If you buy an entire building in Cali you can have very good rental yields
Cali is the third Colombian city in terms of population after Bogota and Medellin. Real estate is not expensive there, particularly buildings that need a total gut job. For a budget of just over $1 million, you can buy a sizable building, renovate it from scratch, and rent it out to tourists and nomads. The whole thing would cost around $1,000 – $1,100 per m2 or around $100 per ft2.
I saw the same thing in Bogota as in this case study. Buying or erecting entire Airbnb buildings is cheap and a good way to operate in Colombia. Full control of a building also gives the operator much more flexibility.
Patrick, a Danish friend who has been in real estate in Cali for many years, shows us one of his projects.
Pro-business parties have just won the regional elections in Colombia
One of the big risks in Colombia was the former communist guerrilla president, Petro. His party just lost the mid-term elections, which shows that Colombians are already fed up with him. This is good news for foreign investors.
I also wrote an article about the real estate market in Cali.
You can reach out to Patrick by sending him an email: firstname.lastname@example.org.
To a World of Opportunities,
The Wandering Investor.
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
- Is Colombian real estate still investable following the election of Gustavo Petro?
- Double-digit yields in Bogota for Airbnb multifamily units
- 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.
Transcript of “12% net capitalization rate and rental yield in Cali, Colombia”
LADISLAS MAURICE: Hello, everyone. Ladislas Maurice from thewanderinginvestor.com. So today, I’m in Cali, in Colombia. I was here for a few days for La Feria de Cali, which is a big salsa festival. And I was here last year in Cali. I met with Patrick, from Denmark, who bought a big building for his investors. And his plan was to renovate it completely and then to rent it out on Airbnb as luxury rentals.
So back then, the construction had barely started. His plan was for the building to be finished by now, by the end of December 2022. By the time we publish, it will be a bit later. And the numbers were approximately $1,000 per square meter all in. So approximately, $90 per square foot all in to buy the whole building, renovate it completely at luxury standard, so including one of the apartments is a penthouse with a Jacuzzi, etc., so really top end stuff, and including the furniture. So it looked like a great deal.
And now we are here and we’re going to go follow up with him and see how the project is going, if he’s on time, if he’s on budget, and what his projections are in terms of the rental yields and the capitalization rates for the year, and what his other projects have been giving him here in Cali in terms of numbers. Because they’re quite impressive. And that’s what we want to dig into, really, it’s about the numbers here.
The short-term rental market in Cali, Colombia
LADISLAS MAURICE: All right, Patrick, we’re here to put you on the spot. Looks like you’re a bit late, the construction doesn’t seem to be finished.
PATRICK: [laughs] Oh, no. Yeah. I think we were here, when was that that? It was probably late November, last year?
LADISLAS MAURICE: Late December.
PATRICK: Late December. So it’s about a year ago. This is 31st of December, actually, right now. We are about two months behind schedule according to what we originally estimated. One of the things that has been a big trouble or a big challenge has been just this whole year just like the whole global economy, the scarcity and things that haven’t been available, delays in deliveries, so forth. So that has been the main reason that this project isn’t done. We were hoping to get La Feria. La Feria is one of the high seasons of the year here. So we missed that one, but high season actually continues until–
LADISLAS MAURICE: Yeah. I mean, it was almost impossible for me to book an Airbnb here.
LADISLAS MAURICE: Everything was completely booked. I had a really hard time finding something half decent.
PATRICK: So compared to last time we spoke, we had 32 apartments. Now we have 46, and they’re all rented right now, 100% occupancy.
LADISLAS MAURICE: I think, let’s go inside. We’ll just go in there quickly have a look. We’ll publish this video in a few months from now. The building is due to be guest ready in?
PATRICK: February, late February.
LADISLAS MAURICE: In late February. All right, so by the time we publish this video, maybe March or something, and then I’ll add some B-roll to show what the end result is. Because, again, the goal here is not to look at a construction site, but to look at the end product, what it was before, so the first video from last year, and also what the numbers are. I think this is really interesting. This is what makes Cali different from markets because the numbers are very, very attractive here.
