#107 – The Expat Files: Real Estate, Taxes, and Living in Latin America

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

[00:03] Hi everybody, I'm Johnny Mueller and you're listening to The Expat Files, living in Latin America. The show that tells you what it's really like to live, work, play and or retire in Latin America. I tell it just like it is, not the version they give you in those glossy travel magazines, or the picture they paint for you in those international traveler websites, where they're only trying to sell you something. What's it really like for expats living in Latin America? Well, it's time to take off those rose colored glasses and find out. So let's get started. Well today I think we'll do some housekeeping. I have a ton of emails and a lot of really good ones, so we'll try to clean up some of those first. Okay? We'll start with this one from Nick. He says, dear Johnny, you're a big jerk. No, just kidding. He didn't say that. But now that I've got your attention, here's what he really said.

[00:51] I have a question for you. I'm concerned with the financial status of the US, as many are. I'm also looking to diversify my assets by investing internationally. What do you think about purchasing an investment property in Latin America that can serve as both a cash flow vehicle and a ticket into a Latin country if crap goes down here in the US? I also like the idea you mentioned of holding this property in the Latin version of a corporation and use the stock idea you mentioned to keep it on the QT. So what are your thoughts? What country or country's cities would best fit for an expat wannabe and his wife for cash flow and international refuge? And what steps can I take to educate myself more? I'm totally down to schedule a trip and work with a local to identify the best real estate options. Et cetera, et cetera.

[01:37] Well, thanks, Nick. So let's get into some of that, okay? Well, in regards to purchasing a property down here in Latin America, with an eye towards investment, if the crap hits the fan up in the first world, well, the crap already did hit the fan, Nick. And the fans just been revved up and another volley of excrement is coming, so you better get ready because it's going to be worse than the first one. And that's not just my opinion. If you listen to the other PRN shows, you know that it's true. And what I'm advising for expats and expat wannabes, who want to come down here to ride out the storm, well, I'm saying it's a very good idea to do that. But it's not exactly a great idea right now to buy land or real estate down here. And the reason is, the first world financial and real estate crashed at your head starting in about 2008, which was followed by all those huge trillion dollar bailouts. Well, just like everything down here in Latin America, they haven't quite felt that effect

[02:25] yet. And it's coming. I can see it just around the corner. But as usual, delayed by a few years. And what I'm seeing down here is a pretty good replica of a lot of the things that led up to the crash in the first world. First of all, they've got massive real estate overbuilding down here. You can't drive six blocks out of any big city and not run into a half a dozen or even more huge subdivisions with hundreds and hundreds of houses that aren't quite complete yet, with hundreds, even thousands of units yet to be sold. And the vast majority of these houses, condos, and condominium projects are not going to have enough cash on hand to actually be completed. Since when financing a project like that, you depend an awful lot on pre-selling those units to keep the cash flow going. And guess what? In the last year or so, that pre-selling business has disappeared pretty much all together.

[03:10] And the thing is, these projects almost always offer their own financing. So a huge percentage of people who are buying into these projects are very late on their payments and are in fact defaulting because they weren't qualified by a bank but by the property developer who's offering financing. And property developers are always more lenient on that because they want to make that sale so bad. Sound familiar, anyone? And it's true. A certain percentage of these big projects are funded with cash, narco cash, which means there's no banks or financing involved at all. And nobody knows exactly how many projects there are like that, funded with narco money that is. I mean, who's got the balls or the lack of brains? To walk into a model house or condo and ask, hey, by the way, is this a narco funded project? I don't think so. But that doesn't even matter.

[03:57] If individuals and their families don't have the money to buy in, that means big problems on the horizon. And there's thousands of brand new empty units already in every big city in Latin America. Yet some developers are actually breaking ground for new projects, if you can believe that. And there are dozens of new ones on the drawing board slated to start in a few months. Are these people crazy? And it looks like some of these big projects have run out of money already. So it's a huge buyer's market right now. And the buyers don't have any cash. And from what I see, it looks like within a year to a year and a half, there'll be so many houses and condos and residential towers on the block that prices just have to drop 40 to 50% from their highs right now. And when I say highs, real estate prices in Latin America are at all time highs. But we are talking about Latin America now, not the first world.

