#547 – The Expat Files: Real Estate in Latin America – Bubbles, Advice, and Market Shifts

Automatically transcribed from the original recording; names and wording may contain errors.

[00:00] South of the border, down Mexico way That's where I fell in love when the stars above came up to play and now I wonder Hello there all you expat wannabes. I'm Johnny Mueller and you're listening to the expat files living in Latin America The show that tells you just what it's like to live work play and or retire down here in Latin America It's a mix of the good the bad the ugly and the great and it's all right here. So let's get started real estate real estate Everybody's talking about real estate. When's the Latin American real estate bubble gonna burst? Well funny enough seems that only people who've been down here in Latin America a long long time And who've had a lot of boots on the ground even know there's a real estate bubble

[00:47] Now for people who've only been on the gringo tourist trail for example in Costa Rica things were never really cheap Even 20 25 years ago when I first went down However off the gringo trail is where you see the bubble has really blown up fast now if you've been to those places that retirement rags like international living and AARP and overseas living have been touting namely those earlier destinations like Mexico Costa Rica Panama Ecuador and now Colombia Uruguay and Nicaragua if you've been to those places, you know, there's so many gringo tourists The prices are always going up. In fact, you meet people all the time who say God I was in Costa Rica eight or nine years ago. I should have bought back then now Everything's doubled same thing with Cancun and Playa del Carmen and Panama and a lot of other gringo tourist

[01:35] Destinations that rags like international living had been touting now Let me ask you this who do you think writes those articles for overseas living and international living and AARP? Mostly people that got in early bought some real estate and want to cash in on their pet projects or projects They have an interest in or they're on a sweetheart commission basis with the owner So that's what they'll always lead you to but they won't tell you that I know I know you trust these guys and you've read their rags for a long long time I used to feel the same in fact 30 years ago up in Chicago when I was looking to become an expat I used to read international living too. It was the only expat rag around There are supposed to be the experts and they're supposed to guide you I mean, that's what you read those rags for right, but I have to tell you

[02:21] They may know a lot about living on the gringo tourist trail, which believe me is not my preference But they seem absolutely clueless about the future of the real estate market in Latin America They don't even know there's a bubble coming. How about that? Then again, maybe they do and that's why they want to dump their little pet projects now before it blows in any event I don't get it either. They have blinders on or they're just not being honest at all Now for any of you people who've been down to my expat insider seminars You know I do a whole real estate segment four hours in the classroom and then about four hours on the road boots on the ground Check in all the real estate projects out Basically showing you why you're nuts to buy anything down here in Latin America right now unless you find a desperate seller and believe me

[03:07] More and more of those guys are showing up daily Why because we're at the absolute peak of the bubble right now In other words the rents they're getting on most of these projects Can't even begin to pay the interest on their mortgages a sure sign of a disaster in the wings bottom line It's a renter's paradise in most all of Latin America now But you have to haggle never pay what they're offering Remember when there's a severe medium and high-end housing glut like there is combined with a renter's market You might be the only person that put in a solid offer in the last six months or maybe a year So remember that when you haggle and why do you think that is? Well, because you've been so much over building especially in the upper-middle class and wealthy segments of the real estate market that there's just not Enough buyers to go around so you have to look at it from a real estate developers viewpoint

[03:56] Suppose he built 50 first world style units in a nice guarded gated subdivision and the houses start at let's say $200,000 now in Latin America Who do you think can afford a $200,000 house or can afford to qualify for a bank loan for 200 grand? How about 5% or less of the adult working population? 5% and about 80% of those people that can actually qualify are already up their ears in debt and cannot take on any more Real estate properties cars boats anything but back to our developer. He's got $50,200,000 houses and a brand new upscale subdivision. He tries to sell them directly So there's no real estate broker commission. He puts big ads in the papers has open houses

[04:42] Advertisers in the monthly slick glossy real estate rags that just started showing up about two years ago all throughout Latin America Nope before that they just didn't exist which by the way is another symptom that there's a big bubble here So he has his ads in his open houses and guess what a few people come through but nobody buys Oh, I take that back a year or so ago people came through and didn't buy now people don't even come through That's why gringos expats and wannabes you can come down here off the gringo tourist trail Locate any number of first world subdivisions in great neighborhoods near safe and secure upscale shopping that's where you'll find brand new houses that have never been lived in like they were built on Mars or something and Amazingly enough many times right across the street. There's phase two and phase three under construction

