As part of this analysis on making a real estate investment in Medellin, Colombia, we’ll look into the following topics:
- The macroeconomic environment in Colombia
- The real estate market in Medellin
- In which neighbourhoods to make a real estate investment in Medellin, Colombia
- An example with exact rental yield calculations and all assumptions
- Real estate related taxes in Colombia
- Obtaining residency through real estate ownership in Colombia
I am spending a month in Colombia to investigate investment opportunities. This article is part of my intellectual exercise to gain a better macro-understanding of the country’s economic situation, and outlook.
To be fair, I started off my trip in the Amazon. So only after having hung out with my monkey friends and taking a few naps did I head out to dig deep into investments.
And then nap 1 and nap 2
Colombia is consistently at the top of various Latin American rankings
So far so good. Colombia is one of Latin America’s freest economies, in a generally business-unfriendly region. Overall, we can talk of relative economic freedom.
Colombia boasts attractive demographics for investors
In spite of a fertility rate below replacement level (1.8 per woman), Colombia has an appealing demographic curve due to past fertility rates, which will result in the population expanding over the next 30 years.
A growing population is a key driver of growth. Also, Colombia is a magnet for immigration thanks to easy residency options. The country currently has almost 2 million socialism-fleeing Venezuelans living within its borders.
Similar to most of Latin America – a relatively unsophisticated economy
In spite of being of one Latin America’s freest economies, with a local market of over 51 million people, and with access to both the Caribbean and the Pacific, Colombia’s export profile is relatively primitive. It essentially pulls things out of the ground and exports them, with minimal local value creation. Add tourism, and these are the main exports.
Non-commodities exports are growing fast, which is great. However, if you are of the view that we are on the cusp of a commodities bull market, I don’t mind seeing such a commodities-heavy export profile. It does point to a potentially very cyclical economy though. Additionally, the lack of CAPEX in the oil industry in the last few years is visible in its production numbers.
Are we at the top or the bottom of this cyclical economy?
A key export, energy, is likely to do very well
On the one hand, commodities have started doing well, and we are likely to see a worldwide structural deficit in oil production which should lead to much higher energy prices. Seeing that over 50% of Colombia’s exports are energy, this should be very growth-positive.
A boom in energy prices would solve Colombia’s persistent current account deficit, because let’s face it, the current account deficit has not been covered by growing FDI.
If anything, Colombia has managed to achieve a decrease in FDI.
Colombia has been financing itself through external debt
A lot of the debt seems to be held by the government
Luckily, most of the government debt is held locally, but the amount of foreign currency, and externally-held debt has been growing.
Is Colombia going to hit a wall?
If Colombia were to continue on its current path, it would face issues. A persistent current account deficit, growing government debt, declining FDI, and a refugee crisis. The only way out of it would be through radical, free market structural reforms to attract FDI and take advantage of its natural resources and great geographic location.
But there haven’t been many reforms. And let’s not forget that Colombia has been particularly peaceful in the past few years, as many guerillas and paramilitary groups signed peace deals with the government. Yet, FDI did not flow in.
There are deep social issues in Colombia
I won’t talk about the various internal conflicts with guerillas and paramilitaries that keep popping up, but will just focus on the social side of things. Throughout 2021 there were massive, violent and violently-suppressed protests across the country.
People want jobs, better services, and better security.
One of the key Colombia risks are the upcoming 2022 presidential elections. Hard-left candidate Petro is polling really well, and his opponent will be from the center / center-right.
A Petro victory would be bearish for Colombia as he is similar in many ways to Peru’s Castillo. This being said, it is unlikely he would win congress as well, so governing would be an issue. Most likely, no reforms would take place until he is replaced at the next elections. It would probably be possible to contain the damage, but certainly wouldn’t lead to a local economic boom.
A continuity vote for the center / center-right would mean gradual (albeit too slow) reforms and moving forward on the current path.
The coming commodities boom will most likely be used to buy peace
The government is unlikely to fully implement the needed, structural reforms, especially if it receives a windfall from the commodities bull market. The money will most likely be spent to stabilize the growing external debt, and to buy peace internally.
The commodities bull market will not be as exciting as it should be, due to declining petroleum production, itself due to declining CAPEX in the industry.
So is Colombia a good investment?
Looking at it purely from a macro point of view, and not digging into the specific asset classes:
- If the commodities bull market does not materialize, I see too many headwinds, and not enough tailwinds.
