Expected Returns for Medellin Real Estate Investing - Medellin Advisor

Expected Returns for Medellin Real Estate Investing

Medellin real estate offers attractive returns for savvy investors.  This article is geared for folks that’d like to buy a place and rent it out to others for profit.  

International investments are a great way to diversity your investment portfolio.  Ray Dalio, a hedge fund manager with a 17 billion dollar net worth recently said to “put your savings in a well-diversified mix of currencies, countries, and asset classes”.  International real estate investments offer a large diversification benefit for most portfolios.

medellin real estate
An international real estate investment is an effective and profitable way to diversify a typical North American or European investment portfolio


An international real estate investment is especially great if you like to travel.  You can stay at your apartment a few weeks or months a year and make money from renting it out when you’re not in Medellin.  There’s nothing more comfortable than checking into a familiar apartment when you touch down in an exotic international city.

Medellin is poised for growth. Experienced travellers consistently rank Medellin as their top South American travel destination.

This article presents some real case studies so you can understand the expected returns from investing.  It’ll help you avoid some of the pitfalls of international investing and will make sure you purchase a property that matches your maintenance preference.

Decorating a rental property to make it attractive for travellers isn't a ton of work and can be quite enjoyable - especially for the creative types

CASE STUDY #1: DAILY RENTALS

The landlord business can be a lot of work, but not if you outsource all the day-to-day operations to third parties.

Property management companies in Medellin will generally charge between 10-20% of gross rental receipts. One of these companies currently has a listing in a daily rental building for $175,000 USD that nets an annual return of $8,800 after all expenses – that’s a 5% cash flow return, not including capital gains (which are significant and consistent – see the image below). 

Note: For simplicity, and for the benefit of readers not as familiar with the local currency, I’ll use USD figures for a lot of these calculations. As of January 2021 the current exchange rate is 1 USD : COP 3450. Keep in mind that if you go forward with this type of investment, almost all of your dealings, bills, etc will be in COP (Colombian Pesos)

Let’s dive into the numbers a little more to see where that $8,800 cash flow comes from. 

Suppose you can rent out the apartment at $70 a night for 220 days a year. That’s 60% occupancy. Pre-covid, that’s a conservative estimate for a nice place in El Poblado. Tourism here is bouncing back. That might be an optimistic figure until the pandemic ends, but for 2022 and beyond it is undoubtedly attainable. 

SEE ALSO – CORONAVIRUS AND MEDELLIN REAL ESTATE

 

$70 per night x 220 days a year = $15,4000


The property management company, even at the top price point, will get 20% or approximately $3,080. Annual estimates for building administration fee ($1,600), utilities ($1,120), property tax ($800) leave you with total expenses of $6,600. 


Revenue ($15,400) minus expenses ($6,600) equals profits (cash flow) of approximately $8,800 per year. 


Short Term Rental Restrictions

You can only legally offer short term rentals for buildings that have the permission to do so from the Ministerio de Comercio, Industria y Turismo. In my experience, about 19 out of every 20 buildings do not allow short term (ie: daily) rentals.  Most buildings don’t have the license and cannot be rented for contracts less than 30 days. The general rule is that most buildings can have rental contracts of minimum 30 days, or longer. Some buildings impose even more stringent requirements and demand rental contracts of at least 3 or 6 months. These policies vary widely not just in El Poblado but in all parts of the city. It can really only be determined on a building-by-building basis by speaking with porteros or building administrators. 

If you buy a regular apartment in a building that does not have the tourism license and try to put it on Airbnb, you will run into problems. The porteros will notice. The neighbors will notice. And they will try to shut it down. 

If you’re living in a high-end building, you’ll also create a lot of drama.  High end Colombian buildings have strict doormen and up-tight neighbors.  They have no patience for foreigners that disobey the building rules and the Colombian social contract.

Finding a building with the express permission to rent for short term is difficult. You should never take a seller’s word for it that the building allows short term rentals.

Time and time again I have seen cases where the seller says they have this ability, only to find out that the administration of the building does not allow it. Don’t be tricked here. Most buildings don’t allow it. 

The Energy Living building in El Poblado is one notable example of a building that allows daily rentals. While others have this permission, the majority do not

CASE STUDY #2: MONTHLY FURNISHED RENTALS

As of December 2021, of over 400 properties for sale on this website, only 18 have express permission for daily rentals. Click the “daily rentals” button to see which ones. 

 

However, although a building doesn’t allow for daily rentals on Airbnb, this does not mean the apartment can’t be a good investment. 