[04:43] Anyway, if you're off the tourist trail and you're not in Costa Rica, Panama, or in resort cities like Cancun and Rio de Janeiro, and I have to include Argentina and Chile, well if you're not real estate hunting in any of those places, anywhere else, you'd be able to buy a nice three or four bedroom, three or four bath, 100% first world style house on a third of an acre or more for about two to three hundred thousand dollars. And even though that might sound pretty cheap to a lot of you expat wannabes up there, it's still an all time high for down here in Latin America. And you can get a nice secure luxury two or three bedroom apartment in a beautiful residential tower with underground parking, a swimming pool, and a gymnasium in your building for a hundred to two hundred thousand dollars if you know where to look. And about those property taxes, well if you're off that tourist track like I said, on properties

[05:29] like that, you're only going to pay anywhere from a hundred to three hundred dollars a year. No, not a month, a year. And that's one of the absolute beauties of living down here, believe me. The unbelievably low property taxes. Now I know that some properties like that, up in the first world, have slipped to fifty percent of their former value, which means a nice four hundred thousand dollar penthouse condo is now about two hundred thousand. However, you're still going to pay five, six, or even ten thousand dollars for your yearly property tax bill. Nobody cut that by fifty percent now, did they? In fact, I know people up in Chicago who have little cracker box style houses that are worth about a hundred and fifty thousand dollars now after the crash. And they're still paying four or five thousand dollars a year in property taxes. Man, what a ripoff. And when I try to tell them that a first world style house worth twice that, down in Latin

[06:15] America, only pays between a hundred and three hundred dollars a year in property taxes. It's as if they don't even hear me, their eyes glaze over, and they just keep flicking through the remote control to the next reality show. I mean, it's as if I just said a meteor just landed in your backyard. And they just nod and say, yeah right, hand me the Cheetos. But I assure you, it's absolutely true, the property taxes are really that low. But on the other hand, you don't really get anything for that hundred to three hundred dollars you pay in property taxes down here. It's all scammed or pissed away by the government bureaucrats. And all the roads and infrastructure projects you do see down here, they're due to IMF loans and first world donations, giveaways, and junk bond issues. Because you see, the actual tax dollars collected down here in Latin America are all stolen or skimmed or used to pay bureaucratic salaries.

[07:02] Now, I'm holding in front of me a very interesting article that came out this week from the World Bank that I'm sure you'll never read about in the first world. It's an analysis of all the Latin American countries and how they spend their tax money. And I'm talking about the actual taxes collected from the people, not the monies that are brought in through loans and first world giveaways. Now listen to this. For every dollar collected in taxes, whether it's license fees, direct tax, EVA, which is value added tax, like you see in Europe, which is built into everything you buy, and down here in Latin America, it's anywhere between 10 to 20 percent of every single purchase you make. Depending, of course, which of the 20 Latin American countries you're in. And because it's included in the price of every product, it's an embedded tax, not just a one-shot deal when you buy a product. That EVA tax, whether it's 10, 12, 15, or 20 percent, is taxed all the way down the

[07:51] chain of raw materials till you get to the finished product. So you can imagine when building a car, for example, which has thousands of parts, each one of those parts is individually taxed before it ever goes into the car, and when the car is finally built and sold, it's taxed again. That's double, triple, even quadruple taxation and more. So in effect, Latin governments and European governments collect unimaginable amounts of revenue through the VAT, or EVA, as they call it in Latin America. What an invention. With the VAT, the public doesn't even know what hit them. But don't be fooled. In case you have the mistaken idea that because 30 to 40 percent of the people down here actually work off the books in the gray market and the informal economy, they say, well that might lead you to assume that most governments don't collect much in taxes at all.

[08:38] Well, you'd be completely wrong, because even if people are off the books, which means they don't pay personal taxes on income, well whether they're taxed on income or not, every single person pays the value-added tax on every single product they buy. And now I'll give you a breakdown from this article on how Latin American governments spend that tax money, and like I said, most of it comes from that value-added tax. Well, for every dollar in taxes collected, the average Latin American government spends 65 percent of it, that's 65 cents, for every dollar of taxes collected, just on employee benefits and wages. In other words, it's salaries for useless bureaucrats and paper pushers. And 15 cents of every dollar pays for the interest on all the massive debts that they've accumulated. That's the interest on all those IMF and World Bank loans, as well as the B and C-rated junk