Cool. Patrick, so can you help us refresh the numbers and where do we stand right now?
PATRICK: Okay. So we’re in northern Cali, a neighborhood called Versailles, is right next to Granada, which is very important because it’s one of the main entertainment districts, like gastronomic districts.
LADISLAS MAURICE: So not AAA location but AA.
LADISLAS MAURICE: So Granada is AAA, this is a five-minute walk from AAA in a very good area.
PATRICK: Yeah, we’re about three blocks away. It’s more quiet, is beautiful. We got amazing views of the mountains. We’ve got beautiful palm trees on the boulevards outside, so it’s a really nice location, but it’s a lot more quiet than being in the heart of the action. If you’ve ever stayed in Parque Lleras in Medellin, you would know what it’s like to sleep next to a discotheque. So it’s no fun.
And this is a nine-storey building. So we have eight floors with apartments and then we have a garage, underground garage. And there is one apartment per floor except for the last two floors, which is a two-storey penthouse. So we have three-bed three-bath in the bottom, and then we have five apartments with two bedrooms, two bathrooms, and then we have a three-bedroom penthouse unit with a private terrace and a Jacuzzi.
LADISLAS MAURICE: So the initial budget for the investor was $1.2 million.
LADISLAS MAURICE: So about $350,000 for the purchase of the actual apartment. And again, I keep repeating this, Cali is extremely interesting for people who want to buy a whole building, $350,000 for this entire building. And then the renovation altogether and furniture, you were budgeting $1.2 million. Where do you expect to land?
PATRICK: We are still more or less in that range. I cannot give you the exact number because we still got about two more months of construction going on. But what happened was that we had elections this year. And Petro won, which a lot of people are familiar with. And the currency took a hit, which you’ve seen when a lot of socialist leaders come in. It happened in Chile, it happened in Argentina, it has happened in Brazil. So the currency went from 3,500 to the dollar to about 5,000.
So a lot of the inflation that was transmitted to Colombia, so to speak, that affected raw materials, it affected anything that was imported, we’ve been able to keep up with that because we have a dollar investor. So for him, the budget is still on track even though, in pesos, we’re spending more money than I originally estimated.
LADISLAS MAURICE: Cool. Fantastic. So still on track. So again, this comes down to $1,000 per square meter, about $90 per square foot for a full building with all these apartments. It’ll be luxury finishings. By the time we publish this video, I’ll add B-roll the finished product. I mean, right here, there’s a jacuzzi with a cool view, etc. So really high-end stuff.
And in terms of the neighborhood, though, it’s not AAA, as I mentioned, I mean, they’re just opening a big private hospital right here. So the one with the green thing right here. And that’s a private hospital. And what’s important to know about Cali is that medical tourism is a huge industry here. So you manage how many Airbnbs right now with your partner?
LADISLAS MAURICE: And approximately what percentage of turnover is related to medical tourism?
PATRICK: 20% to 30%.
LADISLAS MAURICE: All right, so huge. This is really huge. And this is something that I’m seeing as well with my own investments in Turkey, in Izmir. I hadn’t completely taken that into account. But the reality is medical tourism is very attractive, because it’s not people who come here and stay for two, three days.
Typically, they come here, they stay one week, two weeks, three weeks, they come with family, they like to have an Airbnb, they want privacy because they look all, they have issues, so they don’t want to go through a hotel lobby, they just want to go discreetly into the Airbnb, order in food, chill there. They’re with family, they’re not partying, they’re not causing any problems. They just want comfort and a good internet connection. So they’re great guests.
PATRICK: Yeah. And Netflix. [laughs]
LADISLAS MAURICE: [laughs] Yeah, Netflix. They’re great guests. So what percentage of your guests are local tourists?
PATRICK: I would say about 20%. And when I say 20%, I’m also including the Colombians that live abroad.
LADISLAS MAURICE: I think those can be foreigners.
LADISLAS MAURICE: Because they come with dollars. What about, like, local-local?
PATRICK: Yeah, probably 10%.
