Investor's Guide: 8 Common Mistakes When Buying Properties in Medellín, Colombia - Medellin Advisors

Investor’s Guide: 8 Common Mistakes When Buying Properties in Medellín, Colombia

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8 Common Mistakes When Buying Property in Medellin: What Investors Should Avoid

Investing in real estate in Medellín, Colombia, can be an attractive opportunity to generate passive income, increase your wealth, and enjoy a vibrant lifestyle. However, it is crucial to avoid common mistakes that could jeopardize your investment and plans. Many investors, especially those unfamiliar with the Colombian market, make errors that can cost them time and money. Here are eight common mistakes to be aware of and how to avoid them to ensure the success of your real estate investment in Medellín.


Medellin is a preferred location for real estate investment in Colombia
Medellin is a favorite destination for investment in Colombia's real estate sector

(1). Lack of Knowledge of The Local Real Estate Market:

The real estate market in Medellín and Colombia exhibits significant differences compared to countries like the United States, Canada, or European nations. Some aspects to consider include:

*Listing exclusivity: Unlike North America, Colombia does not have exclusive listings. This means the same property can be listed by different real estate agents, leading to confusion and price variations.

*Agent licensing: In Colombia, there is no specific licensing requirement for real estate agents, resulting in varying levels of professionalism and knowledge. It is advisable to seek a professional with experience and local market knowledge.

Medellin's real estate market is different from other countries.
Medellin's real estate market is different from other countries

*Price negotiation: Prices in Colombia are often negotiable, unlike markets where prices are more fixed. Local example: An American investor attempted to purchase an apartment in El Poblado and was surprised to find the property listed at different prices by different agents. Unfamiliar with the non-exclusive system, they ended up paying more than necessary. 

*Exchange Rates: Real estate investments in Colombia are subject to fluctuations in the exchange rate between the Colombian peso and the foreign investor’s currency. On June 15, 2024, the Colombian peso depreciated by 2.9% against the US dollar, with a TRM (Market Exchange Rate) of 4,153 pesos per USD. This typically reduces the cost of investing in Medellín for foreign investors holding stronger currencies such as the US dollar or the euro. 

The fiscal pressure on President Gustavo Petro’s government, with a budget deficit exceeding 4.4% of Gross Domestic Product (GDP), suggests a potential devaluation of the Colombian peso to offset reduced revenues amid an economic slowdown and declining tax collection. The government must seek resources to address this complex financial situation and meet the most urgent needs of the budget and social programs.

 

Colombian peso devaluation against the dollar encourages investors to enter the real estate market
Colombian peso devaluation against the dollar encourages investors to enter the real estate market

The complex and deficit situation of the local economy paradoxically favors foreign investors. They (foreign investors) see how the cost of entering the real estate market is reduced proportionally, making the money coming from abroad more valuable in Colombia. For several years now, thousands of foreigners have been coming to Medellín with plans for investment, business ventures, or retirement.

Colombia's fiscal deficit is encouraging the government to devalue the national currency and is a perfect storm to enter the real estate market.
Colombia's fiscal deficit encourages government to devalue national currency.

(2). Not Having an Axperienced Local Real Estate Agent:

Having an experienced local real estate agent in Medellín can be an invaluable ally in navigating the market and making informed decisions. A good agent can:

  • Provide accurate information about the different neighborhoods and areas of the city, including their current development status and future plans.
  • Guide you through the negotiation process, whether with local or foreign sellers. To achieve a mutually beneficial agreement.
  • Understand common tactics used by local sellers and help identify the best opportunities.
  • Comprehend the culture and motivations of local sellers to facilitate a smooth transaction.
Having an experienced Real Estate Agent is a great advantage when investing in Medellin.
Having an experienced Real Estate Agent is a great advantage when investing in Medellin

Recently, I heard about an expatriate investor who chose not to use a local agent and bought a property in a growing neighborhood, unaware that there were plans to open bars and nightclubs in the area. Now, they have to endure disruptive noise until late at night and are struggling to sell their property. Unfortunately, the property has lost value and appeal to many potential buyers due to the new commercial use of the area. Clearly, a local agent would have been aware of this situation and could have offered appropriate advice before the investment.

You should consider the advice of a real estate agency with expatriate experience.
The advice of a real estate agency with expatriate experience is a great advantage when it comes to investing.

(3). Underestimating The Additional Costs of The Purchase:

Acquiring a property abroad implies additional costs that go beyond the sale price, such as:

– Property and capital gains taxes “Impuesto Predial: In Colombia, property and capital gains taxes must be paid on the acquisition of real estate. The value of these taxes varies according to the area and the value of the property. In Medellín, the property tax is paid quarterly and can also be paid annually, so you could save on the final amount.

– Notary and registration fees “Gastos Notariales”: Notary and registration fees associated with the purchase and sale of a property in Colombia are usually between 1% and 2% of the value of the property.

