The Costa Rica real estate market is hot – Should We Sell?

The numbers are in for 2020, and despite Costa Rica borders being closed from March through November, we were able to eke out a small profit across our three properties. We attribute this to one major factor – owning all three properties outright, with no mortgage to cover.

When you don’t have a monthly mortgage (or 3, since we own 3 properties), you don’t need much income to break-even. In addition, property tax rates in Costa Rica are low – .25% annually. Ongoing costs (e.g., insurance, utilities) are manageable – though fast Internet is more expensive than I would have guessed. It also helped that we were able to pivot from vacation renting to longer-term renting for our biggest property, Casa Salita – now rented for a year to an expat family on sabbatical.

We didn’t buy these properties just to break-even

The downside of owning property mortgage-free is that you have 100% of the cash tied up in equity. [We have written before about financing for Costa Rica real estate investing. You can read here about how we financed our first property and here about financing our second and third.]

That cash represents 25% of our net worth. The plan was for the vacation rentals to throw off enough profits that we would replace that tied-up cash within 10 years, at a 10% profit or ~15 years at a 7% profit, etc. The illiquidity would decline over time because we would be reinvesting the cash outside of real estate and outside of Costa Rica.

Since we’re only break-even in Costa Rica, there is no spare cash to reinvest. In the meantime, our paper assets are growing, our US rentals are fully occupied and appreciating and we are seeing other interesting investment deals. The missed opportunity cost makes the cash tied up into equity and earning 0% return particularly expensive. Should we sell and release the cash?

The Costa Rica real estate market is hot

There is no MLS, or multiple listing service, in Costa Rica to see everything that is listed, or more importantly, at what price things actually sell. However, if you continually mine the listings, as I do, you get a sense for the direction of prices and the pace of sales. Recently, I have noticed that prices for properties similar to our  Casa Salita are significantly higher than what we purchased it for in 2017, just over 3 years ago.

We still don’t know how long the pandemic will depress travel. Costa Rica has reported an uptick in international tourists – twice the number in December 2020 compared to November. However, that’s still a decline of 77% year-over-year (i.e., compared to December 2019). Once our current annual tenant ends their sabbatical, will there be another? Even so, do we want another year of 0 or low single-digit returns?

Your first idea can easily be wrong – force yourself to come up with at least 5 solutions

My day job is providing career advice, and in that capacity, I often find myself reminding clients not to fixate on their initial assumption or idea.

Instead, if you force yourself to think of at least 5 possibilities, you expand your thinking and see angles or perspectives you might have overlooked. Even if you end up reverting back to your first idea, you have more confidence in it.

That same practice of pushing past your initial response apples to real estate. I used it recently with my friend who got declined for a mortgage – we brainstormed four alternatives. Not only did she feel better about her situation in the moment, but she actually created a better real estate situation for herself by thinking more broadly. (Though the deal fell through with that first house, she’s in a rental that she prefers, is cleaning up her credit and has a rent-to-own option on the rental timed for when she should be able to get financing.)

Similarly, I took my own advice and forced myself to come up with at least 5 options for releasing the cash now tied up into our Costa Rican rentals:

1 – Sell the biggest property, Casa Salita

This was the first idea that came to me because it’s the most obvious. The biggest property has the most equity in it. We would keep the other two rentals, which still gives us the benefits of why we invested in Costa Rica in the first place, but decreases our exposure from 25% of net worth to just over 10%.

2 – Hold for another year

This was the immediate second idea because it’s just the opposite of the first option and therefore just as obvious! Tourism is recovering, and if we were able to make a small profit even in the worst of times, things should only improve. Give it a year, and maybe we’ll change our mind about selling.

3 – Renovate, then sell

The properties that are selling quickly and at a premium are in the higher-end, and fully renovated. There are some updates we could make that don’t matter as much for rental but would matter for a resale. Besides, think of the blogging potential from capturing the day-to-day of a renovation in the land of Pura Vida! Our other work is virtual so we could take 2-3 months to live in Costa Rica and oversee a renovation.

 4 – Sell the two condos instead of the house

This one only came to me when I forced myself to think past the obvious. I prefer condo living, and we want a property for ourselves (sure, we would rent it out when we’re not there, but it would still be our Costa Rican home). However, the larger property is better for larger families, and our kids are young adults who sooner than later will have families of their own – once that happens, we’ll be grateful for the space. The larger property also has the strongest rental prospects. It abuts a green zone, sits on a double lot, has mature fruit trees, so has unique aspects that would be hard to replicate if we sold and wanted to buy back in – this points to stronger appreciation potential too.

5 — Divide the 2 lots and keep one

The house sits on a double lot and has one main house and a 1-bed casita. We could sell the main and keep the smaller place. We could sell the condos too and release the most cash with this option and still have a foothold with that small lot and casita. We’d also still have a potential renovation project to build out from the casita.

Scott came up with yet another idea:

6 – Find a money partner

Now that we have a track record and 5-star ratings on our rental properties, we might be able to find an equity partner who wants to put in cash for a share of the profits, or a straight mortgage lender so we could cash-out refinance one or more of the properties.

Which option would you pursue? Or do you have an alternative idea?

We’re not in a rush to act – having a lot of runway is another benefit of owning rentals mortgage-free. But I do think more people will be looking for an escape hatch, and Costa Rica is the number one international location to retire. It’s prudent to consider options when a market is hot. If we decide to stick with the status quo, at the very least, we’ll have reconfirmed why that is the best strategy for us.

We’ll keep you posted!