- If the commodities bull market happens, the inflow of cash will cover a lot of the issues in the short and medium term.
- The government should use this opportunity to implement structural reforms, which may or may not happen. Realistically, some will take place but not enough.
- This looks to me like a market that I would not want to be overweight. However, it is a very interesting diversification play away from the geopolitical hotspots of the West, the Middle East, and Asia.
- In the current day & age, I want geopolitical diversification. Colombia offers this, with attractive rental yields if one invests in real estate in Medellin and in some cases Cali.
- Therefore, how to play this market?
The first objective is to find an investment that will not just beat currency depreciation, but also bring attractive returns in hard currency equivalent
This chart of the Colombian peso is what your investments will be racing against, and hopefully be exceeding.
The local stock market does not appear to have been a great hedge against currency depreciation
There are obviously out-performers in there, but as a whole the Colombian stock market has been a disappointment. I’ll want to dig into this to understand whether there is potential upside after years of under-performance. Is making a real estate investment in Medellin, Colombia, a better option?
Why make a real estate investment in Medellin, Colombia?
Though Bogota is the capital city, Medellin, Colombia’s second city, is by far people’s favourite place to live in and visit. Its 2.5 million inhabitants are blessed with “eternal spring” weather which almost never requires one to wear a sweater, nor to use indoor heating and air conditioning.
The city has a seen a true surge in foreign tourism thanks to sharp marketing, a unique lifestyle, and affordability.
Not only is the city itself very pleasant with a wide variety of dining and drinking options, but the surroundings are known to be breathtaking as well.
Medellin, Colombia, has a strong, diversified economy, which is a huge plus to make a real estate investment
Medellin is not just about tourism. When you walk around Medellin you can tell that the city does not cater exclusively to tourists unlike Cartagena. The locals go about their lives in various industries.
There are many mines in the area surrounding Medellin, and the city has been successful at attracting foreign FDI in the tech space. It has even been dubbed the “Software Valley“.
This Newsweek article explains how Medellin has become one of the world’s first “smart cities”.
The real estate investment investment market in Medellin, Colombia
Between 2011 and 2018, real estate prices grew 85% in Colombian Pesos (COP), which is comparable with Cali (86% growth) and Bogota (80% growth). Prices were flat in 2020 and started growing again in 2021. Thus far, prices in USD over time have been relatively stable. Prices go up in COP, but not so much in USD. The play up to now has been yield, rather than USD capital gains.
The average price per square meter in Medellin currently stands at 4.1 million COP, which is roughly $1,000 per m2. Smaller units (below 80m2) command a premium.
The local market is relatively uninteresting. When speaking to agents and checking prices online, it becomes clear that gross rental yields, on the long term, unfurnished, local market stand at about 4-5%. The real money is to be made by renting to foreigners.
I generally dislike targeting foreigners, as it is a market that is more fickle
Destinations are cool one day, and then not so much a few years later. Or people realize the opportunity and the segment quickly becomes overcrowded, thus depressing yields. This is extremely common in markets where agents tell you to target “embassies” and “diplomatic” staff.
However, in Medellin’s case, I am bullish this segment.
American digital nomads will be the driving force for strong real estate rental yields in Medellin
The reality is that a few hours flight away from Colombia is a massive market of high-earning Americans who simultaneously realized a few things:
- They can work almost entirely remotely.
- They can work from abroad, thus leaving behind an increasingly toxic environment. This perception of toxicity applies to Americans of all political stripes.
- They can live a cheaper, nicer life abroad and in many cases can save on taxes if structured properly (feel free to get in touch with my tax consultants here)
Millions of Americans have either reached these conclusions, or will soon.
Americans have high standards for housing, can afford it, and don’t mind paying
I don’t mean to come across as rude, but I need to make a clear comparison between European digital nomads and American ones. I don’t have exact data to back it up, but rather many data points from having met hundreds of digital nomads as I travel around the world. People like to open up to me about their personal finances :).
European digital nomads typically earn €2,500-€3,000 after taxes. For Europe this is a great salary. Most are very content with these figures.
American digital nomads in contrast would probably not get out of bed for such an amount ($3,000-$3,500 per month). Earning $6,000-$7,000 per month is fairly standard, as well as 6-figures.
Also, let’s face it, Europeans can be a little cheap (I know I can be at times 🙂 ), and have traditionally lived in housing that is less opulent than Americans’.
The result is that Americans have the means, the “want”, and the “need” to pay for superior housing.
