This ad was in last week's La Nación here in Costa Rica. Translation:
"This is the moment to buy. Stable price and
low interest! Resale opportunity. Pre-construction priced at $250,000.
Only 10% down and you can pay that in four payments! [So get into this game for only $6,000 now.]
To be completed in 2010, then finance 70-80% for 30 years. I sell these
properties in Miami." The rest is contact information…
There are so many things that struck Hal and I about this ad, like:
- Advertising a Miami condo in a Spanish language third world country's newspaper? Isn't this the reverse of how it's usually done?
- Advertising for speculators at this point in the market?
- Could this be a sign that Costa Rica real estate is now as expensive, if not in some cases MORE expensive than Miami's?
From everything we know about Miami's real estate market, it's
crashing badly. Condos that sold pre-construction in 2004 for $600,000 are
selling now for $300,000. How much will these be selling for in 2010? Is the trend up or down?
Hal told me that in the first five years of the decade (2000-2005),
only 5,000 new condos sold in Miami. Total. That's 5,000 TOTAL sold in five years. I'm hammering this point because I kept thinking I wasn't understanding the numbers. Because…
As of 2005, there were 50,000 new condos in
the Miami pipeline at some stage of construction. Fifty thousand new condos
being built… when only 5,000 new condos sold during the preceding five years.
Do developers do any research? Can they add? They can sure
extrapolate their presumed profits. But none of them, it seems, looked
back or around. They were building for the 77 million baby boomers coming along any minute, 50,000 of whom would surely want a new condo in Miami. "Who wouldn't?" the developers muttered to themselves on the way out of the architect's office.
Switch locales: On the road to the Multiplaza here in Escazú,
we pass, in a one-mile stretch, at least 10 new office buildings in
various stages of construction. TEN. Multi-story, multi-office, big,
fancy, brand spanking new so most likely expensive. I'm guessing in the $250K range. But it doesn't matter how much. Because there are too many of them.
Where are the businesses located now that are
supposed to fill all these offices? What will entice them to move to
far fancier, far more expensive new digs? These businesses are making Costa Rica-style
incomes… can they afford Miami-style expenses? And… do enough
businesses even exist? I'm betting most of these developers plan to sell or rent to start-ups.
Here's the scenario I've constructed for this office park boom. But it will work for any real estate boom anywhere:
- Costa
Rica's real estate starts booming, driven by easy money people acquired
in their home country – either borrowing on their primary residence or
selling at the exact right time. Which was an incredibly short window
of opportunity.- People start to believe the hype, "Real estate never goes down."
- Everyone hears that commercial real estate is the next boom. That's what I heard two years ago in Key West.
- Two years ago, a guy builds an office building near the Multiplaza and it sells out.
- Nine other guys quietly buy land on the road to the Multiplaza, to build "the next" office park. They tell no one.
- One by one, they start to build… noticing the new office park going up right next to theirs.
- They start cutting corners and hurrying along to finish before next door so they can get to closing their pre-sales…
These buildings aren't completed yet, so we don't know if I'm an hysterical doomsayer or aptly able to put two and two together. We'll see.
I've managed to get to the end of this post without mentioned the 50 permitted condo developments slated for beachfront in Jacó right now, not including the St. Regis (starting at $800K per condo), the Ramada now under construction, the Four Seasons resort, the ever-expanding Marriot, the privately held developments of which there are many, and the property Trump just bought upon which to build his Towers. And this is just Jacó.
So… how do you think this will end?
The world, and I mean world is still in the grips of what is called “The Greater Fool Theory,” believing of course that as you say prices are always going to go up so there will always be greater fools than we to pay more than we did. It is now estimated that real estate prices will probably fall 35 to 50% before this is over. Because the medium price house has to match the medium price wage. The credit boys have screwed the pooch. And it may never be over. Now is not the time to buy anything. Of course the financial people will tell you different but if you listen to them expect to lose. The entire world is going to be in for a rough ride this year and some following years.
Do people point and laugh when you talk like this, LB? Because they do me and Hal… but we believe like you with two caveats. Writing that post now for tomorrow. But prices in Key West have already fallen 50% in some areas, like in New Town and on the Golf Course. Key West is a resort market so extreme in most respects. But any market that saw a boom will see a bust in proportion.
