Adding Value to Real Estate

Build Investment Portfolio – Costa Rica Real Estate FAQs.

Is it better to build a house or buy a turnkey home when considering rental income?

It really depends on the investor’s strategy. If you build a house in Costa Rica without any major issues, you could be looking at a smart financial decision. You could save up to 30 percent from the final asking price on a turnkey home. 

Needless to say, building a house or commercial building in Costa Rica has a steep learning curve if you’re doing it for the first time. I recommend surrounding yourself with a strong team of architects and civil engineers and learn the process. 

On the other hand, buying a house allows you to start receiving rental income right away, which speeds up the return-on-investment timeline. However, you may encounter infrastructure issues along the way by not being involved in the building process.

Should I structure my properties with debt or equity?

Most people start their investment experience with debt and move towards equity as their assets start paying off. Debt can be a really useful instrument if used properly under the right circumstances. It can also be an investor’s worst nightmare if interest rates rise and the portfolio is overleveraged. When using debt to acquire a property, always ask yourself “what if?” What if my property is empty with no tenants? What if interest rates go up? What if my operating expenses rise? These are just some questions to help you run a financial stress scenario and let you know how elastic your portfolio is.

Can I create my portfolio with other partners?

For sure. The easiest way to do it is by creating a corporation (Sociedad Anónima). This will be the owner of properties that you acquire with your partners. Each partner owns a number of shares depending on the capital invested on those particular assets. It’s important to have a written agreement among the partners underlying different scenarios that will occur in the future, including asset selling prices, share purchase agreements among partners, external share purchases and managing fees.

How do I measure my real estate portfolio’s performance?

Hundreds of financial ratios may be used to compare the performance of different portfolios. Also, property location and the current economic environment may be deciding factors. Capitalization (cap) rate is one of the main ratios to consider when analyzing a property.

Cap rate is the annual net operating income (NOI) divided by the property’s purchase price. This ratio allows the investor to forecast the cash inflows derived from rentals. For example: if a house purchased for $100,000 during that year received $10,000 of NOI (rental totals minus operating expenses), the cap rate would be 10 percent. A cap rate of 10 percent to 15 percent is considered very good in Guanacaste with current market conditions.

When is the right time to make changes in my portfolio?

Changes will derive from three major points: economic variations where the properties are located, opportunities to strengthen the portfolio and overall strategy variations. There can be long periods where no changes occur and you hold on current positions. At other times, fast, well-thought decisions can make a huge difference on the financial returns and structure of your portfolio. A good investor is always analyzing the main variables in the market and making decisions accordingly.