms of transfer, income and capital gains taxes, as those vary greatly from one country to another. To financially plan is key and not doing so properly will most likely affect the total return of your investment.
For example, capital gains such as inheritances and real estate are taxed at a rate of 10% in Colombia, whereas in Sweden they can be as high as 22%. Keeping the local tax laws in mind is really important for a possible investment overseas.
Important tax considerations are the length of ownership and the type of asset acquired. In Colombia, it has to be determined whether you have owned the real estate for two years or less. If you’ve owned it for more than two years, any appreciation will be considered capital gains and payable at a rate of 10%. However, for sales turned around in less than two years, the appreciation is treated as ordinary income and the rate is much higher – but depends on one’s personal circumstances. The income from the sale is included in the non-labor income certificate and the rate provided in artículo 241 of the tax statute applies. This is a progressive table that starts at 5% and goes as high as 35%. The higher the gains on the property, the higher the rate. So, in a worst case scenario you could have to pay 3.5x the rate in taxes just because you sold one of your properties a few months too early.
5. Allocate wisely
When investing in overseas real estate for the first time it may be tempting to make a large investment based on return potential. Even though Medellin has great comparative value in comparison to other countries, to start small is a good idea because if you make a mistake, and mistakes do happen, your loss won’t be as dramatic. It’s a good way to test the waters and get to know yourself as a foreign investor and what you have the stomach for. Are you afraid you will miss out on great opportunities if you invest small? Well, I have great news for you.
At Premium Propiedades, we have seen that smaller apartments – those that cost around $100,000 – $150,000 USD – can be very profitable, with net ROI around 12- 14% a year, especially for the first couple years after coming on the market. After that, the ROI tends to go down slightly since people like to “estrenar” and choose newer options and are willing to pay premiums for those places. (If you’re not sure what that term means, this article is for you.) For a first time investor, this is great news since you are able to generate a solid return without investing your life savings, and sell it for a handsome profit at some point in the future.
6. Invest with a Team
Purchasing property overseas can be a complicated process and we do not suggest anyone do it alone. It is wise for even the most experienced investors to have guidance from a local real estate professional who is credible, well-reviewed, and has a ton of experience and local knowledge.
From time to time I meet people who are sure they do not need any profesional help, whether for buying or selling. But what is important to remember is that it is our full-time job to track down homes that meet our client’s criteria, get in touch with seller’s agents, organize showings, and see places. This might sound easy but it is extremely time consuming, even though our team is fluent in Spanish and well versed in the local culture. When it comes time to negotiate we can be extremely useful as well: negotiating a sale with a stubborn seller can be stressful and frustrating – it’s far easier to have a member of our team be the “bad guy” in the transaction – hammering away at the sales prices until an agreement is reached. Our job here, and we do it well, is to speak for you in tough transactions and smooth things over to keep the deal from getting too personal.
In order to make your next overseas purchase as smooth as possible, send us a message and let’s schedule a free consultation where I will provide you with a ton of useful, free tips and tricks about buying a property here, but also valuable information about life in Medellín during COVID-19.
My thoughts about the Medellin Real Estate market post-pandemic
Over the past 15 years, Medellín – used to be known as the former headquarter of the notorious drug lord Pablo Escobar – has risen to become one of the highest ranked retirement spots in South America. A lot of focus has been placed on security and social and urban innovation, which has helped the city to become what it is today – one of the safest cities in Latin America.
In the last decades Medellin has experienced incredible growth in terms of tourism, development, and economic progress, until March 2020 when COVID-19 struck. And while the pandemic is affecting Colombia greatly, what hasn’t changed are the many reasons why Medellin is a perfect city to live in. The majority of the people who wind up living in Medellín or keep coming here for vacation year after year do so because of some combination of the following factors: amazing weather, favorable cost of living, wonderful locals. (Of course there are more things to list, like nightlife, nature, and beautiful people). But the core three things mentioned – are not going to be adversely affected by this virus. The things that make Antioquia and attractive place to live are going to endure well beyond the pandemic. If the Paisa people can overcome a 50 year civil war and internal conflicts with guerrillas, it seems highly unlikely that the virus will be the great undoing of the incredible society that has been built here.
Early indicators are that real estate prices are not going to drop substantially, so if you’d prefer to act but are still hesitant to buy, one great initial step would be to transfer your money into COP soon and take advantage of an incredible exchange rate – one of the best in history. Even if the market drops 10% you are now getting a 30% better exchange rate than only a little over a year ago.
The problem trying to time the market is that you need to be right twice – both when you exit it and when you reenter it. Therefore, if you care more about making money than being right you should do as following – transfer your funds to Colombia, wait until you can come down and purchase your home, and until than we would be more than happy to look for suitable listings for you.
Real estate is my passion, and I’d love to discuss this more with anyone. Like the article? Hate the article? Leave a comment below or message me on Whatsapp (+57) 317-523-3469 to talk more about the future of Medellín Real Estate.