I hope so because that means to me that I am seeing things the way they are, not with the old rose colored glasses most people love to wear even when the mat is about to be pulled out from under them. I would recommend a blog by the name of clusterfuck nation by a guy named James Howard Kunstler and his 2008 predictions. When I mentioned the 50% figure I meant the overall average prices everywhere. Not to mention the falling dollar the rising oil prices global warming overpopulation greed and plain stupidity. the monkeys in suits calling themselves politicians the 2008 puppet show going on in the U.S. right now. I could go on forever but still everyone is pretty much in denial about everything and conducting business as usual. Yea, they laugh at me all the time and I laugh right back. I think that this post of yours is one of the best in along time. I was beginning to think that the expats of Costa Rica still had their heads in the sand but with people like you and Hal and maybe because it is a small country things could be a little different. I guess all I can add is be prepared and enjoy everyday. Maybe I have been reading to many McCarthy books.
We homeschool our boys and tonight we are watching the IA caucus for the experience. I am appalled that people can listen to the politicians and BELIEVE them. Very depressing. Which is the worst part of believing as we do: it is very depressing. No wonder no one wants to listen!!! I don’t blame them. Also why I don’t post much about real estate or the economy unless it’s connected to something I’m doing right now. It’s just too depressing.
The puppet show is something, isn’t it? SO glad I don’t live there right now! Most expats here do have their heads in the sand on this topic because it really hasn’t hit here. And you have to make an effort to follow the U.S. news or world news. If it weren’t for Hal, I would be in denial, too. Blissfully unaware. And probably trapped in a flip somewhere in the U.S.
Protect your assets, then read something cheerful or mindless. Plant a tree. I had to stop worrying about it. It was making me nuts. Que será será.
OH: went right to Kunstler’s site. His name is familiar, probably Hal knows who he is. Looking forward to reading that – will post a link on my Key West real estate site (www.sallyskeywest.com).
Saratica –
Thought you might find the link below amusing and informative. It’s the median home price in the US adjusted for inflation from 1890 to present as experienced as an animated roller coaster ride on youtube.
http://www.youtube.com/watch?v=kUldGc06S3U
Hope the link works. I’m not experienced in linking.
That video is FRIGHTENING. We got a surprise call from the RE agent who sold us our house last week – we should be meeting with him next week. I sincerely hope not to get screwed when the house finally sells.
I think condos are so tough to value (unless of course if you are planning to truly use it). Best gauge is to check possible rental income it can provide. With the video you showed, the selling price of $176k would mean that it should be rented for at least $1200/month (factor in assoc fee). I’m not sure about Miami’s rental rates, but I checked craigslist for rates at the building mentioned (Platinum) and it seems that it goes for about $1500. This indicates to me that Miami is going to hit bottom soon, maybe not bounce back up and stay sideways for a while. Question is: what about vacancy? How much are these in demand right now and for the next few years.
All in all, the Miami example does seem to show opportunities. Maybe not an outright bargain, but price seems to be fair. Real Estate here in Costa Rica, scary….
Like most things in life I find moderation to be the key, that includes libertarianism. Most that I know have been waiting for the US economy to go into a deep recession and the real estate market to crash/burst for ten years. I am curious about the glee they appear to be having as blisters rise up in segments of the US economy? Regarding real estate it is a relatively small percentage overall that are taking a real bath; speculators, flippers and those poor souls that were sold sub-prime loans. Most folks live in there homes and can easily afford there 30 year fixed mortgage payments at 5.85%. Unemployment is low and overall the economy is in pretty good shape, this housing correction in segments of the market will correct and there will be pain felt by some; it will not bring down the US and world economies. And whats the real value of those videos? At the height of our prosperous times I could show you video of parts of Brooklyn and the Bronx that would make the US look like a “3rd world” nation(actually the Chinese would do stuff like that). I could also show you many, many videos of small town America humming along with people mowing there lawns etc…whats the point? Also most Americans have owned there homes for a long time, so there equity has not been wiped out but depleted, at worst a lot of folks will have to either lower there prices or wait; as markets certainly don’t always go up, they do go up and down and up again…Also we can not lump Key West, Miami, Brooklyn, Washington state, Iowa, Illinois etc into one real estate market…they differ greatly especially markets like Key West or a highly speculative market like Miami with say Huntley, Illinois or Brooklyn, NY. I hate the weak dollar as I really want to go back to France and walk around like a little prince with my dollars, but hence now they are flooding our country and it’s there turn to be little prince’s. And as my European friends tell me, hey it’s about time they had the weak currencies for years! A weak dollar may be bad for expats but US companies getting paid in strong foreign currency are making a windfall, and tourism in NYC is booming. Yes my libertarian friends you have been jumping up and down for 10-15 years waiting for the sky to fall, for the big bad collective US government to fall..things ain’t great that’s for sure, and this war is a mess to say the least but the end is not here my chicken little friends….and least lets hope not.