[09:28] bonds that they float every year to try to cover their deficits. So if you add that 65 percent labor cost to that 15 cent interest debt charge on every dollar, together those two things take up 80 percent of every tax dollar received. In other words, 80 cents of every dollar goes right in the toilet, leaving just 20 cents of every dollar for infrastructure and actual physical improvements to the country, like roads and schools and water treatment plants and computers, as well as to buy supplies, parts and materials to do the maintenance on the existing physical plants and the existing infrastructure that was under-built in the first place and always falling apart. Now, I know what you're thinking, 20 percent maintenance and reinvestment on every tax dollar collected is a very bad return, in fact, a really poor, if not pathetic, bang

[10:14] for your buck, and basically unacceptable to any rational person in private business. But we're talking about a different animal here, that vast slimy parasitic cancer called government. But let's get back to that 20 percent that's actually used for investment and maintenance. Well, guess what? It's not really 20 percent at all, it's more like 10 percent, because it's been estimated by international organizations and World Bank figures, too, that 50 percent of every tax dollar collected in the third world is either stolen, skimmed, or misappropriated, which is a nice way of saying that insiders in government let out contracts and sweetheart deals to their friends and relatives. So there you have it, folks, 10 percent of every single tax dollar collected in Latin America gets used for infrastructure, maintenance, and development. In other words, 90 cents of every tax dollar collected goes right in the toilet.

[11:02] But if you're a Pollyanna or a supreme optimist, the best that you could say about Latin American governments is that they're all just a kind of a super inefficient wealth transfer program that takes money out of everyone's pocket to pay for a hugely inefficient make-work jobs program. And it's an artificial jobs program that pays twice what the private sector pays. And just like any cancer, including governments in the first world, its only objective is to feed off the host and grow larger. Okay, it's time I get off that rant, and now back to the emails. Sorry about that. Anyway, to repeat, just wait a year or so before you buy property in Latin America, because the land and real estate markets are poised to take a big dive, so just hold on a little bit. And in his email, Nick is also asking if it's good to hold a property down here in Latin America as a good cash flow vehicle and as an eventual ticket into Latin America when

[11:50] Uncle Sam steps in the next big cow pie. Well, Nick, one thing you have to know, if you have a property down here in Latin America or a business or a rent producer and you expect to get a decent cash flow out of it, well, you can do that all right, but you have to stick around close to your investment. You can't leave six months out of the year and expect it to just roll along like a good old cash cow. And though a lot of expats down here do have cash cows, it's the rare guy that makes a killing, coming down here, opening a business, getting it started, and heading back up to the states. After all, this is Latin America where the average guy makes about $300 a month, which means if you get a business started, let's say a restaurant or a bar or a disco or a US franchise like Subway or Kinko's or even a mom and pop bed and breakfast, if you take off for a few months and don't put someone in charge who's absolutely got all the values

[12:36] of a first world business person, when you come back down, after you've taken a nice three or six month sabbatical, you might have a huge shock in store. And I've seen it happen. Because even if you've got a good manager and you trust him, you're only paying him maybe four or $500 a month. So there's an awful lot of temptation there too. And it depends a lot too on what kind of business you have. For example, if you're renting out mini storage units, the ones you can put a car or two in or furniture, you know what I'm talking about. Well, if you're not there for a few months, your manager can skim money from you by taking the rent from a new client and not writing it down in the books. And if he reports just a few extra vacancies when you get back, you'll be none the wiser and he'll have done a nice skim. Because if you normally rent those units at 100 a month and your manager gets two or three free rents out of you a month when you're not there, well, that's half a month's salary

[13:23] for him. Of course, that does happen up in the first world too, especially in the bar and restaurant business where inventory has a tendency to grow legs. And as you well know, in a cash business like that, when the cats away, employees will skim. And down here in Latin America, cash still is king. So to a guy making $300 a month, if the boss is away and he can skim 20 bucks out of the register just once in a while, well, that's more than a day's pay for him. And the way he figures it, probably worth the risk. Anyway, if he gets caught and gets fired, there are hundreds if not thousands of $300 a month jobs available in any big city down here. So he'll just make a lateral move to another job just like the one he lost and he'll probably skim from them too. And here's the thing, when you fire a guy down here in Latin America, he or she will always ask you for a letter of reference, which is quite ballsy, especially if you fired

