I helped a relative buy an investment property in Ecuador
I typically like to make investments that give me good cashflow, but I also occasionally go for options that are rather geared towards capital gains.
I helped a relative of mine make such a move in Ecuador. He bought an apartment in the historical center of a city called Cuenca, high up in the Andean mountains of Ecuador.
Yes, it’s random.
Yes, the rental yields are not amazing.
But we are making the bet that many people will move there from the US, Canada, and possibly Europe over the coming years. It’s a capital gains and diversification play with a small allocation.
If you want to understand the Cuenca real estate market in Ecuador, do these two things
- Watch the video above, in which we do video case study of a fully renovated historical house in core Cuenca
- Read the full guide to investing in real estate in Cuenca, Ecuador, which includes the case study of the modest investment my relative made, and a macro analysis of Ecuador.
Would I go all-in Cuenca? Absolutely not. But the exodus of Westerners from the West is on-going, and is just getting started. Cuenca will most likely be a key beneficiary of these migration flows.
To a World of Opportunities,
The Wandering Investor
Services in Ecuador:
- How to obtain Residency in Ecuador
- Real Estate Lawyer in Ecuador
- My favourite Realtor in Cuenca, Ecuador
Article on Ecuador:
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 “Cuenca Real Estate Investment Case Study”
LADISLAS MAURICE: Hello, Ladislas Maurice from thewanderinginvestor.com. So today, I’m in Cuenca, in Ecuador, and we’re going to go check out a house that’s being sold for $530 a square meter, or $50 per square foot, that’s fully renovated. It’s a historical house right here in the center. We’re going to meet with Veronica, my agent here, who’s helping some of my family members make a purchase here. And we’re going to go through all the numbers in terms of the return on investment, the cost, maintenance, etc., rental prices, the whole deal.
Downsides of investing in Ecuador
So why Ecuador? Objectively, when you look at Ecuador from a macro point of view, there isn’t much to say that’s very positive. It’s a country, when you look at all the rankings in terms of ease of doing business, competitiveness, etc., it generally ranks along with Brazil and Argentina, which are really laggards from a competitiveness point of view. So that’s not a plus. It’s a very bureaucratic country. So this, not a plus. Also, if you look at the export profile of Ecuador, it’s essentially just commodities. They export oil, they export fish, flowers, agriculture, some minerals. That’s all, they export. There’s nothing that’s being done locally, really, no value-add locally. And seeing how there aren’t that many reforms going on, that’s probably not going to change.
A few positives of investing in Ecuador
Taking a step back, though, because we’re probably going to be entering a commodities bull market, it’ll be fine for the country. If you look at the debt-to-GDP ratio, it’s approximately 60% right now. It’s relatively high, but it’s manageable. In 2022, at some point, the yields on the government bonds really shot up to almost 30%, the country was close to default, but it didn’t default. Since then, it’s relatively okay. So that’s kind of the situation. And you can’t expect too much from the politicians here. Luckily, it’s a dollarized economy, so it forces honesty on the politicians. Generally, it’s better when the economy is not dollarized so that you can set your own monetary policy. But when you have politicians of low quality, it’s actually probably better to have a dollarized economy.
So those are kind of the pluses and minuses. So I don’t think that your real estate investments in Ecuador are going to do well just because of something fantastic happening on the economic front. I think, rather, nor will anything catastrophic happen to your investments because of the economy. Rather, the risk is political and indigenous revolutions, like we’re seeing in Peru, in Bolivia, these things happen once in a while. But often, they just last a few months and then things are fine. Rather, when I’m looking at here in Cuenca, is a city within Ecuador which is a city of excellence, essentially.
Why invest in real estate in Cuenca?
So it’s a small town, about 300,000 people, beautiful historical town. So you can see the amazing cathedral behind me, gorgeous. The whole center is all these like little historical buildings. There are a bunch of rivers that go through. We’re in the middle of the Andes Mountains, so the hiking is absolutely amazing. It’s pretty and there are a lot of activities. Life is affordable. And whenever you look at research, or whenever you Google top 10 places to move to in Latin America, top 10 places to retire, etc., Cuenca is always in these lists.