Somewhere between Chicken Little and Pollyana there are calmer, more reasonable people calculating what their next move might be during the current set of events. Chicken Little follows the herd clucking out doomsday warnings. Pollyanna strides along within the herd touting what a great society we have here in the U.S. and how great things will be in the near future. I am not listening to either of them.
It is fun to imagine horrific catastrophic scenarios from the sidelines. It is not so much fun if you just pulled your head out of the sand (or some other dark, warm place)to see all the Chicken Littles running about and clucking up a storm. It is all about timing the markets. That can be achieved with luck and some insight. Here is my story:
In 2006, I pulled all the equity out of my Miami house. It was substantially more than I paid for it back in 1986. I took some and bought a very nice piece of property in Costa Rica. The rest I put to work in the stock market and that money, to date, has returned about 30%. The price of my house has dropped about 13% to date. There is still equity there but I anticipate that to dissipate temporarily over the next few years. I will leave the U.S. for Costa Rica in about 6 years. Maybe there will be more equity in the home then, maybe not. Either way, I will have benefited from the boom because I relocated some of the temporary equity to a more permanent spot in Costa Rica. The remainder in stocks is liquid and can be pulled and manipulated should conditions warrant.
For those who just sat still on their homes during the boom out of fear and timidity, that temporary equity has gone. For those that speculated and did not move in time during the boom, they also lost out. I am looking at this as a lesson in moving ahead of the herd rather than with or behind the herd. Moving behind the herd would have resulted in a paper loss, moving WITH the herd would have involved an actual loss.
Hi John – great video, that’s what selling real estate was like for me: a roller coaster, mostly going up. With all the attendant anxiety.
Arp: good luck!
To the condo guy (no name… make something up, ok?): If the sales price is $176K, factor in condo fee (at least $250/month and we’ll be Pollyannas and say insurance is included in that), plus property tax at 2% which is another $300 a month. Plus something for maintenance, at least $150/month (you only spend this every few years really, but you will spend this much) and you need to rent this for $1,760 + $700 = $2,460 to break even.
You can’t look at advertised rental rates – or, omg, take what the sales agent says you can get. You have to look at the demographics: who are tenants? Mostly worker bees, although in this market you will see more affluent families renting because nothing else makes sense. And look at inventory: 50,000 new condos means 50,000 new tenants (unless there are plans to tear down 50,000 old condos)… are there jobs for these people? Where are they coming from? High inventory means lower prices. If you flood a market with balloons, each balloon lowers in price. No way will these condos get $2,460 a month in rent. And, if you are the landlord, you want more than that to make it worth your while. Otherwise, just put that investment money you were going to buy the condo with in a CD paying 4%…
The opportunities in Miami may be coming, but they are not here yet. That’s my story and I’m sticking with it.
Hi Keith,
All true. You can see the world thru so many lenses and perspective is everthing. But there are certain inalienable facts that are hard to comprehend, the most glaring is the magnitude of the subprime mess. As that unravels – and it’s only just begun – it will surprise us all.
I have realtor friends and past customers all over the world. KY, CA, AZ, NY, NJ, Las Vegas, London, Australia. ALL say their markets are falling.
The U.S. government is SO crooked, they are robbing you of your dollars every single second and you don’t even know it. Every time they print more money, every time they borrow from the Central Bank to buy goods from China, every time they lower the interest rate, they are stealing pennies from YOUR dollar. The glee is not because people are suffering, I don’t believe people getting their just desserts (except pay back for not paying attention), not at all.
We are looking forward to the U.S. government, those thieving politicians, to suffer the consequences of their actions. We will all suffer, too. We believe a big suffering is unavoidable. But this madness has to stop. Libertarians don’t want to see our fellow man suffer. We want the politicians to stop stealing from us! We’ve allowed it to go on so long, like the obedient sheep we’ve become, we can’t fathom the depths of our mistake in doing so.
And their actions hurt every person in every town. The U.S. inflation rate is not 3%, it’s more like 10%. Some say higher.
Many people may have equity in their homes that they’ve owned forever, but you adjust for inflation and the weakened dollar – which may see a bounce but won’t see a recovery, it’s worthless paper and people are starting to wake up to that. So you adjust that equity for today’s value and you will have much less than you planned on.