[14:11] him for stealing. But it doesn't matter, they'll still ask you for one and they'll ask you with a straight face too. And though you'd be nuts to actually write him a letter of reference, there is one way to burn a guy like that if you really want to. And a guy that steals from you probably deserves it. Well, if you do want to stick it to him, write him a real nice letter of reference, but one that'll backfire on him. And by the way, a letter of reference from a real live gringo means a hell of a lot down here to a person and to a prospective employer. It's that special gringo advantage working again, but in this case, it's working for the guy you gave the reference to. Because if a prospective employer gets a letter of recommendation written by a gringo, he's automatically thinking that you've trained the applicant like a first world employee. That he's going to be a little bit faster, a little more conscientious, a little cleaner,

[14:57] and actually get to work on time. You know what I mean? It's that old first world stereotype working in our favor. I mean, the guy you gave the reference to. And a prospective employer reading something like that from an ex-boss that was from the first world like you or me, well in the back of his mind he's thinking, some first world qualities must have rubbed off on this guy, and everyone in his brother down here wants an employee like that. So how can you burn a guy who you've just fired? Well, when he asks for that letter of reference, give it to him. But be sure you put in the letter somewhere that the employee has some special skills and that whoever is reading this letter should feel free to email or call. And make sure that letter is in English and not Spanish. It's better that way and much more impressive. And anyway, the guy that you fired is a working stiff that certainly can't translate English. Okay, so how does this burn the guy who's been stealing from you? Well, here's how it works.

[15:43] The next prospective employer that gets your letter of reference in English is going to be a little bit shocked because he's probably never ever seen a letter of reference in English before. In fact, I can practically guarantee that. Anyway, he's going to be so impressed that he's actually going to have that letter translated in Spanish and he'll call you or email you. Now that's happened to me a couple of times already, so I know it works. And that's when you tell him the truth, that this guy was a sticky fingered little thief. And I guess you might be wondering right now why people even bother to write letters of reference for people who they fired for one reason or another. Well here it is. You might not believe this, but the Latin people in general are just so damn nice they don't want to hurt anybody's feelings. Latin people in general just do not want to rock the boat. They're generally very easy to please, all smiles, and very helpful in all kinds of circumstances.

[16:33] And most often even when a Latin boss fires a guy, he's nice about it. But that carries a double-edged sword. In fact, most Latins are so accommodating and easygoing. I've never yet met a pure-blooded Latin who had what we call in the first world an aggressive type A personality. In fact, it's more the opposite. And because of that desire to please, when you ask a Latin person a question, they'll often give you an answer that's wrong just because they don't want to disappoint you by saying they don't know. And after a while, every first world tourist down here kind of figures that out. For example, you ask a Latin guy on a corner, where's the gold museum? Or the Danish embassy? Or the nearest rent-a-car place? Well 9 times out of 10, whether he knows where that place is or not, he'll give you some kind of directions. He doesn't want to look like a dummy in his own town and he doesn't want to disappoint

[17:19] you, so he'll send you off with some kind of directions. And the same thing happens when you're in a store buying something. For example, let's say you wanted to buy a 32-inch plasma TV. And there's a floor walker right there, ready to answer any of your questions. Now suppose you asked him a few questions like, can you hook this up to your computer? How much energy does it use and how long can you expect it to last before it burns out? Well I guarantee you, your average floor walker making 300 bucks a month doesn't have any idea how to answer questions like that, really. But he'll try and he'll give you a lot of wrong information with a smile. Now of course I'm not saying they don't know anything about the products at all. I mean, if you go to a computer store and all they're selling is computers, well, the guys on the floor are going to know they're computers. But in general, if you go to a big variety store, like Sears or Walmart, there's just so many thousands of products that no one's an expert.