So rather, my running thesis, and that’s why my family bought here, is that we expect that, over the coming decade, millions of North Americans and Western Europeans will want to leave these countries because of social issues, because of cost of living issues, etc., and a lot of them will go to Latin America, and they’re going to be looking at these lists, and they’re going to be going for cities like Cuenca. And Ecuador’s immigration policies, so I did a video as well on how to immigrate to Ecuador, how to obtain residency here, it’s very easy to obtain residency here. There are tons of ways to obtain residency, including buying real estate. But there are also ways of getting residency there that are more affordable.
The city itself is safe. Unlike many cities in Ecuador, there’s very little crime. You can walk around and you won’t be attacked. So that’s a plus. And that’s also causing internal migration from other cities in Ecuador to Cuenca. So it’s not just foreigners that are moving here, it’s also Ecuadorians, because it is a city that is better than the other cities. And the city has a lot to offer. It’s got private schools. There’s even a private German school. It’s a healthcare destination, healthcare tourism destination. So as soon as you arrive here, one of the things you notice is that there are doctors everywhere, hospitals, private clinics, etc. So very good place from a healthcare point of view.
The profile of people moving to Cuenca is changing
And there’s a large and growing expat community. So historically, what we saw was mostly retired people, retired North Americans. And in the last few years, the profile has changed, and we’re seeing more younger families and digital nomads that are coming here. Ecuador, from a tax point of view, isn’t fantastic, isn’t the best solution. But it’s certainly better than Colombia, for example. And if you structure things well, you can really get to a very low overall tax rate. So what I see is, for a place like Cuenca, I see so many positive catalysts, because it’s so easy to move here. It’s nice as well. You don’t really need a car. It’s very walkable. There are bicycle lanes all over town, very easy to get around. Public transport is good. The airport is, until recently, was just a domestic airport, and they have recently changed it into an international airport. So there are now flights to Miami. And they’re looking at opening routes to Peru and to Colombia. So this city has a lot of catalysts.
So when you look at investments here, sure, look at the net capitalization rate or rental yield, but what you want to start building is the potential for capital gains and for an increase in your net rental yield over time. So this really is the thesis. So now we’re going to walk to that house. And we’re going to have a look at all the numbers with Veronica, my agent, and see how interesting of an investment it is.
Rental income from historical house in Cuenca, Ecuador
Great. Veronica, thank you very much for showing us this place. So let’s go through all of the numbers. So the little café is being rented out for $700 a month. The three units, the three one-bedroom units, on average, for $450 a month, including utilities. The large one, so this one we’re in, the really nice one, is $1,200 a month. What do you think the occupancy rate would be approximately for the apartments?
VERONICA: Due to its location, at least 11 months out of a year.
LADISLAS MAURICE: Yeah. In terms of location, it’s great. It’s right in the center. People who move here or just want to stay for a few months in Cuenca like being in the center because you don’t need a car here. It’s easy to just get around. So when you get a historical building that is renovated, that is in a good location, it’s very easy to rent out to foreigners because, ultimately, that’s what people really want.
LADISLAS MAURICE: They love the historical aspect. So here, it’s a bit of the dream life that they get to live.
VERONICA: That’s right.
LADISLAS MAURICE: Cool. And then the store, I mean, that’s rented all the time, the little café.
Running costs for landlord in Cuenca, Ecuador
LADISLAS MAURICE: That’s easy. Also, right in the center. What would be the utility fee/internet fees that the landlord would have to pay roughly on a monthly basis for all four apartments?
VERONICA: For the entire house, approximately $200 up to $250 a month for all the apartments and the master main house.
LADISLAS MAURICE: Personally, in the numbers, I would prefer to put $300 to be on the safe side. And in terms of property tax?