The other thing is, what good is equity if you can’t tap into it? Hopefully future retirees who own their homes also have savings to live on, because they won’t be able to live on their equity. They will have a place to live and that’s lovely.
There is no glee for me in watching my friends in Key West lose everything. One of the reasons we left was to avoid being right there, hand holding, feeling their pain… My two best friends, who were wealthy in the heights, are losing everything at 50+. Bankrupt. Flat broke. As broke as Hal and I are, we have some savings and are looking for a business to buy. My friends have NOTHING: no savings, no equity, no cars. Just jobs. Hopefully recession proof although I don’t think so.
If you think there is glee in that for me, you are wrong. The glee for me is in looking forward to the scam to end, the scam that allowed this to happen. The scam that allows our government to mess with our money: the more dollars the Fed pumps into the economy – just by printing it up – the less valuable each dollar in existence becomes. Just like balloons, just like tulips, just like houses: the more there are on the market, the less valuable those in existence become. The value of each won’t increase until those in existence are absorbed in the market.
Dear God, I pray the end is near. If anyone but Ron Paul wins, the end will be moved forward in time somewhat. With serious manipulation, it could be prolonged indefinitely… but the U.S. will no longer be the greatest nation on earth. We are teetering on the edge of financial collapse. If we don’t take our medicine and straighten out our dollar and our economy, nothing else will matter.
James, it sounds like you have a good head on your shoulders and are moving ahead without emotion. Congratulations on your excellent choices. But don’t discount us Chicken Littles. The problem is so much bigger than conventional wisdom allows for. Sound reasoning will mean less and less because the entire world is caught up in this debacle.
I tend to agree that you will lose some equity in your property here in the near future. It may or may not recover in your lifetime. As long as you are happy with it and can afford your golden years, more power to you. I wish the same for everyone.
We lost out on some opportunities in Key West because of our inability to stomach the flip scene. But thank goodness we are not caught sitting there now, trying to sell our last flip!
There is overwhelming evidence that the sky is falling. If you don’t believe it after examining the evidence, that’s fine for you. But make sure the reason you don’t believe it is JUST because it’s an extremist viewpoint and you clearly do not tend toward the extreme. We believe this is a time unlike any in history. An extreme moment. We believe the U.S. is already in recession and that things will get much, much worse before they get better.
The only way to survive this as a nation intact and strong is to admit how bad things are and take sound reasonable steps to fix the mess. But if no one acknowledges the mess, if we allow the politicians to keep glossing over it, fixing it with band-aids and short term feel-good fixes… it will come crashing down upon our heads.
Not having a job gives one plenty of time to read the news, don’t you know…
Sorry, Keith, I have to say one more thing. The real estate boom has driven the ENTIRE U.S. economy the last few last years.
Our Key West dentist, also a friend, called us last year to chat. He said his business was suffering because real estate agents and developers stopped getting cosmetic dentistry… This year he’s really suffering.
Not only were agents and developers cash rich the last few years, but architects, construction guys, plumbers, roofers, lenders, appraisers, surveyors, hardware store owners, designers, fluffers (the house kind, not the porn movie kind), painters, paint store owners, gardeners, landscapers… and, by extension, dentists, hairdressers, restaurants (we probably kept Ambrosia afloat all by ourselves), plastic surgeons (they are feeling some pain), travel agents, cruise lines… the list goes on.
The huge incredible wealth generated by the real estate industry touched every segment of the economy. We kept it afloat. Everyone was in the game at some point or another. As houses stop selling, that loss of wealth trickles down through every single economic layer… The boom was so big, so rich, went so deep, the reversal of it will be felt as deeply.
Ok, I’m done. And I haven’t even written a post yet on my two caveats…
Sara, well there were a few that pointed fingers and laughed but you are using common sense and keeping your eyes open. Just remember the puppet masters are in control, they always will be, and they have big plans for us.
the US (and to a lesser degree most other economies) have been adicted for quite a while to ‘easy debt’/’free’ money, by that I mean, offering credit cards to people that don’t even have a job yet (students), no money down loans, interest only loans, adjustable rate loans, home equity loans exploting ‘appreciation of 20% /year or more’, 5 or more credit cards, easy chapter 11 bankrupcy etc etc etc etc
At some point the music has to stop and face the reality that ‘because you can spend money’ doesn’t mean your personal finances are ‘ok’
Well, for the banks the music stopped already, they ‘gave away’ a bunch of $ to people involved in speculation or ‘hoping that they could afford the house in the future and refinance’, and now they hold depreciating assets and a bunch of SIV/CDO’s that are useless since noone would buy them even at discount (noone knows what /if any $ they are worth)
Now the banks are scared to lend $ to each other because they are afraid the other bank might have been as stupid and greedy as they were……and that they might never get repaid the $ they could lend to the other bank. And of course with no $ /depreciating assets the banks need liquidity to survive…so they cry and beg the Fed for $ and lower interest rates.
