Buying Rental Property
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Why are expats buying rental property in Costa Rica in 2021 Read on to find out about income, future planning, and the other reasons why Costa Rica rental properties are hot this year!
A trend that we have seen in recent years is the rise of the income property. More often than not, Costa Rica property buyers are looking for something they can use for rentals. More than 50% of the buyers who have come through our real estate office this year are buying rental properties in Costa Rica that they can use for at least part of the year, or possibly live on the property and have rental cabins. Is this the right choice for you Here is a list of questions that our rental property buyers ask us all the time.
Can Americans and other foreigners legally buy property in Costa Rica Absolutely! The great part about Costa Rica is that foreigners and locals have the same ownership rights when buying property. Foreigners can purchase property on a tourist visa without the need for residency or citizenship.
Any foreigner, resident, or non-resident has the same rights as a citizen in Costa Rica, except for voting rights in presidential and municipal elections and can, therefore, purchase and own Costa Rica real estate legally. However, the one exception is that a foreigner can only own 49% shares in a property in a Maritime Zone (within 200 meters of the high tide line).
These people may be close to retirement age but the majority of rental investors in Costa Rica are still working and raising families. They are looking to secure a safe investment and a possible place to live outside of their country while they keep working. Those who are able to work remotely tend to look for properties with multiple housing options so that they can live on the premises and rent out the vacant spaces. Life coaches, yoga instructors and practitioners of all types of therapeutic modalities are finding that Costa Rica provides powerful settings to host healing retreats. Many have chosen properties where they can grow food and invite guests into a beautifully organic living experience.
There may not yet be any large, all-inclusive hotels in our South Pacific region of Costa Rica but there are an increasing number of investor groups who are scouting our region for income property opportunities to meet the growing demand.
When people first start thinking about buying property in Costa Rica, they will typically book a trip to visit. Oftentimes, people will visit more than once before committing to a location and a property. And those who have been visiting in recent years will note that rental prices in Ballena have gone up and rental availability is more and more scarce.
We are in a strange time in the rentals market in Costa Rica because at a point in the year when it would normally be quiet, most rental homes in Costa Ballena are filled. They are, however, filled with long term tenants, most of whom are looking to stay for a while. Recent buyers who have purchased homes in Costa Rica are making 0.5% to 0.9% monthly return (6%-10% annual return on investment) on their purchase price at this time. One home recently bought for $450,000 is renting for $4000 per month to long-term renters. Another home purchased for $285,000 is charging $1500 to long-term renters.
These rentals would normally cater towards short-term renters but because the pandemic has put a damper on international travel, rental home owners are not counting on intermittent traffic and would rather secure long-term renters for a lesser monthly income. When borders finally open, many rental home owners are likely to switch back to focusing on short-term renters.
When it comes to Costa Rica taxes for Expats, both residents and non-residents are subject to taxation on the income they earn within the country. This means that any rental income you earn from a rental property in Costa Rica is subject to a 13% VAT tax. You will also have to declare your income in Costa Rica to the IRS or any other foreign revenue body that you are subject to.
Income from foreign sources is not subject to Costa Rican taxes. Annual taxation on a property in Costa Rica includes the not high payment of property tax which is calculated at only 0.025% of property value. To learn more about taxes in Costa Rica for U.S. citizens, click here.
Many semi-retired owners or remote workers manage their own rentals in Costa Rica. It is easy to live comfortably on a Costa Ballena property and share it with renters and many people opt for this style of living to earn additional income.
Those who choose to own a condo over a private residence in Costa Rica are looking for ease of ownership. They want to minimize maintenance costs and to have increased security. Many renters enjoy staying in a condo; however, this type of property is less popular with buyers who envision themselves eventually moving into the property. Condos simply are not representative of what makes life in Costa Rica extra special, which is primarily about living surrounded by nature.
Buying property in Costa Rica is not the best kind of investment for highly leveraged and cash poor buyers. However, it can be a very good long and medium term investment for a more experienced and economically-stable buyer looking for rental income, long term price appreciation, and a lovely tropical family getaway or retirement home to sweeten the deal.
You also need to know the building and safety codes in your jurisdiction and follow them to the letter. That costs both time and money, in your initial property updates and by attending to regular maintenance and checking on your properties periodically.
Some cities also require you to obtain use and occupancy permits, and register all rental properties (with a fee, of course). In my experience, cities that require you to register all rental properties tend to impose tenant-friendly rules and regulations. Proceed with caution.
Among their many benefits, real estate investments come with plenty of tax advantages. And beyond those inherent tax advantages, investors can also get fancy with low-tax exit strategies like 1031 exchanges or holding their rentals in a self-directed IRA.
But the flipside of all the tax benefits is that investment properties add some extra wrinkles to your tax return. If you do your own taxes with a service like eFile, expect it to take you longer. Do you understand how rental income is taxed versus capital gains On which schedule rental income should appear How depreciation works, or depreciation recapture upon sale of the property
Being a landlord is not for everyone. Rental properties come with significant risks, costs, and time commitments. It takes time and effort to learn the skills needed to succeed, to find good deals buying rental properties, and to manage those properties (or the property manager) on an ongoing basis.
In this scenario, the money advanced to you by a cash-out refinance can be used to make the down payment on an investment property. In other words: If you have enough equity in your current home, you may be able to start investing with no money out-of-pocket.
Under lease options, the property owner charges the buyer a monthly or yearly premium, in the form of higher rental payments. The excess rental fee will then be channeled towards the purchase price of the home.
Real estate is a solid asset with value cycles that are largely decoupled from the stock market and the daily news cycle. A well-selected rental can produce consistent cash flow as well as the potential for appreciation over time.
Assuming the rental income of the $100,000 property is half that of the $200,000 property, that both operate at a 30% ratio of expenses to income, and that they will appreciate at 3.5% per year, the numbers would look roughly like the following:
Rental prices are seeing a similar trajectory, with mid-size cities like Salem seeing an 18% increase in rental prices. This is largely due to increasing demand, with steady population growth in both metropolitan and suburban locations, according to research by Portland State University.
Just east of Portland, Gresham is a suburb on the rise. What was once a working class neighborhood has become a sanctuary for Portlanders looking to get more for their money without losing access to jobs and perks of the nearby city. Long-term renters are moving to Gresham for more, making it an ideal city to invest in rental properties.
The growth in Gresham is reflected in its real estate value. Home values increased nearly 16% in the last year to an average of $469,500. And the potential for rental property is undeniable. While rentals are 20% lower than the national median at $1,645 for a two-bedroom, that price has increased by $267 in the last year.
The lender will typically use the lesser rental rate in their calculations to process your application. This helps minimize the risk of the loan that your lender takes on. But these numbers are only used for mortgage approval; you do not have to rent the property at the rate your lender uses for your loan.
There are costs associated with the property that your lender will need to account for to approve the loan. The lender will adjust the rental income amount to allow for the expenses and losses that happen with any rental property.
The investment property has a positive cash flow if the adjusted rental income exceeds the housing payment. Therefore, the lender will include the income amount as an addition to the income on your application.
Even with the negative cash flow, Joan can still use the future rental income to help her qualify for the mortgage. As long as her employment income makes up for the loss, she can buy and fix the property, enabling her to collect more rent over time. 59ce067264