A lot of people having been asking me about Colombian real estate following the election of Gustavo Petro.
I spent quite a lot of time in Colombia last year exploring real estate and immigration opportunities.
Overall my take was that Medellin was very interesting as it’s cheap, offers a great lifestyle, and the rental yields in some segments can be very high (analysis here)
Bogota on the other hand seemed to be suffering from oversupply, higher prices, and low rental yields. (analysis here)
And Cali offered amazing deals for entire buildings in prime areas that could yield very high numbers (analysis here)
I always made it clear that the single biggest risk at the time was the coming presidential elections, which took place in June.
Unfortunately for foreign investors, the Colombian people elected a hardcore socialist – Gustavo Petro.
He is a former communist guerilla fighter, former mayor of Bogota, and has now made it to the top position in the country. Some of his rhetoric during the campaign was quite alarming, such as wanting to ban all further exploration by oil companies, though Colombia is extremely dependent on the extractive industry for its current account balance, as well as its fiscal position.
Crude oil currently accounts for about 42% of total exports, while coal – which Petro has also promised to phase out – comprises 14%.
Has Colombian real estate become uninvestable because of Gustavo Petro?
Before this, all indicators were green for cities such as Cali and Medellin. The reality is that real estate prices are very low, there are barely any mortgages in the market, so the potential downside is relatively limited.
It’s important to understand that Gustavo Petro had to form a coalition with more centrist parties to obtain a majority in parliament, which could slow him down. Also, most institutions in the country are not in his favour.
This doesn’t mean he won’t manage to achieve stupid things. Socialist politicians can generally be trusted to do so.
But what I do know, is that in the next few years, his policies are unlikely to have a strong negative impact on tourism in Colombia, which is the source of such high rental yields in Cali and Medellin. Real estate is objectively cheap in absolute terms in these two cities, you can earn high single-digit rental yields and in some cases double-digit yields, which massively protects your overall downside risk.
In a world of rising interest rates across the Western world, there are worst places to invest your money than in a country with little leverage in the housing market, lots of commodities, and in a currency that recently took a hit due to this election.
Also, if you invest some amounts of money in Colombian real estate you can obtain a long term visa. It’s still a decent deal overall. So, no Colombia has not become uninvestable.
But Colombia has become less attractive than it used to be
He’ll do damage. The question is how much and how soon. In many ways he is no more of a socialist than many Western politicians. However, the overall economic and fiscal position of Colombia is weaker, so the country is less likely to withstand bad policies. I’m going to repeat the point that his single biggest mistake would be to make Colombia unattractive to the mining, oil, and coal industries.
If he were to make strong moves against these industries apart from just rhetoric, I’d stay away.
The key, as always, is position sizing
If you plan on living there for part of the year and require a long-term visa, it still makes sense. If you are a HNWI and want a high-yielding, lovely place in Medellin for $200,000, then sure, why not. You wouldn’t be too exposed.
But for people who don’t have too many other assets, I would say that this is probably too high on the risk curve.
I had a great conversation with my friend Patrick who has done dozens of deals in Colombia over the years
In this short video, he shared some of his key learnings with regards to investing in real estate in Colombia. He lives full time in Cali and helps foreign investors enter the high-yielding Cali market (email@example.com).
Gustavo Petro or no Gustavo Petro, Cali real estate is dirt cheap and offers high yields
I wrote this analysis on the real estate market in Cali here.
If you want to get in touch with Patrick feel free to send him an email. It is in the description of the Youtube video and in the Cali real estate article.
To a World of Opportunities,
The Wandering Investor
Much more content…
Other articles on Colombia:
- Making a Real Estate Investment in Medellin, Colombia – unusually high yields
- Is it too early to make a Real Estate Investment in Bogota, Colombia?
- Actual Capitalization Rates / Rental yields in Medellin
- Penthouse Investing with High Yields in Medellin
- $100,000 investment house in Medellin, Colombia
- Making a Real Estate Investment in Cali, Colombia – the next frontier?