I can’t wait for the 4th quarter 2008 financials from these ‘financial institutions’ and see how well they did
The puppet master scare the life out of me, another reason I’m glad to be here. Although we are not untouchable here… Hal talks about how the U.S. has exported its inflation and I can’t understand that… but he explains its exactly why the world is not involved in the U.S.’s economic debacle.
Yes, Wolfie, only time will tell. Looking forward the end of 2008 and the financial picture then. Not gleefully. I just want it to be over. Once you see the lie as clearly as we do, you just want it to be over.
The current central banking system has been playing the same game for over 75 years, it didn’t just start with the Bush/Clinton administration. ST you can not use Key West as a barometer for the entire Country. This great real estate boom was not so big in many parts of the country, like the midwest or upstate New York. It was greatly exagerated in places like Key West, Miami, Vegas etc..but one size does not fit all. And not everyone needs to sell there home, many will continue living there you really should’nt be borrowing against your home to begin with, now property taxes that’s another story. I must say I don’t understand how your friends with stable jobs lost everything? The stock market has been on fire for years, as long as you can pay your mortgage you don’t “lose” money when the price of your home drops. I own land at the beach in C.R. and will build a simple mortgage free home in a year or two, about 700sqft. with the hopes of living there someday. My land will be just as beautiful at $35M2 or $10M2. Listen I agree with quite a bit of what you and Hal have to say but as you both know from reading our History the dreams of Jefferson ended a long time ago(early 1800’s?), …The US will most likely never be the Libertarian utopia you dream of, but just as Europa has survived for a thousand years with similar style policies we will as well, they invented the idea of a central bank(Bank of England). Gas has been $5 dollars a gallon in europe for years, they drive tiny cars that get 45mpg, we should all do the same untill the auto makers make the next generation of cars that burn something else…of course they can do this but Americans are a tough sell. Live within your means and learn that happiness should not depend on things…sounds so simple but so hard for most to follow as they are addicted to TV and mucho consumption. I am in the real estate biz so you can understand my anxiety!! I try not to worry about things that may happen in the “future” and have found staying in the now makes for a much saner, happier life. I’m more of a classical liberal than a libertarian…Although I like the idea of collective societies, tribal life etc..it worked for the Native Americans quite nicely.
Blessings,
Keith
Well, for me it comes down to this. Get to know and be close to nature and take the time to understand consciousness and get to know myself.
consciousness on the quantum level which is unexplainable and abstract.
Hi Keith – I hope YOU are right!!!! Meanwhile, I’m trying to live as Laffingbear and you suggest: within my means, in the now… looking out the window now and then and appreciating the beauty all around me. Pura vida!
We must be using different parameters. First, I don’t know why you would need $2400 for a $176k condo? Mortgage comes to $900/month after a 20% downpayment (remember, this is actual money people use to pay to buy real estate?). I factored in $150/month assoc. fee and and another $150/month (maintenance should be lower since its a condo) insurance and maintenance. Taxes are deductible, so I always put this as a wash, but for your sake let’s put it at $100/month. So that takes us to $1300. You can basically have somebody pay for your property by investing that 20% downpayment ($35200). Not a great bargain, but is a decent investment. Like the guy in the video said after an auction, it can move down more but he can live with it. I just don’t see it moving down another 50%. Another way to look at it, you’re exchanging $117/months interest (minus taxes AGAIN) and swapping it for a condo unit that the renters would pay almost everything for you. Good things working for you here is: Rent increases and inflation. Personally, I am not attracted to condos, because of fees, but you could easily use this calculation for SFH. To sum this all up: opportunities are starting to show up, its not going to be plain as day obvious and always has risks attached to it.
A 4% CD is an awful, awful investment because as you said, the gov’t is taking more than that by inflation (you mentioned this). Staying in cash has only been a good investment idea in very short periods of time, unless you have a crystal ball you will never be able to time it. The issue is, the economy is dynamic, things change and we don’t have any control over it. Your dollar is changing, one day it can buy a cheeseburger in the US, the next day it can barely buy you fries in France.