Property tax in Cuenca, Ecuador
VERONICA: Property taxes a year, about $300 average. And that’s how much they’ve been paying.
Discounts for real estate owners of 65 and above in Ecuador
LADISLAS MAURICE: Yeah. So imagine this massive house with four apartments, a retail outlet, $300 of property tax a year. And then if the owner is over 65, then he’d be paying even less, right?
VERONICA: Correct. If the owners are after 65, then you get senior discount benefits. And that amount can come down to a third or not even that. It’s really a good situation if you’re after 65.
LADISLAS MAURICE: And then also that would impact the utilities if you’re 65, correct?
VERONICA: That’s correct, yes.
LADISLAS MAURICE: How does it work?
VERONICA: They also get discount, especially in their electric bills. Not much into the internet, but electric and water bills, they’re going to get half price or even less.
LADISLAS MAURICE: And because this is one whole house, apart from the retail outlet, it’s one bill, right? So it’s all on the retired owner’s name.
VERONICA: That’s correct, we would have only one meter for electricity, one for water, one for the entire house.
LADISLAS MAURICE: Cool. So the numbers really improve in terms of upkeep if you are 65 and over. Even if you’re 65 and under, I mean, $300 of property tax, not much, $300 of utilities is cheap. But you can slash all of that essentially in half if you’re 65 and over, which would help with the capitalization rate or the rental yield. Roughly, when we do these numbers, we take out all of the fees, etc. I didn’t put any property management for this one. Because what’s happening is actually the tenant of the top unit is the property manager for the smaller, the one-bedroom units. So that makes property management easier. And he’s still paying $1,200–
LADISLAS MAURICE: and does property management. So we’ll leave it at that. But essentially, you get a bit over $31,000 net a year in income, which gets you a net rental yield of about 5.6%. So if I were to buy this unit, Veronica, and, let’s say, you’re helping me find real estate here in Cuenca, and I tell you, “What can I do to get a better rental yield?”
VERONICA: Well, we could, potentially, work into the smaller units’ rental income, which, personally, I think the price, at the moment, the prices are excellent, because, once again, the location. I think we can improve that.
LADISLAS MAURICE: To how much? So right now we’re at an average of $450, bearing in mind the one at the bottom is a little dark, and the one on the top is very pleasant.
VERONICA: I would try to raise it at least to $500 a month. Because according to what I’ve seen, $550 would be more than enough, more than fair to charge for a unit with this location and that size, and just with everything around, yeah.
Scope for negotiations when buying real estate in Ecuador
LADISLAS MAURICE: Cool. And what about the purchase price? So it’s listed for $565,000, including all the furniture, which is a big plus. Typically, so I’m not asking about this property in particular, but generally, in Cuenca, when people come and negotiate, what’s culturally expected to negotiate? Like, in some countries, you can negotiate 5%, and others people don’t want to negotiate, and others it’s 10%. It really depends.
VERONICA: Well, here it is, too. It really depends on how motivated the seller is, number one, and how flexible the whole negotiation is. But I would say, in this case, we are facing a pretty flexible situation and also a motivated seller. He needs to put the money in a different investment, and that’s why he’s considered not overpricing the unit. And also, he’s very open to negotiate. So that means that we are facing a pretty good range or percentage of negotiating room there.
LADISLAS MAURICE: So if we were to raise the price of the three one-bedroom rental units to $550 on average, and if we were to get this building for $500,000 as opposed to $565,000, we would get down to a net yield of 7.9%. So, rents as is with price as is versus 500K and $550,000 for the small units, essentially, the net capitalization rate is somewhere between 5.6% and 7.9%. Essentially, it’s somewhere in that space. Look, is it a fantastic capitalization rate? No. Is it decent? Yes. But I think the investment thesis for this house is the fact that you’re getting so much prime real estate for a very low price per square meter of $530, or per square foot of about $50. So it’s deep value.