A limited supply of well-designed, well-managed, and furnished apartments makes for an ideal combo of relatively low per m2 pricing, and high rental rates for digital nomads who rent for a few weeks to a few months at a time.
First-time American digital nomads will stick to the name brands, which is bullish for making a real estate investment in Medellin, Colombia
Medellin is one of the world’s top digital nomad destinations, along with relatively closed places like Chiang-mai, Bali, Budapest and Mexico.
Medellin will be a huge winner, because it’s not just marketing, but actually really nice too. I must admit that I came here with low expectations. Being well traveled, maybe I became a little arrogant thinking along the lines of “if it’s that popular it’s can’t be that nice. It’s probably basic”.
I was wrong. Medellin and its surroundings are lovely.
And this is why I travel full-time looking at investments worldwide, because travelling so often exposes how wrong I am.
To top it off, Medellin airport is undergoing a true boom
Medellin will become a major regional air transport hub. Internationally, Viva now flies 14 times per week to Miami, as well as to Lima, Mexico city, Cancun, Orlando, and is planning to launch flights to Buenos Aires, Sao Paolo, Santiago de Chile, etc.
All of these connections will bring in more tourism, more business, more nomads and Medellin will increasingly become a playing ground for those with money.
Rio Negro airport (Medellin airport) saw its November 2021 domestic traffic grow 12.2% versus pre-Covid November 2019.
Its international traffic went up an astonishing 17.7% over the same period.
Americans are probably not too surprised. But for Europeans and Asians who are in perpetual lockdowns, yes, other parts of the world are open and booming.
In which neighbourhoods should you make a real estate investment in Medellin, Colombia?
Only two neighbourhoods are investable.
Most the area is comprised of private complexes, whether composed of individual homes or large buildings. This is also where all the offices and the best malls are located.
Parque Lleras and Provenza
Technically these neighbourhoods are part of El Poblado, but they are so notorious that they deserve a special mention. Essentially, they are where most tourists spend time, and where wealthy locals like to go eating and partying. This map below is crucial for you to understand.
“Girls”: This is the area with a lot of prostitution. Walk around there in the evenings and girls (mostly) litter the streets and pack the girly bars. Small-time drug dealers abound as well. If you’re into this that’s fine, but I’d be very wary of buying real estate in this area due to the type of clientele I might attract.
“Cool Bars and Restaurants”: This is the really cool area. Tons of exquisite restaurants, cool bars, and nightclubs. The wealthy locals want to be seen around here.
The real challenge is that during the day it is not too visible, so make sure you go for an evening walk before making an offer. One street might have cool restaurants and great vibes, while the next street could be a sex den.
Overall though, rental demand in this area is extremely high.
A bit farther to the north-west from El Poblado, or a 15 minute cab-ride away, is the gentrifying neighbourgood of Laureles.
Foreigner-wise, when people stay for not too long in Medellin, they typically tend to stick around Parque Lleras and that area. However, people who stay in Medellin for a few months often prefer to stay in Laureles because it is better value, calmer, more walkable as it is flat as opposed to hilly in El Poblado, and has equally good amenities.
I personally like this area a lot, and it comes at a 20%-30% discount to El Poblado.
A concrete example of a Real Estate Investment in Medellin, Colombia
This is an actual case study of a huge penthouse that Mauricio, my Swedish real estate agent here in Medellin, helped a client buy, renovate, and rent out. He essentially managed the project, and has access to all the numbers.
This is why you follow The Wandering Investor, because of on-the-ground research such as this.
This massive 350m2 four-bedroom, five-bathroom penthouse was sold for 884 million COP, which corresponds to 2.4 million COP per m2, which is about $615 per m2 excluding purchasing costs. These numbers include the 50m2 terrace with stunning views. It is located in the hills of El Poblato, in a prime area.
Obviously the place needed a serious renovation if one were to target the lucrative US market. The new owner ploughed 220 million COP into a full renovation and 40 million COP furniture.
The renovation part cost about $150 per m2, but to be fair, the renovation was relatively light in the sense that the electrical wiring and pipes did not need to be changed. Also, the large terrace skews the per m2 number to the downside.
The result of the renovation work that Mauricio’s partners did is quite incredible.
Here is the exact breakdown. We are assuming a conservative occupancy rate of 85%. In reality, it has been over 95% using contracts of a month up to a year. All the actuals are from Mauricio’s numbers. I just changed the occupancy rate, and added relatively high maintenance costs.