– “Impuesto de Timbre”: Since 2022, by means of Law # 2277, this tax is established in addition to the notarial expenses, for the documents that elevate to public deed. There are different ranges for this tax applicable from values higher than 941,300,000. See the complete article here: “Gastos Notariales- Everything You Need to Know”.

It is important to foresee additional expenses after buying a property in Medellín.
It is important to foresee additional expenses after buying a property in Medellín.

– Remodeling or initial repairs: The property may require some remodeling or initial repairs, which implies additional costs.

– Property insurance: It is recommended to purchase property insurance to protect the investment against damage, theft and other unforeseen events.

– Administration fees “Cuota de Administracción”: Typically, whether in a residential complex or an apartment building, you must pay a monthly fee for the maintenance of common areas, cleaning services, security, employee salaries, repairs, and other common expenses. This fee will be proportional to the coefficient that your unit represents in the community.  

When investing in a property you must consider additional costs.
When investing in a property you must consider additional costs

 Example of Administration Fee Calculation: Suppose there are 30 apartments with a property share coefficient of 3.33%. If the total monthly administration cost is $50,000,000, the monthly fee for each owner would be calculated as follows:

= COP: Therefore, each owner would pay approximately COP: 1,665,000 per month.

In addition to the purchase price. Other costs must be taken into account, such as management fees, taxes, legal fees, closing costs, insurance and, any necessary renovations, repairs or, improvements. Being cautious and having an additional budget of 5-10% will help you to correctly estimate the amount of your investment.

(4). Ignorance of Local Laws:

Real estate laws in Colombia can be complex and different from what many foreign investors are accustomed to. It is crucial to understand these laws or hire a specialized real estate agent or lawyer to guide you through the process. Recently, an American buyer who did not know the local laws acquired a share through an “Cesión de Derechos” in a hotel tourism project. Eventually, he had unexpected costs and according to the contract, he could not withdraw from the business as he would lose his investment. In this case, our friend learned that he could have avoided the issue, had he hired a Real Estate Lawyer.

It is advisable to seek the support of a lawyer specialized in the market to be invested.
It is advisable to seek the support of a lawyer specialized in the market to be invested.

Therefore, it is advisable to understand the Colombian laws that regulate the purchase, sale and possession of property. A lawyer with experience in real estate law can advise you on aspects such as:

– Restrictions on foreign ownership: In Colombia, there are no restrictions on foreigners acquiring property. However. Law # 309 of 2023 seeks to limit the purchase of rural lands to 15% of the extension of the country’s municipalities by foreign persons. With the argument of protecting food sovereignty. This Project has not been approved in the Congress of the Republic and has generated a debate in the country.

 

– Purchase and sale processes and deeds: The process of buying and selling a property in Colombia must be carried out following the established legal procedures. The public deed is the official document that certifies the transfer of ownership.

The "Certificado de Tradición y Libertad" allows the study of legal titles before investing in properties in Colombia.
The "Certificado de Tradición y Libertad" is a document that certifies the ownership of real estate in Colombia.

– Taxation of real estate properties: Real estate properties in Colombia are subject to property and capital gains taxes. The rate of these taxes varies according to the area and the value of the property.

– Construction and land use regulations: It is important to verify that the property complies with the construction and land use regulations in force in the area.

Generally an attorney should review the legal history “Certificado de Tradición y Libertad”of the property to make sure that there are no liens, mortgages, or ownership problems. He or she can also advise you on the legal requirements for obtaining a building permit, if necessary.

(5). Ignoring The Risks of an International Real Estate Investment:

Every international investment carries specific risks. Some of the most common include:

  • Currency risk: Fluctuations in the exchange rate between the Colombian peso and the foreign investor’s currency can significantly affect the value of the investment in foreign currency. For example, in 2022, a devaluation of the Colombian peso against the US dollar positively impacted real estate investments in dollars. With some investors seeing appreciations of 10-15% in a short period due to these fluctuations.

  • General economic risks: Variations in interest rates, inflation, and economic cycles can affect property demand and value.

Fluctuations in the exchange rate of the Colombian peso against the dollar affect the real estate sector.
Fluctuations in the exchange rate of the Colombian peso against the dollar affect the real estate sector.
  • Legal risk: Different legal systems and regulatory frameworks can create uncertainties and legal challenges. It is crucial to be familiar with the Colombian legal system and seek local legal advice to minimize risks. For example, understanding specific regulations on horizontal property or restrictions on the purchase of rural land that could affect foreign investment.

  • Natural disaster risks: Colombia is exposed to risks such as earthquakes, floods, and landslides, which can cause significant damage to properties.

In Medellín there have been incidents in buildings involving AIRBNB services
In Medellin there are now stricter controls on the Airbnb business in tourist homes.
  • Operational and management risks: Issues related to poor property management, maintenance, and compliance with regulations can affect investment profitability. For instance, stricter regulation of short-term rental services has complicated business operations through platforms like Airbnb and Booking in some buildings.

