Real Estate in Colombia vs the US: Where to invest?
As a real estate investor for over 15 years, I can’t help but analyze and compare markets everywhere I go, and living in Medellin, Colombia is no exception. Right now I’ll be comparing investing in the USA and Colombia and giving my breakdown on which market I prefer and why.
I currently own a multi-million dollar real estate portfolio that is concentrated in the USA with some properties in Italy and Brazil. My personal goal is to build out a portfolio that spans 12 cities throughout the world with a market value of over $100,000,000. Now that I’m living in Medellin I have been eyeing the market for opportunities to add to my portfolio.
My core strategy for real estate investing is the BRRR method, so before we get into analyzing the markets let me tell you what this method is about to see if it can be applied here in Colombia.
The BRRR method — does it work in Colombia?
For those of you who are not familiar with that term, the BRRR method stands for:
- B for buying
- R for renovating or repairing
- R for renting the property
- R for refinance
- Some people add another R for repeat
That is an excellent way for accumulating a large portfolio of property because what you’re doing is that you’re investing in a single property, raising the value by making improvements, you’re also renting that out so that you’re generating cash flow and income on the property, and the refinance allows you to either take out your initial investment or restructure your debt so that your payments are lower.
You can even take out more than you put into the property so that you have more money to invest in more deals. Ideally, if you have more money after that refinance process you should absolutely repeat that process.
From what I gathered the BRRR method will not work in Colombia for two critical reasons: the inadequate lending facilities that are available here, and the low rental rates. Let me explain.
Lending in the US vs. Colombia
In the US, the market is entirely different mainly because of how readily available capital is for real estate purchases. In Colombia and in many other places in the world that’s just not the case.
Right now in the US you can get a mortgage anywhere from about 2.5% to maybe 6% as far as your annual rate of interest is concerned. In Colombia it’s 15 to 18% of annual interest, amortized over 5 to 15 years.
When you compare the typical loan terms, in the United States you’re getting much more money a lot cheaper with less down payment requirements, less requirements for approval and you’re getting control of much more real estate in comparison to what you could get in Colombia.
Additionally as a foreigner in Colombia, I can’t get a mortgage, I have to become a Colombian resident or marry a Colombian. In the US it’s a whole different ball game when it comes to the availability of capital to do this sort of investing. So right off the bat that’s one of the principal differences between investing in these two markets. Here in Colombia you’re gonna have to focus on what you can buy with cash, because refinancing with the BRRR method just isn’t gonna work out.
Rental rates in the US vs. Colombia
When it comes to rental rates that’s a whole different situation.
Another huge difference between the market in Colombia and in the US is what you can get for rent. In the US, it’s not uncommon to rent properties for $2,000-3,000/month. In most major cities that could be apartment buildings or even smaller single family homes.
However, in Medellin, Colombia, somebody could get a three-bedroom apartment in one of the best neighborhoods in town and pay anywhere from $600 to $900 a month. By comparison, if you were to look at a city like New York, for the same sort of property you’re easily paying $5,000 a month.
Since wages here in Colombia are fairly low, they can’t gut people for more than what they’re making per month to afford their rents, and by comparison wages are on average higher in the US, so a percentage of those wages are acceptable to be paid towards your housing expenses.
If somebody was making $5,000/month in the US they might be looking for rental rates in the $1,500-2,000/month range. Here in Colombia, somebody might be making $900/month and because of that they’re going to be looking at renting properties for maybe $400/month just so they have enough capital to live their life and spend on other things.
Best investments in Colombia: Rent-to-rent
In a YouTube video where I covered this topic I gave an overview of two similar investments in the US and Colombia to compare the markets and profits.
A property that I bought in NY for $120,000, is rented for $1,700/month and makes me about $1,200 each month. By comparison, a $150,000 property in Medellin can be rented for only about $900, and that’s on the high-side.
You can watch the video to get the full overview of each property:
As you can see, applying the BRRR method to invest in Colombia just doesn’t make sense. The only investment I would make here would be in real estate that is positioned for use as a high-end vacation rentals and even then I would most likely utilize a rent-to-rent strategy.
What this strategy essentially is, is you renting a property and re-renting it to a third party at some sort of increased rate compared to what you’re paying for it. This works particularly well with office spaces and Airbnb rentals.
When I look at a market like Colombia’s where mortgages just don’t make sense and rent is so low, I would employ a rent-to-rent strategy and make the spread between what I’m paying for the property and what I’m re-renting it out for. Although you don’t own the property, you can still make a boatload of money.
Invest and learn with me
So my general approach in Colombia is going to be taking out long-term rentals on properties (10 years or so) and then improving those properties — improvements that aren’t going to be that expensive since wages are so low.
Then I’ll be renting it out to foreigners on Airbnb, mainly because foreigners are going to be used to paying in US dollars or in Euros so the cost to vacation here isn’t really a burden for them. For them to pay $100 a night per room is actually a discount compared to what they would pay in other large world cities.
Right now I’m piecing together deals that are focused on vacation rentals in prime sections of Medellin and Cartagena in Colombia. If you’re interested in joining this deal, I’m opening it up to members of my real estate investing course and anyone else who’s interested in investing alongside me.
To participate in these deals you can reach out to me at firstname.lastname@example.org, making sure that you use the subject line “Invest and learn”; let me know what sort of opportunities you’re looking for and how much you’re looking to invest. I hope to hear from you!