[05:31] Meanwhile phase one's been done for a year or two, and they've only got about 10% occupancy It's just amazing to see so many upscale subdivisions like that and you think they're full But you don't see any cars and at night the street lights are on but there's no lights in the windows of the houses That said you could rent a nice 1500 2,000 2,500 square foot house for about from three to seven hundred dollars a month then many times That'll include cable water and maintenance But back to our developer so he's got these houses all up for sale and no one's buying Six months goes by a year goes by all the while He's dropping the down payment from 10% to 5% to 1% then finally no money down

[06:17] A year and a half goes by suddenly he's sold maybe ten to twenty percent of them owner occupied and maybe another Thirty to forty percent to investors who will never live there But the maintenance costs on the development are killing him then he realizes since he can't sell the things he better start renting them And that's why it's a renters market Let me give you example on the pan-american highway on the road from Guatemala City to El Salvador You'll find some of the most beautiful guarded gated community suburbs that you'll ever see They're popping up like mushrooms all over the place, and I'm not talking about in Guatemala City All those great new developments start about 12 miles out from the city limits Extending like an octopus some 30 miles south down the pan-american highway on the road to El Salvador with no end in sight

[07:05] There's cement trucks and cranes and earth movers all over the place all along a beautiful 30-mile stretch of the pan-american Highway, which is the biggest highway in Latin America remember That's when it goes from Alaska all the way down to Panama and most of these suburbs have beautiful Million-dollar views of active volcanoes that are blown off right now. No, they're not right in your backyard They're maybe 20 miles away But you know some people like a house with a view of a forest or the ocean or a river But here you've got volcanoes big-time tremendously imposing active volcanoes that take your breath away What a view at the breakfast table you got to see it to believe it again No danger though because they're very far away and this area believe me is the high-end burbs That's also where they have the biggest commercial mall in all of Latin America

[07:54] They've got Ace Hardware Home Depot IMAX TGIF Sears Starbucks Walmart Costco Gold's Gym Gap Diesel Hill figure Forever 21 and every well-known first world franchise Retail store you can think of but that's not all on this 30-mile strip of the pan-american highway There are at least 17 more strip malls Some of them very high-end to with another 10 believe it or not under construction right now And right about now the developers have figuring out they just can't fill these places They can't rent the stores and they can't get the customers some of them even the brand new ones are like ghost towns Then on the same road, they've got Latin America's biggest brand new Evangelical Christian Church that looks like a gigantic flying saucer holds

[08:43] 30,000 people has seven state-of-the-art television studios in it and broadcast 27 religious channels around the world by the way the ridiculous pint-sized money-grubbing pastor of this church has a private jet Two helicopters a fleet of bulletproof SUVs and eight bodyguards and by the way when you're driving down the pan-american highway Sometimes you could see one or two of his glistening white helicopters sitting on the pad And I'm telling you this 30-mile strip of the pan-american highway is a high-end SUV paradise Not to mention you'll see the occasional Porsche Ferrari Maserati even Lotus Why because they've got dealerships for those brands right in the area talk about a spirochete fire in between two neurons

[09:29] Who'd be stupid enough to dump a couple hundred grand on stuff like that rich show off brain-dead latins with low self-esteem? That's who need proof see for yourself just pull into the Starbucks or the Costco and you'll see bodyguards and SUVs galore and Why am I mentioning this because all over Latin America? It's pretty much the same scene everywhere you find a medium to large-sized city huge wealthy subdivisions are popping up And that's where people with dough are moving out to why because as you know most of the big cities in Latin America Have a lot of safe areas, but still always nearby That's where the sweaty masses the poor and the gangs are located, too But now they're doing like the gringos did in the 70s 80s and 90s movement to the burbs That would be in the open spaces that were forests and hills and mountains and farmland just five or ten years ago

[10:16] So all over Latin America people with a little wealth are moving to places with fantastic views 10 20 30 even 50 miles out of the big city No soot no smog and an area chicken bus in sight Well, you will occasionally have to fight it out with them on the highway and these places are the epicenters Of the real estate bubble in fact the other day. I was talking to a couple of Latin professionals One was a real estate guy one was a lawyer And they were lamenting the fact that real estate's not selling and rents are going down And they don't understand why so what's that tell you remember like I said before there's only one place in Latin America Where they had a real estate blow-off in fact they've had a few that would be Argentina They're the only Latins that know what it's like and know how to prepare