I think the biggest difference in our parameters is that you seem to believe the market is stabilizing and will be moving up from here in the not too distant future. I don’t believe we’ve come close to bottom yet. The time for cash to be king is coming, not past.
Yes, a 4% CD is an awful investment, but no worse to me than buying a condo in Miami. Prices there may not fall 50% again, but they have a ways to go.
The 5 to 7x annual rent formula has been a hard and fast rule in the real estate world for years and years and years. If a house sells for $75,000, you should be able to get rent of $1,000. Only getting $750 a month is still acceptable IF that real estate increases in value. If you stray from this formula, you have no wiggle room. Getting less is very risky.
Your formula is at 10x income, one and half times what experts say is the top of the mark! WWWBP? (What would Warren Buffet pay?) Your formula ONLY works if real estate is going up.
If you are right about everything, you will come out ok, even making a nice little hit. But if you are wrong about one thing, you could lose your shirt.
Inflation works on all money, not just in the bank. It works on your mortgage, it works on your rental income all the while it’s working on your rental price.
If you rent that condo for $1500 a month, you will have $2,400 a year “income.” That’s all you are making on your $35,200 investment which is a 6.8% return. If you have one month empty, that goes down. If you have any unexpected advertising or maintenance costs, that is eaten away. If you can’t rent it for $1500… you are in trouble. For that kind of return, why would you bother in the first place? It’s a big fat headache. I rent property for other people for a living. They pay me 10% of their rental income to do my job. Like maintenance costs, it may not look like I earn it each month, but at the end of the year, I’ve earned it. Advertising, problem solving, interviewing tenants, credit and reference checks, an escrow account…
If the value of your property moves down by 20%, you’ve lost your down payment. If by only 10%, you’ve lost $17,000. Do you see property values stable in Miami or still dropping? Is 20% out of the question?
This investment is too close for me. I want an investment worth my time and energy. I have my money in colones here paying 7% with no headaches. The condo investment giving $200 a month is just too close to the vest for me. Especially in this unstable market.
(Just re-did my calculations – fixed my boo boo up there in the WWWBD line…)
To be in the 5-7x income parameters for a $176,000 purchase, you have to get rent between $2,100 and $2,900. $2,100 would be ok, but you can’t get less and have it be worth your while. Unless you are banking on a good year for real estate prices.
Ugh, the real estate market gives me a massive headache. I’m in the southeastern US, in a city that has been hit fairly hard by the mortgage crisis. I’m also a commercial real estate attorney. Luckily, we have a lot of older, very experienced clients, and they’ve been bankrupt before and learned their lessons. These guys are buying rarely and wisely these days, but they still invest occasionally. We’re still fairly busy with work, though it’s down the last month or so (I say that, but I’m closing a $25 million loan on Monday).
On a personal note, we have a townhome we’re renting at a $200/month loss. Why we ever bought the da*n thing is my question, but what’s done is done. It’s our mess to deal with now. “It’s a big fat headache” is right. At least the rental market is strong in our area b/c people with middle incomes and middle-of-the-road credit can’t get mortgages. We’re going to have that townhome and our brand new house for a few years yet, I have a feeling.
Oh, and way OT Saratica, but I’m trying to find a place to stay near SJO on our arrival night and near Pavas on another night. Any suggestions? I keep hearing Grana Del Oro, but it’s a tad expensive. Do you know of any other places?
Also, if I may, do you know of any good places near Arenal?
Like I said, no investment is risk free. But I can tell you with absolute certainty: your cash is going to lose value. To tackle the figures you gave me: 1) if the property values drop by 20%, I only lose it if I sell. I never sell when things are dropping, only when they’ve reach insanity levels (do the same calculation with the previous sale prices of $325k, yikes). 2) I am always assuming at least a 5 to 10 years timeframe, this wait is buffered by the renters paying for most of my costs. 3) Do you honestly believe that rents will be the same in 10 years, but there’s something that’s guaranteed here, your mortgage will still be the same since its fixed. Inflation here is your friend. There is a reason that the colones pays 7%, its because our local inflation here is over 10%. How can that be a good thing? Its awful.
I haven’t bought any condo in Miami, and I don’t sell RE for a living. I just look at the figures and it is what it is. Some people want a sure fire home run risk free investment, short of something illegal these things are almost non-existent.