  • Political risk: Changes in the country’s political or economic landscape can impact property values and investment conditions. For instance, changes in government policies related to foreign investment or the real estate sector can significantly influence investment decisions.

It is essential for investors to comprehensively assess these risks and seek professional advice to develop appropriate mitigation strategies before undertaking any international real estate investment in Colombia or any other country.

(6). Inadequate Evaluation of Return on Investment (ROI) or % Occupancy:

It is crucial to have an accurate assessment of potential “Return On Investment (ROI)” and occupancy or vacancy rates in daily rental services, as misinformation can lead to incorrect ROI estimates. 

For instance, a new investor underestimated the vacancy time for their rented property in Envigado at 85% – where as the area’s average vacancy rate is lower. This resulted in a lower-than-expected ROI. Consequently, income projections were unrealistic. 

To avoid these pitfalls. It is necessary to follow these recommendations:

  • Estimate Actual Rental Income and Property Value Appreciation: Potential rental income or property value appreciation over time should be realistically estimated. Setting overly ambitious goals may not align with market realities.

  • Consider Maintenance and Management Costs: Factor in maintenance, management, and property repair costs, etc.

Return of foreign investments in Medellin
The ROI calculation must be realistic and consider occupancy to avoid disappointment for real estate investors.
  • Forecast Taxes and Associated Fees: Account for property taxes, homeowners’ association fees, and other associated costs.

  • Define Investment Expectations and Time Horizon: Clearly define the investment horizon, i.e., how long you plan to hold the property before selling.

Example: For an apartment valued at 550,000,000 COP with a monthly rent of 4,500,000 COP, the annual gross ROI would be around 9-10%. However, it is essential to consider associated costs and expenses to determine the net ROI accurately.

(7). Lack of a Reliable Property Management Team:

For novice investors entering the local market or even experienced ones who do not reside permanently in Medellín, it’s crucial to have a reliable property management team that handles:

  • Tenant Search and Selection: A property management team can find reliable tenants and conduct background checks and selection processes.

  • Rent Collection and Payment Handling: The management team ensures timely rent collection and manages utility payments and other property-related expenses.

  • Maintenance and Property Care: This includes tasks like cleaning, minor repairs, and general upkeep.

  • Handling Issues or Emergencies: If any problems or emergencies arise at the property, the management team addresses them promptly.

Having a Real Estate Agency in Property Management is a great advantage when investing in Medellin.
Having a Real Estate Agency in Property Management is a great advantage when investing in Medellín.

 

A trustworthy Property Management team is essential for safeguarding your investment when you’re not present. This team should be incentivized to ensure the prosperity of your property. 

Recently, a foreign investor entrusted their property to an inexperienced friend, resulting in inadequate maintenance and property devaluation.

At Medellín Advisors, we offer property management services that encompass maintenance, tenant search, rent collection, utility payments, and emergency response. This provides foreign investors with peace of mind knowing their property is in good hands, even when they’re away from the city.

(8). Lack of a Clear Exit Strategy:

It is important to define an exit strategy before making the investment, considering aspects such as:

  • Time horizon for selling the property: In addition to the investment objective, an estimated time frame for selling the property should be established, whether it is short, medium, or long-term.
  • Tax implications of the sale: The tax implications of selling a property in Colombia vary depending on how long the property has been owned. It is advisable to consult a tax advisor to understand the specific tax obligations. After 2 years of ownership, the Impuesto de Ganancias Ocasionales, must be paid on the property’s appreciation. This tax has a minimum rate of 10% of the sale value.
Revaluation and ROI are key indicators when investing in real estate.
Revaluation and ROI are key indicators when investing in real estate in Medellin.
  • Costs associated with the sale: The costs associated with selling the property must be considered, such as real estate agent commissions, capital gains taxes, legal expenses, and others.

It is important to consult with a Colombian accounting advisor specializing in the real estate sector to understand the specific tax implications and evaluate strategies, exemptions, or benefits that you may obtain. According to Article 311-1 of the tax statute, there are certain conditions to obtain reductions of this tax if the sale is of a residence intended for the habitation of a natural person. In conclusion, it is crucial to plan when and how to sell the property. Taxation can vary considerably depending on the timing of the sale.

In Medellin, real estate appreciation has been on a positive trend for more than 20 years.
In Medellin, real estate appreciation has been on a positive trend for more than 20 years.

Conclusions

Investing in real estate in Medellín, Colombia, is an attractive opportunity with significant potential for return on investment. However, it is crucial to avoid common mistakes that could jeopardize your investment and your plans. By having the right knowledge, professional advice and a clear strategy, you can increase your chances of success in the real estate market of The City of Eternal Spring.

Questions, comments? Contact me today and I will be happy to discuss any of these issues further with you.

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