LADISLAS MAURICE: Probably 10%. Okay. And again, this is how you end up having very good yields here, is because you buy in pesos and you rent out in US dollars. And then there’s essentially that arbitrage to be made. And the rest, so 10% locals, 10% diaspora, and then roughly the other 50%?
PATRICK: It would be what you’d put in more into the category of being traditional tourists and also including digital nomads. So anybody who can make money in euros, dollars, pounds, and have some sort of a foreign contract, or even being allowed to work remotely, a lot of them have been opting for kind of a traveling lifestyle, where they stay one month in different destinations and they kind of take out at night and enjoy the local nightlife, or culture, or Spanish classes, salsa classes. Or, they just take advantage of the lifestyle, where it’s, okay, earn dollar, spend pesos, which is a very powerful strategy right now. It allows them to save a lot more or discover the world at the same time.
LADISLAS MAURICE: Yeah. And also, this is why, in my previous video on Cali, I called it the next frontier. Because some people like to claim that Medellin it’s too much blah, blah, and people are looking for the next thing. So though there’s always a few people that say this, and a lot of them actually come here to Cali. A lot of people say Cali is the next Medellin, blah, blah. But the reality is the market is absolutely not saturated in Medellin. In the big scheme of things, there still isn’t that much tourism and the investment case is very strong in Medellin.
But there is a spillover, definitely, from people who have been to Medellin many times and who feel that Medellin is becoming a bit too comfortable, the infrastructure is a little too good, it’s a bit too foreigner friendly, etc. So they like to come over to a Cali, which still feels like more the real, real Colombia. Like, anyone who comes to Colombia, I encourage them go to Medellin, for sure, come to Cali, two very different worlds. I, personally, like both of them. They both have an investment case, a very strong investment case. It just depends what, really, ultimately, you’re into.
Construction project in Cali, Colombia
LADISLAS MAURICE: I find that, for entire buildings, Cali is absolutely amazing in terms of deals. And you’re starting, so this project is going to be finished in about two months?
LADISLAS MAURICE: And you’re starting another project in essentially like now?
PATRICK: Yeah, next week.
LADISLAS MAURICE: Next week. So that one is a AAA location.
PATRICK: Yeah, it’s about three or four blocks away from here.
LADISLAS MAURICE: Yeah. So that one’s AAA location. Can you give us a bit some of the rough numbers, how much you– because it’s a lot that you’ll build?
PATRICK: Yeah. It’s first project we’re doing from the ground up. So actually, I’m working with a local construction company, a very recognized one. They built the Marriott Hotel. Because I just wanted to make sure I got the best quality. They charge an 8% management fee on top, but then you get access to all of their contractors, all of their knowledge. You have their structural engineers, you have their architects on board and they’re supervising the project every single step along the way.
I hired them to supervise what is the excavation and build the structure. I mean, we can put in the windows, and paint, and all that. I don’t need them for that. But I hired them for the critical first phase, because the first time we’re doing that project from the ground up. And our investor, who’s the same guy who owns this building, he was okay with that budget increase for that particular project. So we bought an A location property–
LADISLAS MAURICE: AAA.
PATRICK: AAA. Same price as we paid for this whole building, but it’s 812 square meters, and we can build about 2,100 square meters. So we’re going to be having a mix of one, two, three. And I think there’s one four-bedroom unit over there, and 19 units in total, five storeys, and underground garage, and with electrical backup plant, water reserve tank, terraces, balconies, sun-reducing windows, all that kind of stuff.
LADISLAS MAURICE: And so let’s look at the two projects. So this project, for the investor, how much is the investor expecting to make in terms of net yields before income tax?
PATRICK: So we are aiming for about 12%.
LADISLAS MAURICE: 12% before income tax. And that is based on what occupancy rate?
LADISLAS MAURICE: 70%. And what is your actual occupancy rate in your whole portfolio?
PATRICK: This last year has been really good, [laughs] we’ve done 87%. I would never promise anybody 87%, but that’s the reality of what we’ve delivered this year.