So essentially, you come to Ecuador, you buy some deep value away from your own country, away from your own geopolitical risks, etc., you get a completely different profile in terms of investments. I see this as the investment thesis. And the fact that you have control. Because Airbnb regulations here are ambiguous.
VERONICA: Uncertain, yes.
Airbnb regulations in Ecuador
LADISLAS MAURICE: Yeah, right. So essentially, there are no real Airbnb laws in Ecuador, so you can kind of do whatever you want to do. But if the other owners in the building do not like the fact that you’re doing Airbnb, then you can run into problems. So having an entire house/building like this, essentially guarantees that you’ll be able to do Airbnb. So these were the rental yields for long term. If you were to do Airbnb, which you can, generally, it’d be pretty fair to say that you could expect about 30% more in terms of net yields. So again, if we’re going to take this and push it through the various scenarios, then with Airbnb, we’d be looking at net yields of between 7% and potentially 9%, which starts to be quite interesting.
So Veronica, you’ve been in real estate for how many years here in Cuenca?
VERONICA: I’ve been doing this for just about 10 years.
LADISLAS MAURICE: Ten years. Have you seen a difference in terms of the profile of people that are moving here? Because historically, Cuenca in Ecuador was just old people, retired people, typically, North American. You just go on to these lists of top 10 places to retire in Latin America, Cuenca was always there. Is it still the case or are you starting to see a change in terms of people?
VERONICA: No, now it’s actually completely different. Years ago, we, as you well said, used to be facing only older couples moving in, retired people. But now it’s completely different. We are having now much younger people moving in, younger families, just people wanting to work from their houses, in the middle 40s, 30s, 50s. So a much younger expat population are starting to move out here, and also from all over the world. We can find a lot of Europeans now here, people from Russia, China. So we’ve also expanded in that regard.
LADISLAS MAURICE: And I think this is very interesting, because the profile of people moving here is changing. And, in some markets, you can get some very good yields or capitalization rates, but it’s based on very high occupancy rates and based on where you can tell that people are going to be building a lot more and your yields are capped in many ways. Here, when I look at Cuenca, I feel that there’s upside in terms of rental prices, because I expect a lot more people to be moving here because it’s so easy to move to Ecuador. So we’re seeing a lot of people in North America and in Europe wanting to move to Latin America. When you actually really look at it, Ecuador is probably one of the easiest and cheapest countries to move to. So I expect more people to come through. And if you buy a whole building like this, right in the core area, you’re always going to have tenants, and chances are your rental prices are going to go up.
Construction costs in Ecuador
So I feel that in such an investment, you’re not just playing essentially deep value because you’re paying so cheap for what it is, and average net rental yields, but there’s also upside, not just in terms of rental yields, but also in terms of capital gains. Because if you were going to build, I think this is very important, builders in the center of Cuenca, when they sell something in the center for new builds, you will not find anything for less than $1,500 a square meter. And here, you’re buying fully-renovated, historical for $530 a square meter. So honestly, in terms of absolute value, this is a really good investment.
VERONICA: That’s right, yes.
LADISLAS MAURICE: Not the best cash flow, but absolute value, it is tremendous.
VERONICA: That’s right. I totally agree with you.
LADISLAS MAURICE: Veronica is helping some family members of mine invest in an apartment. It’s a bit smaller, the budget was smaller, but we’re good. We’re expecting some decent rental yields as well. And the value that we’re getting here in Cuenca is quite interesting.
LADISLAS MAURICE: Cool, fantastic. So if you’re interested in real estate in Cuenca, I wrote a whole article below. You can see the link below, explaining the macro situation in Ecuador, and also the neighborhoods in Cuenca that are interesting to invest in. So we worked on this together. And if you want to get in touch with Veronica, there’s a link below with more information on her services.
VERONICA: I’ll be glad to help you and help all of our clients.
LADISLAS MAURICE: Great. Thank you, Veronica.
VERONICA: My pleasure. Thank you.