[11:02] But the rest of Latin America has never really seen real estate go down well It's happening now in fact the Panama Tourism Board just reported in with some figures saying that hotel occupancy since the new year has been at 50% and losing ground down from 70% occupancy in the years previous and they expect hotels in 2017 to be at 42% occupancy and they report the average break-even occupancy rate is 60% meaning most hotels are losing money every day and get this hotel occupancy rates are so pathetic right now The operators are asking Congress to pass a law demanding that the whole country be a hotel duty-free zone for tourists in effect Eliminating custom duties import duties and refunding all tourism taxes to visitors now if they succeed in doing that

[11:53] They'll be the only country in the world where tourists pay no taxes hey now There's a brilliant idea, huh now I want you to keep in mind for just a second what I just mentioned about Panama so hold that thought but first I want to read an email it comes from one of my past expat insiders seminar attendees Kathy Who came down to the seminar with her teenage son? Opening his mind up to a worldly perspective at a very young age isn't that great wish my parents would have done that for me Anyway, she writes just thought you'd get a chuckle out of this great Panama real estate plug-in prediction If you can't let us know what you think on your show ha ha ha hope you're well We'd love to get down there for another poke around Central America all the best Kathy then she quotes Woody Allen from the movie sleeper quote

[12:41] I'm a financial advisor. I help people with their money until it's all gone So anyway what Kathy wants me to look at is this blurb She sent me from that site live and invest overseas calm You've probably heard of them and yes They tell you how to live overseas on the gringo tourist trail and they want you to invest there too But in their pet projects now, I'll give you some highlights from this little promotion But suffice it to say Kathy who wrote the email is laughing all the way She came to one of my expat seminars And we showed and proved to her and everyone else in the seminar with plenty of boots on the ground Exactly why you do not want to buy into this big real estate bubble Unless you find desperate sellers and there are some out there But again, you have to be down here a while and get boots on the ground to see that these guys ready

[13:29] These newsletters are pulling the wool over your eyes in a big way. Okay, let's get to the article now This is from March 17 and I'll paraphrase here It starts with this big headline a bold prediction about Panama's high-end property market We've had a series of five panel discussions and for this week's meetings We've showcased leaf Simon and Lee Harrison one of leaf's markets of focus for the past 15 years and still is today Panama City Panama this morning leaf led a group of 18 conference VIP attendees on a private Panama City property tour I tagged along first stop was an apartment on Avenida Balboa with an expansive ocean view This is one of the best addresses in the city leaf toured the apartments in the same buildings two years ago prices today

[14:16] Noted are up at least 20% in the interim Then he says the capital appreciation in this part of the city should continue above average as well for the indefinite future He says an investment property along Avenida Balboa is as solid a long-term bet as you could possibly make right now Then he says this front line to the water district will hold its value while always Attracting renters, then he says the cost to own along Avenida Balboa today can be as high as $260 a square foot and then he said I predict that in the next five to eight years that the costs will push to $500 a square foot an easy double then he says you read it here first. Okay, it's me now Apparently this brilliant real estate guy has had his head in the sand for the last five or ten years

[15:06] Apparently he hasn't studied or read that the world is heading for the biggest financial and economic calamity in its history It shocks me to think that supposedly intelligent people think things are gonna go along just the same old way They always have hey listen I've been down here more than a quarter of a century and I lived in Panama. I've been in another place 50 times It's at the top of the biggest bubble. It's ever seen and he doesn't see that And remember a lot of brilliant analysts are saying the blowouts gonna come within the next six months and he's looking out five to eight years Yep, he says it'll be a double the prices will go up a hundred percent and then he says you read it here first Yeah, well you heard it here first that he's deluded or possibly just a guy with an incomplete financial education

[15:54] Man does that sound familiar now? I'm not gonna hammer on these international living and overseas retirement people for the other really good things They do they put out some good reports and information and interviews But as I understand it international living has a couple of hundred employees and they can't make their nut by just selling Subscriptions and little reports the real money is in selling hand-picked real estate developments to gringos Hey nothing wrong with that Especially if you're looking to invest and you don't speak Spanish But don't fool yourself that you're getting in on the ground floor The people selling that stuff are the ones who got in cheap you certainly won't So good luck with that and as always buyer beware so bottom line You're not getting ripped off, but you're not getting a deal either And no matter how bright they try to spin it the bubble will collapse now