Essentially, there is buffer in these numbers.
|Purchase price||884 million COP|
|+ Purchasing costs 2%||18 million COP|
|+ Exchange fees (0.6%) + financial transaction tax (0.4%)||9 million COP|
|Total purchase price||911 million COP|
|Renovation costs||220 million COP|
|Furniture||40 million COP|
|Total investment||1,171 million COP|
|Monthly rent of 14.5 million COP x 12 (gross yield of 15.4%)||174 million COP|
|– Vacancy of 15%||26.1 million COP|
|= Yearly rent||147.9 million COP|
|– Yearly HOA (Home owners association) – 1 million per month||12 million COP|
|– Property tax||6.5 million COP|
|– Property management 10% of rent||14.8 million COP|
|– EPM (electricity, water, sewage) – landlord pays up to 300k per month||3.6 million COP|
|– Internet||2 million COP|
|– Maintenance (assume 5% of rent)||7.4 million COP|
|Net, net yearly rental income||101.6 million COP|
|Net, net rental yield before tax||8.7%|
I can’t think of many markets worldwide that offer such yields. Only Ukraine for now, which comes with it own set of risks.
Taxes on rental income in Colombia
I wish I could write more confidently here. I spoke to a few accountants, as well as agents. Everyone tells a different story.
- Some say that you must pay based on the normal Colombian income tax rates, which would mean that the overall tax would probably not be very high as the first brackets are low (if you have one property).
- Others claim that the property manager must withhold 20% on payments made abroad and that no income tax is due if this methodology is used.
Both sides of the story are very confident in their method, and back it up with legal analysis. In practice, it would appear that few people, including foreigners, pay much tax at all, whether they declare or not. It almost seems to be a non-issue.
If I were to make an investment, I would simply choose an accountant I am comfortable with, that seems to make sense, and not stress too much about it. I’d also check with my country of tax residency, and ask my accountant back home to check which method would be best for me to use so that I could benefit from double tax treaty benefits if there are any.
As a free bonus, a real estate investment in Medellin qualifies you and your family for a long term visa in Colombia
If you spend 350 times the minimum wage (about $83,000 at an exchange rate of 4,000 COP to the USD) on real estate in Colombia, you and your family are entitled to a 3 year migrant visa.
To maintain the visa active, you must show up for at least a day every 6 months, which implies regular trips to Colombia if you don’t plan on living there. You can renew the visa as long as you still hold the property. At year 5, you can apply for full residency.
Full residency is better. You can either obtain it after 5 years on the migrant visa, or by spending 650 times the minimum wage on real estate in Colombia (about $155,000 at the current exchange rate). In this case, you immediately get a residency visa for you and your family. To keep it active, you must show up for at least a day every 2 years. So you come to Colombia, and from the moment you leave Colombia, you have 2 years to come back.
It is much more flexible and is a great Plan B option.
I sat down with Alan, a US lawyer based in Colombia. You can get more information on how to obtain residency in Colombia here.
Conclusions on making a real estate investment in Medellin, Colombia
I travel around the world full-time looking for investment and immigration options. I must say that I came to Medellin with low expectations because it had been so well marketed. The reality is that the market for mid-term rentals is booming, will continue to boom, and is clearly under-served. The overall price per m2 is cheap for a vibrant city of 2.5 million people, and the rental yields are very attractive.
Due to a number of macro factors I certainly would not go all-in Colombia, but having a bit of exposure to this market is a great geopolitical hedge in a world of rising tensions.
If you need a good lawyer for your real estate transaction in Colombia, feel free to contact my lawyer Alan here.
Speak to Mauricio for your real estate investment needs in Medellin, Colombia
Do get in touch with Mauricio. He was very good at pointing out the market opportunities and finding interesting deals without over-promising. I also like the fact that he doesn’t just sell real estate, but then manages the rentals for his investors as well, which makes him accountable. He can’t sell you a 12% yield, and then a year later come back with excuses as to why you only got 5% gross.
The people who he collaborates with for renovations clearly do a great job, and he can get you a good accountant. Feel free to get in touch with Mauricio here.
A video example of a Real Estate Investment in Medellin, Colombia
Other services in Colombia:
- Real Estate Lawyer in Colombia
- How to obtain residency in Colombia
- My favourite real estate agent in Medellin
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.
*a consulting session is a discussion about your portfolio and objectives. It does not constitute legal, financial, tax or investment advice.