- Double-digit yields in Bogota for Airbnb multifamily units
- 12% net capitalization rate and rental yield in Cali, Colombia
- Afternoon trip to a Finca for sale near Medellin – with ROI numbers
Other services in Colombia:
- Real Estate Lawyer in Colombia
- How to obtain residency in Colombia
- My favourite real estate agent in Medellin
- My favourite real estate agent in Bogota
If you want to read more such articles on other real estate markets in the world, go to the bottom of my International Real Estate Services page.
If you want to discuss your internationalization and diversification plans, book a consulting session* or send me an email.
Full transcript of “Learnings from a Real Estate Investor in Colombia”
LADISLAS MAURICE: Hello, everyone. Ladislas Maurice from thewanderinginvestor.com. So today, I’m in Cali, in Colombia, with Patrick. Patrick, how are you?
PATRICK SPANFELNER: Good. Thank you for coming, visiting me.
LADISLAS MAURICE: Fantastic. So Patrick has been based here in Cali for the last eight years, and he helps foreign investors get into the Cali market. Today, we’re going to be discussing some of the key learnings that he acquired over these eight years of doing real estate deals in Colombia. And then we’ll discuss the strata system, which is quite unique to Colombian real estate.
PATRICK SPANFELNER: Yeah.
How Patrick got scammed once when buying real estate in Colombia
LADISLAS MAURICE: So, Patrick, tell us about some of the key learnings that you acquired, probably, painfully over these eight years.
PATRICK SPANFELNER: (laughing) Yeah, quite painfully, meaning that probably been in more than 30, 40 real estate transactions by now. Some have been small, some have been big. But one of the most painful ones, I think I told you already, was when we basically lost a huge chunk of our net worth buying a lot here, and we got scammed. It was a guy with a fake ID, who sold a property that didn’t belong to him. And now, six years later, that property is still in our name, but it’s just held up in court, it’s been going on for six years. The legal system here is very, very slow. So the best thing you can do is stay out of it, basically. But there are certain things that would prevent this from ever happening again, meaning that today versus that there’s a digital fingerprint recognition system that verifies that the seller and the buyer is really that person that they pretend to be.
So back in the day, when I signed, this was back in 2014, it was just basically dipping your finger in ink, and then the notary public signed off that, yes, Patrick, you were standing here, you signed in front of me. But you could do that with a fake ID.
LADISLAS MAURICE: And didn’t your lawyer notice it? Is that something he could have prevented, or is it just the sort of fraud with fake IDs, fake documents, you can’t really do that much about it?
PATRICK SPANFELNER: Yeah. I mean, I’d say they closed that loophole for now. But back in the day, that’s just the way it was. And I talked to the notary public, when that happened, to say, “Isn’t that your job to verify that the person who’s signing is actually that person?” He said, “Yeah. You’ve got to understand that the system is based on the good faith of the people.” So that was a really, really vague and disappointing reply. So yeah, lesson learned, for sure. But like I said, the government did take action, and not necessarily because of me but because it happened a lot. And now it’s impossible to do the fake fingerprint. But these guys were very organized. I mean, they opened a bank account with a fake ID and cashed the check with the fake ID, everything. So they were definitely not– it wasn’t their first rodeo, so to speak.
LADISLAS MAURICE: What are some other things to watch out for when you purchase a property here?
PATRICK SPANFELNER: I mean, I think one very important thing is you want to do a title study, and you want to do it with a good lawyer. And the reason is that there’s been so much money laundering going on in this country for so long that a lot of these properties either are owned or have been owned by people that have been involved in drug trade and so forth. And what happens is that you can buy it, but you can probably never sell that property again, because a Colombian will never want to own it. And one of the reasons is that they’re scared that even if this drug lord might be in jail, he’d come out one day, and he would want to get his property back, and he will get it at force. And that has happened. And even if he is dead, maybe some of his relatives are still in that industry, and they would want to recover family property and so forth.
LADISLAS MAURICE: And unless you take a good lawyer, I’m pretty sure no one in the transaction will tell you that, right?