[16:40] I want you to hear this there are thousands and thousands of choice beautiful spots to live work and or play in Latin America and Avenida Balboa is just one of them though It's terrific Lee hot and they never tell you that in the promotional blurbs So then what about the thousands and thousands of equally fantastic places and other parts of Latin America off the tourist trail Okay, pay attention to this if you bought a nice piece of land anywhere you want in Latin America pick the spot I guarantee you can build any style of house You want first world all the way for 35 to 50 bucks a square foot that's complete So you get the land on a river overlooking a mountain of alkane or a vene or even on the ocean and you can build a beautiful First world house all the way for 30 to 50 dollars a square foot complete

[17:26] I built a number of houses myself for around 35 bucks a square foot now I've known very green gringos who've come down with bad Spanish who've built houses for 50 bucks a square foot sure They overpaid a bit, but that's still a great deal. That means a thousand square foot house 50,000 bucks 2,000 square foot hundred thousand bucks and we're talking brand new just the way you wanted That versus what we just spoke about with Panama where you're paying $250 a square foot and that's not a house with a yard. That's an apartment or a condo That's five times the cost of building in other parts of Latin America that are just as nice just as high-end and conveniently situated, too But let's talk about the bubble and what you could get for four hundred dollars a month renting

[18:11] How about a brand new 1,500 to 2,000 square foot apartment or a brand new two-story three-bedroom house plus? 4400 bucks a month you'll be in a gated guarded community, too, but you need proof, right? How about this right now in my hot little hands? I have one of those glossy monthly real estate magazines Yes, it's called a mobile a punto come that's Www I n mo be Ilia.com if you want to look this up and prove it to yourself Of course this slick magazines in Spanish and it would be because it's off the gringo tourist trail But as I flip through this thing The first thing I see is a page a complete page devoted to a construction company that shows Six different house styles modern colonial kind of bow house

[18:58] Typical suburban American style it says here. They'll build you any style of house complete All you need is to have the land $30 a square foot complete by the way The six houses on this page are actual photos of the houses on that strip I told you about that 30 mile length of the pan-american highway from Guatemala to El Salvador Yes, those are the high-end burbs now you heard me, right? You can get a beautiful first world style house for 30 bucks a square foot Which means a 3,000 square foot house would run you slightly under a hundred grand I know you're thinking impossible right well go to that website by the way That's on page 25 of their latest magazine March 2016, and it's free, but that's not all now

[19:43] I'll flip the page 47 another full page ad from a completely different construction company They show their work to very nice all they want is $26 a square foot complete for any kind of house you want to build that means if you use these guys you could have a 3,000 square foot house for around 80 grand or a 1,500 square foot house around 40 grand you provide the land of course and Throughout this magazine. There's a handful of other construction companies offering pretty much the same thing So what's it gonna be and who you're gonna listen to the so-called real estate experts in Belize in Panama and Colombia who think real estate will never go down only up or you can listen to someone like me who's been down here more than a Quarter of a century who's built more than a dozen buildings apartments and houses

[20:30] Someone who will actually take you on a boots on the ground tour of the good the bad and the ugly not just pet projects In fact and my seminars I take people down right into the epicenter of the amazing bubble down here and people see for themselves why it's a terrible idea To buy anything right now However, if you want to build that's up to you too Because if you can get a nice piece of land exactly where you want it and you've already got the house of your dreams And mine why not build it? It's damn cheap to do But again, you got to be there or it's not gonna get done the way you want it But that's another story just look back in my archives. I talk a lot about that So are you starting to get the idea what it's really like in the real estate sector here now Of course when you look at these glossy magazines You can see you're right in the middle of a bubble too because they've got some very expensive real estate in here

[21:18] Fantastic half million dollar houses two three even four hundred thousand dollar condos sure They're luxurious and they're in great locations But man when the bubble burst you'll be able to get any one of these things for a 25 cents on the dollar Even now parts of the market are collapsing. I mean, come on face it earlier in the show I mentioned exactly what's happening with the hotel and hospitality sector in Panama. It's falling apart In fact, the tourist board is admitting that the average hotel is now losing money and next year They predict it'll even be worse. So then why doesn't our Panama real estate expert named leaf mention that in the article where he says quote This front line to the water district will hold its value while always attracting renters Yeah, bro, and Tang is good for you and Cheetos are an excellent source of fiber and Wonder bread build strong bodies 12 ways

[22:08] Right now one of the telltale signs that there's a big crack in the bubble is that it's a renters market Now don't tell anybody but when you're down here with boots on the ground, you'll find rents are actually falling Of course you won't see that if you do a search on the internet for Latin American real estate because the guys who write those blogs and articles work for century 21 and remax and are sitting up in Poughkeepsie in Cleveland dishing out that info from 2,000 miles away. Oh and by the way on that luxury strip on the pan-american highway How would you like to rent a brand new upscale? 2,000 square foot penthouse apartment with two garage spaces in a gated guarded community. How about 450 bucks a month that includes maintenance water and cable Speaking of maintenance when you're off the gringo tourist trail