Monthly rentals can also offer attractive returns, especially if you choose the right property. Additionally, with monthly rentals you are less likely to attract the type of people who might cause damage to the furnishings in your apartment or cause damage to your reputation in the building and surrounding area. 

The following is an example of an ROI calculation for a monthly furnished rental of a penthouse duplex in Vizcaya that is currently for sale. In this example I have used Colombian Pesos (COP) for all calculations and all the expenses (right hand column) are actual expenses for the property. 

 

Example of typical expenses involved in monthly furnished rentals.

The column in the top right left shows the income that might be expected. This property is premier – at 250m2 it is very spacious, it has an amazing view and is located within walking distance of Provenza. All of these factors mean it should be able to rent for a premium price of around COP 11,000,000 per month. At 80% occupancy that is COP 105,600,000 in revenue per year.  The typical expenses for a monthly furnished rental are as follows: 

Property Tax: Called Pre-dial here – generally quite cheap compared to what is typical in North America and Europe.
Admin: Monthly fee paid to the administration (HOA) of the building. Here, COP 734,000 per month = COP 8.8 millones per year
EPM: Stands for “Empresas Publicas Medellin”. This bill includes water, sewage, electricity, and gas. Most landlords will cap this at a certain amount and make the tenants pay overages. 
Internet: Main operators are TIGO and Claro. Might be a little bit higher for ultra high speed but generally quite cheap. 
Property Management Fee: Finding a quality property management company is crucial to the success of your investment. Or, if you have the time and the patience, manage it yourself and save this expense. 

The picture above shows an overview of the types of revenues and expenses that might be typical for monthly furnished rentals. In this scenario we have an expected cash flow of 8.43%. 

Not included in the calculations are closing costs and costs to furnish the apartment which may total around COP 50,000,000. Some investors include this amount, while some do not.  Including these expenses would lower cash flow to 8.0% from 8.43%. 

The Total Return of Investment Section includes the cash flow but also considers how much the property will appreciate in one year. In the section called “Capital Gains as the Icing on the Cake” (below) we will discuss this in further detail. 

CASE STUDY #3: LONG TERM UNFURNISHED RENTAL

You can also buy a place and rent it out on an annual basis, typically to a Colombian family or an expat. Long term rentals require less work and have lower rental agency fees. You also don’t need to invest in furniture.  There are some properties that are simultaneously for sale and for rent, so it’s easy to calculate the investment return. Take this three bedroom, two bathroom apartment in Laureles that’s being sold for about $155,000 USD.  This apartment can be rented for $900 a month or $10,800 per year. Rental agencies usually charge 10% of the rent for long term unfurnished rentals, or $1,080 a year for this property.  The annual building administration fee is $1,000 and property taxes are $800. With long term rentals – the owner is not expected to pay internet or other utilities. Thus, this property will earn you a return of $7,920 a year, or 5.1%. 
El Poblado, Medellin. A rental property with this type of view stands a very good chance of maintaing a high occupancy rate

CASE STUDY #4: STUDENT RENTALS

A few years ago, we published an article about a friend who successfully acquired a property in Patio Bonito and made some renovations to it. 

The property was purchased with 3.5 bedrooms, but with just $3000 USD invested and using a local construction company, it was remodeled to have 6 bedrooms. The apartment is close to EAFIT University, and the business model is to rent rooms to students. The rooms have different sizes and features, but the average rate pre-covid was about $275 USD per room and rented on a monthly basis. 

Before the pandemic struck, the apartment had a 90% occupancy rate. This allowed for annual revenues of $17,820*. 

($275 per month x 6 rooms x (0.9*12 months)

Expenses include building administration fee ($800 annually) + property tax ($950 annually) + utilities ($1300 annually) + cleaning ($300 annually) for a total of $3,350. 

The resulting net cash flow for 2019 was $14,470, and, given an original purchase price of $130,000 USD offered an ROI of 11%. 

*Note 1: The student rental can offer very attractive revenues under normal circumstances, but this business model was hit particularly hard by the pandemic. EAFIT University moved all of their classes online in March 2020, and as of January 2021 only certain classes have returned to campus. Occupancy in Viktor’s apartment for 2020 has fallen below 40% which obviously seriously dents the above calculated ROI. However, the live education model is likely to return to universities as the pandemic ends and as a medium or long term play, the properties around the major universities offer great value. Besides EAFIT,  a couple of other major private universities are the UPB in Laureles, and the Universidad de Medellín in Belen (located on the very western edge of the city off Calle 30). Buying up property near these places and providing student housing is an interesting investment option. 