PATRICK SPANFELNER: They try to not admit it, you know? They have something here called the Clinton List, which is a document, it’s probably several hundred pages with the names of all the people that you should avoid buying from. So that’s one of the things that the lawyer does, they verify that the history of the property and make sure that there’s been no sketchy people involved in that transaction. It’s a very important concept here to have clean money. And they do it by having a good lawyer to verify that everything’s okay. Other than that, I think you need to work with professionals. This is a country of bureaucracy. This is a country where you can spend your whole day or your whole life, basically, doing loops around the city trying to figure out–
LADISLAS MAURICE: It’s so bad.
PATRICK SPANFELNER: –you know, navigating red tape, basically. And you, definitely, want to avoid that. So one of the first times where I signed to buy a property, I didn’t trust the messenger at the notary to do this trip to the title office to register it. So I went by myself, and that was six hours waiting in line. And then you pay somebody 10, 15 bucks to take care of that, in dollars. So, definitely, go with that.
LADISLAS MAURICE: Don’t be cheap.
On using good architects in Colombia
PATRICK SPANFELNER: Go with good architects, if you’re planning to get a construction license, somebody who knows how to navigate the zoning. Because if not, it could just be an endless paper hell and bureaucracy going through the permitting.
LADISLAS MAURICE: Yeah. Because we were looking at one of your projects, one of your clients have bought a large essentially thousand-square-meter building with seven apartments, and you’re renovating all of them. It’s a $1.2 million project. How’s the paperwork? Like how complex is it managing a process like this?
PATRICK SPANFELNER: The licensing process or the purchase?
LADISLAS MAURICE: The licensing process.
PATRICK SPANFELNER: I have three architects that I work with. So I have one that I really like. He’s from Medellín, and he designs very well, but he doesn’t know the local zoning, and every single city is different. So I actually pay another architect from Cali here, who used to work at the zoning office for 15 years, to oversee the process, and he corrects him and says, “Okay, you need to have, you know, a fire escape on this side, you need to have an extinguisher here, you need to make sure that all rooms have ventilation, you need to make sure–,” he comes with all these pointers.
And so I’m actually paying two architects in order to get this done. I could work with a local one, but I really trust this guy, and I know what he’s doing. And he’s very good at adjusting the design for our market, meaning that he knows what the foreigners want. And we rent furnished to foreigners. And that’s what he’s been basically designing for the last six or eight years. So I worked with him. And also their fees are very, very low. So the architect that I work with charges about $2 a square meter, just if it’s a light design, and if it’s a complete construction from scratch, it’s about $5, $6 a square meter, which is very, very affordable if you take it into consideration.
LADISLAS MAURICE: Yeah, it is.
PATRICK SPANFELNER: And then it’s just better to have that, and then I don’t have to worry about it.
Real Estate renovations costs per square meter in Colombia
LADISLAS MAURICE: And how much are renovation costs per square meter?
PATRICK SPANFELNER: If you do a light renovation, you can do it for about maybe $200 a square meter. And if you want to do more extensive renovation, where you change all the plumbing, all the electrical, the ceilings, the roof, the windows, well, then you can spend up to maybe $400 a square meter, if you want to go really all in.
About the strata system in Colombia
LADISLAS MAURICE: And can you tell us about the strata system, because when you come here to Colombia, and you start looking at real estate, one of the key things is which strata is this property located in. And it’s essentially six zones. I’ll let you elaborate on this.
PATRICK SPANFELNER: Okay. The strata system is essentially socialism in the works. It means that every single neighborhood and every single property is categorized from 1 to 6, 1 being low income, and 6 being high end. And what happens is that it affects everything from your utility bill, your internet bill, your property taxes, and so forth. And usually, I mean, you would be able to see, if you’re looking at something that looks like a slum, it’s usually 1 or 2, and then 3 or 4 is middle class, and then 5 or 6 is high end. The people that are in 5 and 6 are essentially subsidizing the ones that are living in strata 1 and 2. So it’s socialism in the works. And 3 or 4 are paying more or less the market rate for water, electricity, Internet, and so forth. And also the notary expenses and so forth. Everything gets adjusted based on the strata system.