[22:54] You'll find at the very high end you'll pay around ten cents a square foot for monthly maintenance charge meaning if you have a 2,000 square foot apartment the most you'll pay is around 200 bucks and that'll include garbage water Cable generally sometimes even internet, but that's the maximum you'll ever pay normally maintenance Labs around 50 to 60 bucks a month for a 2,000 square foot place Of course, we're talking off the gringo tourist trail now However on the gringo tourist trail you're looking at maintenance costs that two and three times as much oops There goes the social security check Oh, and by the way, I said there's a crack in the bubble because the rents are so low and it's a renders market Well, there's another crack in the bubble, too That would be the imminent collapse in the value of beachfront properties and beach houses

[23:41] And there's proof right here in that same glossy real estate magazine There are a lot of private homeowners taking out ads in this magazine trying to sell their properties And I see here at least a dozen beachfront in fact oceanfront properties whose owners are obvious Desperate sellers that's where you can step in now I'm not much for a pacific beachfront myself because the water is not crystal clear and the sand is dark So it's hot. You can't really walk on it without shoes or sandals, but I can tell you this in Latin America That's where the rich people hang out. They build private beach houses up and down the Pacific Coast. They're everywhere now Of course, we're talking about places not one 10th has developed as Acapulco or Cancun or Playa del Carmen or any place on the beach In Costa Rica, but it's typical to see the occasional little town of 500 to a thousand people and an adjacent long strip of beach houses

[24:33] There are hundreds if not thousands of setups like that up and down the Pacific Coast of Latin America Okay. Now, let's look at page 30 in this glossy real estate rag It says brand new house in Monte Rico that specific beach town three bedrooms pool, etc 150 feet from the ocean then they show a very nice picture of a two-story beach house And it says all that for a hundred and twenty grand now. He's a desperate seller You offer him ad and you'll probably get it Do you hear what I said 80 grand for a three-bedroom beach house with a pool a black from the ocean now? I'm on page 30. Here's another one with a photo that says right in front of the ocean three bedrooms swimming pool 78,000 bucks. How about this one three bedrooms pool right on the ocean 90 grand

[25:21] You want to hear desperate? Listen to this 300 feet of oceanfront a house with seven bedrooms a half-acre land all for US 125,000 bucks now there's Desperation and there's much more So what I'm seeing in these glossy real estate magazines is that the bubble is cracking around the edges beginning with beachfront properties And why is that? Well, you see because only wealthy people build these things and they only come up on weekends And after a while that gets old and with the salt and the humidity in the pool They have to be maintained meaning you have to have a maid or a gardener or a caretaker living there full-time Taking care of the place when you're not there You do want it nice when you show up on weekends now Don't you and since practically every socioeconomic class in Latin America is tapped out on credit

[26:09] It's awful hard to maintain that staff in your big house in the city and keep that beach house going, too So when things get tough you sell the beach house and when you can't sell it Well, all of a sudden it shows up on bulletin boards in those high-end malls and supermarket bulletin boards in high-end areas for rent And when's that bubble really gonna blow? Well, don't worry I'll keep you posted periodically But bottom line do not buy any real estate unless you find a desperate seller and they're out there because I'm showing you a few Right now and don't please don't listen to these guys and gals who are pumping real estate at these Panama Costa Rica and Colombian seminars Believe me They're guiding you to their own personal hand-picked projects and though you may think the rental rate of return looks good And you're getting in on the ground floor. There are no ground floor investment opportunities on the gringo tourist trail and the numbers

[27:01] They're promising assume no economic turmoil The okay getting close to the end now Don't forget to go to www the new expat.com and listen to our expat blogger John Gulf I'm there too And of course check out my youtube channel for the slides to go along with the audio and if you want to get in On the early bird discount for my July 2016 Latin insider seminar And yes, I really will hold your hand and show you the real estate bubble Just send me an email the expat files at gmail.com and I'll put you on the list south of the border You've been listening to the expat files living in Latin America coming to you twice a week from somewhere south of the border Email me the expat files at gmail.com And if you want me to help you sort out your own Latin American plans schedule a one-on-one

[27:50] Consult with me just send an email and let me know at the expat files at gmail.com. No spamos