*Note 2: The student apartment is a lot of work. Maintaining a 90% occupancy rate means showings, students coming and going, maintaining the place clean and all sorts of other potential headaches. 

The law faculty alone at this University has more than 4500 students. Live classes are not expected to resume until the second half of 2021.

The cash flow illustrations above are relatively conservative estimates. Surely some readers are thinking about their own places here, where they’ve generated a fair bit more. 

There is absolutely no excuse for running a rental property here at a negative cash flow, even during a pandemic, even when the borders were closed. The fixed costs are so low. In the case of #3 and #4, you can market to not only the expat community but to the local population as well.  The Medellín Metropolitan Area is 4+ million people and growing – someone will want to rent your place. 

Capital Gains as the Icing on the Cake

The foregoing case studies offer a glimpse of the type of positive cash flow that can be expected from various different types of Medellin real estate purchases. Those types of returns will be attractive to investors, assuming the principal remains protected. With real estate in Medellin, the principal isn’t just protected – but rather, it trends in one direction only: UP

Check out the following graph, provided by the Colombian National Statistics Agency (DANE – Departamento Administrativo Nacional de Estadistica). It shows the year over year change in property values across the city. 

In recent memory, whether adjusted for inflation or not (nominal vs real, above), property values in Medellin have not experienced a negative year
increase in real estate prices

As the graph and the table show (the table is a numerical representation of the orange line in the preceding graph), Medellin real estate values have increased steadily since the turn of the millenium. Not even during the economic recession of 2008, which saw house prices plummet not only in the US but across much of the world, have housing prices gone down YoY in Medellin. 

In May 2020 we wrote this article talking about why we didn’t even think the economic fallout from the coronavirus pandemic would cause real estate prices to drop. Statistics for 2020 won’t be available for some time yet. But as of January 2021 we remain very confident in that prediction. The market here remains hot and even those that don’t sell simply raise their prices.  

The blue line above is unlikely to dip negative even for a year as dismal economically as 2020. The graph should make something fairly clear – if you buy a property in Medellin, the price of that property is highly likely to go up. Astute investors will be quick to point out that there are other factors at play here – most notably inflation and foreign exchange rate considerations. 

Thinking back to the conservative cash flow ROI calculations above, and combining them to the near certain appreciation of the property (based on the extraordinary track record of the real estate market here), this type of investment becomes all the more attractive. 

In contrast to Medellin, property values in the G7 economies have, from time to time, saw prices decrease. Source: The Economist

Exchange Rate Fluctuations

From 2014 to 2020 the Colombian Peso depreciated significantly compared to the US Dollar.

Medellin real estate prices rose during that same time period, when measured in Colombian pesos.

Suppose you bought an apartment in Colombia in 2014 for 300 million Colombian pesos (COP) when the exchange rate was 1,800 COP / 1 USD.  Further suppose that that property had appreciated to 500 million COP in November 2020 when the exchange rate was 3,500 COP / 1 USD.

Your apartment was worth $167,000 USD in 2014 and $143,000 USD in 2020.  You lost money during this time period in US dollar terms even though the asset rose significantly in terms of Colombian pesos. 

SEE ALSO – COP vs USD: A Historical Perspective



We’re cherry picking data here.  There have also been periods when the Colombian peso has appreciated vs the US Dollar.

The Colombian Peso appreciated from 3,000 COP / 1 USD in February 2003 to 1,800 COP / 1 USD in December 2012.

The US printing press is running hot.  It’s not unlikely for the Colombian Peso to strengthen against the US dollars, especially at current levels. 

In the 2010s, American investors lost big on currency when investing in Colombia.  In the 2020s, they could win big if foreign exchange rate trends turn. 

Medellín Real Estate is a Great Opportunity

It’s a fast growing economy and local wages are recovering rapidly.  Foreigners love Medellín and are relocating to enjoy the beautiful weather and kind people.

The restaurant scene is booming and it’s a close flight to the United States.  There’s a 5 hour direct flight from New York to Medellín. Check out this article for more reasons why expats continue to flock to Medellín. 

Want more information on investing in Medellín, Colombia? Contact us now. 

SEE ALSO – 15 Spanish Terms You Should Know to Deal in Colombian Real Estate 


SEE ALSO – How to Fund Your Real Estate Purchase

 

 

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