All your points are correct. I don’t think rents will be the same in 10 years, but they will follow real estate. I believe they will go up in the short term for the reasons Island Chica mentioned, more renters in the market. The whole question is which direction is the market going to go and for how long. Oh, that I had that crystal ball!
We figure inflation here is about 20% at least. Eggs have tripled in price since we’ve been here. Very discouraging but it’s not like moving somewhere else will solve that… it’s always something!
I’ll bet your $25M is at 5-7x income… There are smart buyers and sellers out there doing business! Good for you. Sorry to hear about your townhome. But at least you have good rentals and a good rental market – that is handy!!!
Grana del Oro is in downtown San José? That is expensive. There is a lovely place in Alajuela: Pura Vida Hotel. I’ve never stayed there but I have a couple of friends who only stay there. I’ve eaten dinner there – Nhi (pronounced knee) is an exceptional cook and Berni her husband is a very interesting man. It’s puravidahotel.com.
Don’t know anyplace in Pavas… but that is close to Escazú and I would try http://www.bedandbreakfastcr.com, it’s a place called Out of Bounds. Have never stayed there but I’ve met the owner and she is lovely, young, energetic. I would definitely give it a try.
At Arenal, I love The Arenal Observatory Lodge. And my friends just stayed at Linda Vista there and loved it. Mediocre food at both places, but you can’t beat the view.
Sara,
There is evidence, although not overwhelming, that we are probably already in a recession in the U.S. However, the sky is still where it is supposed to be. I know that there are a lot of conditions right now which make the perfect storm look plausible but I am unclear as to what exactly that would mean for me should it come to pass. Possible catastrophic economic, political and environmental events seem to loom on the horizon and they always have throughout history but I am not convinced they are probable yet…only possible. I think it is more likely that your own political and philosophical bent is causing a biased interpretation of events. I am suspicious of collective wisdom in extreme times as I believe there is always a deficit of imagination in the world. But that doesn;t mean an extreme conclusion is always justified.
There seems to be something in common in the character of a lot of expats which I have noticed over the last 18 months of reading blogs and message boards from Costa Rica. There is an independent, original and strong, even somewhat rebellious character present in them. It takes that kind of character to get up and leave the familiar for the unfamiliar. I note a lot of libertarians and liberals.( I consider myself far to the left as well) It also takes a good amount of imagination and that is where we have to be cautious because when you are disconnected from the mundane world of making a living, when you have time on your hands to use that imagination, it can get the better of your judgement. I also entertain myself with musings about a world wide pandemic. But I walk in the real world from minute to minute and I try to keep things in a proper perspective. I am not buying gold and I am not stashing cans of food and supplies for disaster. I am watching very closely, though.
This is mostly for you Sara…on a much lighter note…with your good humor I think you would get a laugh out of this #1 Blog in Europe, she is #1… 3 years running and has just put our her own book.
The title of the Blog and the book is “My boyfriend is a Twat”
Lucky for you, there is Hal; but for some of us…not so lucky yet. Just for fun, this is very funny! Check it out.
Take it from someone who is still just rowing to shore after the ship has gone down. Miami real estate has only just begun to take on water and sink. I have no one to blame but myself since I knew damn well that I was paying too much for a home I would have to stay in for at least 7 years when I bought back in 2005. You want to buy a place in Miami? Wait until 2010. That place will be like Filene’s basement on a clearance day. We will recover from our loss and go on smarter than before, but I worry that many will not get over their losses so easily. This real estate disaster is just the tip of the iceberg that may sink the US economy completely.
I don’t understand: If you feel the inflation rate is actually 10%, then shouldn’t rents be going up by 10% too? And the price of real estate? And the cost of materials to build new houses? (which would also force the price of old houses up?)
Hello Mr. Inflation,
I understand the nuts and bolts of inflation when Hal explains it to me. It is extremely complicated and I’ll bet you don’t understand it either. Stroll on over to http://www.doscolones.com and have an echat with Jon about inflation. He’s got a good grip on it. I know that because he and Hal sound alike on the topic. I asked Hal to answer you. Here’s what he said:
“Inflation doesn’t spread evenly over the economy. Overall it can be 10% but in some sectors prices could still fall. Inflation tends to be prominent in markets where productivity doesn’t matter, government services, for instance. Inflation is less prevalent, but a major factor in highly regulated or price controlled markets, medical care, for example. It is least effective where there is little regulation and modern productivity and market forces can counter it, consumer electronics and software, for example. An interesting example of where high regulation still hasn’t overcome productivity increases is cars. Their inflation adjusted price has fallen despite heavy regulations because manufacturing has become so efficient. (and often done outside the US)
Market forces work on prices at the same time inflation does, but not always in the same direction. It’s true that inflation will effect building materials but will tend to be countered by falling demand for them in a glutted housing market.