LADISLAS MAURICE: Cool. 12% before income tax for his investor with, honestly, upside, unless something catastrophic happens, the economy or whatever, whatever, which could happen, these numbers are absolutely stunning. And for the AAA location, the project that you’re starting, because it takes about two years, right, to do the whole thing?
PATRICK: We got the permits now. So will take us about 14 to 16 months that’s going to be estimate that we have. But if supply chain issues remain and so forth, there’s always there’ll be a little bit of a difference there.
LADISLAS MAURICE: So this project from buying the building to having the first guests, how many months?
PATRICK: Not from buying the building, because the permit was about three to four months, but from beginning demolitions to delivering it–
LADISLAS MAURICE: Still, like, from the moment he put the $350k to buy this building until–?
PATRICK: That would have been about 16, 17 months.
LADISLAS MAURICE: Sixteen, seventeen months?
LADISLAS MAURICE: And what about the new construction building where there isn’t an existing building?
PATRICK: Yeah, it took a long time to get the permit. It was almost six months just for the permitting process. So that one, altogether, is going to be about 24 months.
LADISLAS MAURICE: 24 months.
LADISLAS MAURICE: And in the end, how much per square meter do you expect to pay for that new building, with like everything, furniture, finishings, everything, roughly?
PATRICK: We’re going to be spending a little bit more money on that building. I’m expecting about $1,100 to $1,200 a square meter fully furnished, all appliances.
LADISLAS MAURICE: For a better location and new construction.
LADISLAS MAURICE: And new construction generally is more expensive than renovated stuff. So that is about $110 per square foot for AAA location in a new building and luxury as well.
PATRICK: Yeah, basically, on the same street as the Marriott Hotel, to put things into perspective.
LADISLAS MAURICE: Cool. And you have one of your existing investors that is potentially selling one of his buildings, correct?
PATRICK: Yeah, that is correct. So we have a beautiful 12-unit apartment hotel. The biggest unit is four bedrooms, three bathrooms, and the smallest one is a studio apartment. I think you know the building very well, you’ve been there. It’s centrally located, is well-executed. It’s been operating for a little over a year now. And it’s been performing super well, is part of the 87% occupancy statistic that I gave you before. And we have a fairly big investor who is looking to transition out of that investment and dedicate himself to something else.
And it’s completely turnkey, meaning that we have a small office in there, and we operate every aspect. So for somebody who would like to do this kind of investment being passive, we would be happy to continue on with the current management.
LADISLAS MAURICE: Cool. And it’s 8% net after corporate income tax, etc., etc. So obviously, the numbers are better if you buy a building yourself, get it renovated, or buy a lot like your other investor is doing. But you’re going to have to wait for 16 months or so, there’s going to be uncertainty, etc. If you just want turnkey, it’s going to be a bit more expensive per square meter, but you’re still going to get some very decent returns, 8% net after all taxes for a whole building, you don’t quite find that in many places in the world.
So obviously, Colombia comes with its own set of risks, currency risk related to political issues, blah, blah, blah, the list goes on. So obviously, do your own due diligence. I would not go all in Colombia, absolutely not. But having some exposure to Colombia, to have some exposure to really high-yielding cash purchase emerging market real estate, Colombia is a very good candidate for this.
PATRICK: Yeah. And with this kind of deal, obviously, you are cash flow positive from the first day.
LADISLAS MAURICE: Yeah, which is very attractive. So if you’re interested in potentially making investments here in Cali real estate in Colombia, feel free to get in touch with Patrick. So you’ve been here how many years in Cali?
PATRICK: Nine years going on ten.
LADISLAS MAURICE: All right, 9 years going on 10. And you’re going through your citizenship test, right?
PATRICK: Yeah, exactly.
LADISLAS MAURICE: All right. So hopefully, you’ll be a Colombian citizen pretty soon.
PATRICK: Then I’ll have an excuse for not showing up on time and not delivering on my promises. [laughs]
LADISLAS MAURICE: [laughs] Cool. So there’s Patrick’s email right below. Okay.
LADISLAS MAURICE: Cool. Cheers. Good to see you.
PATRICK: Thank you for having me.