And also, for instance, if you want to go to university, you come from a low income family, then you need to demonstrate that you come from a low income neighborhood, a low strata. Barrio, so to say. I think there’s one important lesson that we learned, especially right now, if you want to do short-term rentals, you’re better off owning either houses, individual houses where the zoning allows for vacation rentals, or you buy whole buildings. Because if you’re planning to buy a nice unit in a gated condominium with a swimming pool and a gym, and it looks amazing on Airbnb, but the homeowners association is not going to allow you to do short-term rentals, which is a very important fact because I think most people realize these days that you just have a way higher return on investment if you’re allowed to do the short-term furnished rentals.
Financial aspects of investing in real estate in Colombia
LADISLAS MAURICE: For sure. Yeah, the numbers are quite interesting here, actually. And, yeah, the long-term market gives very low yields, normal long-term local market. If people stopped paying, as a landlord, to legally get these people out of the apartment, how long does this take?
PATRICK SPANFELNER: I haven’t been in that process but I’ve heard it’s complicated. You better not even reaching that point. And I don’t rent anything to locals, basically. Of course, we have some Airbnb guests that come from Bogota, and Cartagena, and Barranquilla, and Medellín, and so forth, but they’re all short-term contracts, basically. So we’ve never had any issues with them. And also, the good thing when you go through Airbnb is Airbnb has their credit card on file. Usually, Airbnb has a really good customer service, and they help you in the event that you have any sort of dispute with the guests or so forth. Also, when you have a permit to rent to tourists, then you could also actually call the tourism police and they will come and help you vacate if you have problematic guests. It’s not the same as having a long-term contract.
LADISLAS MAURICE: Okay, fascinating. Let’s talk about the financial aspects related to transactions here in Colombia. We were chatting, yesterday, that the process to get money in and out of Colombia is quite complicated. It’s very doable, but it’s quite complicated. And there’s a number of taxes along the way. Can you talk about this topic?
PATRICK SPANFELNER: Yeah. So if you want to bring money into Colombia, the first thing you got to do is have a bank account here. And that can be quite hard if you don’t have a local ID. So we worked with a company called Alianza, which is basically a brokerage. They have investment funds and projects, but they will allow you to open an account just for the passport. They don’t give you a debit card, but you get access to a portal where you can do payments and so forth. And the other thing is working with them, you essentially get a private banker that helps– you have your advisor that’s on top of everything that you do. And you have her email, you have her WhatsApp, and it’s easy communication.
If you go down and stand in line at any bank, you might get lucky. There’s a couple of banks that allow you to open an account with just a passport, but you get treated like cattle, you get to stand in line for hours, and it’s just a very, very long process. But also, if you’re bringing in a large amount of money, Alianza has investment projects where you can park your money and earn, it used to be up to 8% interest a year.
LADISLAS MAURICE: In pesos.
PATRICK SPANFELNER: In pesos. Now it’s a little bit lower, about 3% to 4%. But still, if you’re just parking your money, and you’re doing a million-dollar project, and you’re pulling out the money slowly, it’s good to create some sort of yield share type.
LADISLAS MAURICE: And there’s a financial transaction tax as well.
PATRICK SPANFELNER: That was the next thing. Yes, there is a tax here, they call it 4 for 1,000. So every single time you move more than $1,000 in your bank account, you pay $4 to the government. It doesn’t affect the lowest income families, because you need to have at least two, two-and-a-half thousand dollars’ worth of movements in your account before it sets in. But all companies pay it. And as an investor, when you bring in the money, not bring it in, but when you pull it out of Alianza. So whether you get a check or you wire money to the seller, whatever it is you’re doing, Alianza will automatically deduct that tax from your account. So that’s the transaction cost that people need to have in mind, it’s about 0.4%. And the same thing goes when you’re bringing money in, Alianza, or a bank, would usually charge you anywhere from 0.4% to 0.5% in the conversion.
LADISLAS MAURICE: If you’re interested in the Cali market here in real estate, there’s a link below in the description with an analysis of the real estate market here in Cali. It’s actually one of the highest yielding markets in Colombia. Patrick’s contact information is also below (firstname.lastname@example.org). So, if you’re in need of a buyer’s agent for real estate deals here in Cali, you can just get in touch with him.
PATRICK SPANFELNER: Okay.
LADISLAS MAURICE: So Patrick, thank you very much for your time today. It was a real pleasure. Cheers.