The market is also trying mightily to clear lots and lots of very bad loans against real estate. As that money disappears, prices will tend to fall. Money is borrowed into existence. When loans go bad the money disappears. It’s the opposite of inflation and has the opposite effect. It was newly created paper that inflated the bubble. It’s vanishing paper that will deflate it.
The same is true for rents. The oversupply of units will work against increasing costs of maintenance, insurance and taxes. It’s hard to say how the tug of war will work out, but there is a substantial oversupply of housing, particularly in the previously bubble markets, that will have to return to prices that correspond with people’s income before prices stabilize and continue marching up in lock step with basic inflation.”
I have no idea what he said.
Chris,
There is also another point of view which states that Miami real estate has historically been undervalued compared to the north east and California and the recent boom brought Miami closer its proper value compared to values of those areas. There are good reasons for this point of view too; Miami has a better climate than the other two regions and we have better employment. Additionally, foreign investors as well as retirees maintain an interest in buying here; foreigners for investment and retirees for their place in the sun. Miami is particularly of interest to South American investors because of our heavy latin flavor and commonly spoken spanish.
Nobody can say with any certainty what the Miami real estate scenario will be in 2010. There is an imperative for many to guess because money never stands still. It is always on the move looking for a place to park and if it cannot park in domestic real estate, then that only leaves the stock market or foreign real estate or languishing in a savings account. Foreign real estate is not for the faint of heart or the ignorant and the stock market is looking more and more like it will tank and stay down for a bit. So where does the money go? I am betting that much of the money will park in CD’s and annuities and money market accounts for the next 6 months to two years or however long this recession lasts…. and then,
either the stocks will pick up or real estate will. If it is real estate, Miami house values may be back to where they were in 2005 within 5 years. Assume values fall 30% by the end of 2008 and then a normal rise pace of about 3.5% per year. That would be an net fall of about 15% from 2006 values by 2012.
Of course, if dooms day happens and we have a world wide economic melt down combined with apocalyptic climate change disasters, then all bets are off and you better dust off your evacuation plans. Having a few farm acres in the Costa Rican central valley would be a good investment if you believe in that scenario.
If you feel the inflation rate is actually 10%, then shouldn’t rents be going up by 10% too? And the price of real estate? And the cost of materials to build new houses? (which would also force the price of old houses up?)
EXACTLY! The thing is, it takes a while for inflation to propagate throughout all aspects of the economy. I will take RE (since thats the hot topic) as an example. Inflation might not creep up on rents since other factors affects it, such as amount of rentals available or even affordability. But eventually, it will get into the cost of rents. This is the reason you don’t see everything jump the same amount, sometimes eggs would jump 20%, but other staples maybe just 10%. But eventually, you know where prices will be going, and that’s up.
Always just go by your own drum beat, when everyone was saying RE “never goes down”, if you did your math you’d see there was a huge disconnect in the prices. But now the same people who got caught up in the mania are saying “WAIT, this is just the tip of the iceberg”, always just go back to basic math and see. If you plan to flip a house, yes don’t buy. If you can wait things out a bit (LIKE HOW IT ALWAYS USED TO BE), you can start checking out prices. I think there’s opportunities out there already, maybe ’08-’09 will have even more. Just write a small excel macro spreadsheet and when you see something, plug in the values and see for your self.
NN, I think there are opportunities out there now, too, and doing the math is critical. My math will be different from yours because I’ll be using “tip of the iceberg” formulas… BTW, I never said “re never goes down”. I kept doing the 30%-per-year-increase in house values math that everyone kept promising, then didn’t see that many millionaires around me. Even with inflation.
Jon Markman wrote an interesting article for The Street.com entitled ” The Credit Crisis Could Be Just Beginning.” Here he explores the credit crisis as separate and distinct from the mortgage crisis. I bit scary but worth ( IMO) a read and consideration. The mortgage problem may be just the bottom card in the house of cards.
http://www.thestreet.com/newsanalysis/investing/10380613.html
Well, I guess this would be more pink volkswagons for me… but it’s pretty compelling. Das is definitely Rhodes Scholar material. Thank you!