[18:06] But you'll rarely get a worker to say, I don't know, sorry, I just don't know. Or I can't tell you right now, but I will get an answer and call you back. I've never heard a Latin salesman say that. So basically, you have two problems with customer service in Latin America. One, a lot of times there just ain't no customer service. And when it seems like there is, they just might be feeding you a line because they don't want to disappoint you. Now if you think I'm handing you a line about this, you can try it yourself. Just go to any gas station in Latin America and ask one of the attendants for directions to a restaurant, a hotel, or a shopping mall. Well I can tell you from personal experience, if the place you're looking for is not within spitting distance, you're never going to find it by asking one of those guys. But I'll tell you one thing, gas station attendants are really good at going into a huddle, like football players do. And often, even when three or four of them put their heads together, they'll still give

[18:53] you a completely bad set of directions. And that's if your Spanish is decent. Imagine the poor tourist down for the first time who's got Montezuma's revenge and can barely ask for directions to the toilet. And speaking of toilets, that brings me back to those letters of recommendation I was talking about before. Now, every time I've ever hired a person down here, I actually try to check their references. And to tell you the truth, I don't think they ever expect you to follow up on those letters of recommendation. I mean, actually call the person who wrote it. And that's just the reason why you should. Because a previous boss will tell you something over the phone that they'll never tell you in a letter. And I've found personally that even if the guy or gal on the phone is a bit hesitant when you ask a question, I found a great way to get him to open up, is to just ask if he trusted that employee enough to leave him in charge when he, the boss, was on vacation.

[19:39] And the second question you should ask is whether or not the employee blended in or mixed well with the other employees. And of course, ask if the guy got fired or not. Because you'll never see that on a letter of reference, that's for sure. And then ask that crucial question, would you ever hire the guy back again? Anyway, you get the idea. Do check those letters of reference, even though practically no one else does down here. Oh, and by the way, when Expat Eddie wants to burn one of his ex-employees, he writes a real nice letter in English, though he puts a lot of expletives in it. And some off-color sexual references, too. In fact, Eddie can make a letter of reference sound almost pornographic. And I don't need to tell you what kind of effect that has on a prospective employer. Alright, now let's get back to the rest of Nick's email. He was wondering if investing in a business or land or property in Latin America would

[20:28] give him a kind of a leg up in the Latin country or city of his choice. Well, of course it does, and it helps in a big way. Just that small act of buying some land or some real estate will help you orient yourself and find your way around, your Spanish will get better, you'll hire a lawyer and he'll explain all those great things he can do for you, like protecting your assets by using a society anonymous corporation, and he's the one that'll do all the work to get you your permanent residency, he'll help you buy a car, get your driver's license, and even get you a gun permit. And those are just some of the many things he'll be able to do for you. And when it comes to getting permanent residence, if you have a business, own a piece of property or some real estate, that's usually enough for your lawyer to get you on the fast track to residency or even dual citizenship because it's proof that you're providing jobs for local residents and that you just didn't come down to the country to exploit the resources

[21:17] and send your dollars back to the first world. So here's the thing, if you can prove that you've got a few employees, you almost always can get your permanent residency and even dual citizenship without a problem and in a hurry. And think about this for a second. In more and more countries throughout the world, that good old American passport is not the gold standard of documents that it once was, not by any means. Just take a trip to the Middle East, flash it around and you'll see what I mean. In fact, in some parts of the world, and I'm not talking about Latin America now, when planes are hijacked and hostages are taken, they almost always target American citizens. And in that regard, things are only getting worse. So knowing that, wouldn't it be nice to have residency in another country completely off the radar or even dual citizenship? So if worse comes to worse, you just flash those documents instead of your good old US

[22:05] passport. Just a little food for thought. And finally, in Nick's email, he asks about how to educate himself in general and especially learn more about the real estate market down here in Latin America. Well, I always recommend, months before you come down, you get online with some of the big Latin American newspapers, the dailies. Every big city, over half a million in population, has five or even ten big newspapers. But there's always one or two with huge circulation and those are the ones you should look for online. Go on Google and put the city that you're interested in, or the country, and put in the word prense, P-R-E-N-S-A, which means press, or the audio, which means daily newspaper. And that's spelled D-I-A-R-I-O, the audio. And if all that stuff comes up in Spanish, just use that Google Translate feature right

[22:51] on the Google screen and you'll get to read everything in English. So once you've found one of those big daily newspapers, you can look at all the editions for free online. And at first, just skim the headlines. To see who's killed who that day, which bridges have collapsed, how many chicken buses have fallen over cliffs, and which politician has been caught with his hand in the tail that day. And that's the kind of stuff you see in the first four or five pages of every Latin American newspaper. Big or small. But you should never let that scare you because you know the old saying in journalism, if it bleeds, it leads. Go ahead, skim that stuff if you like. But I suggest you go to the classifieds and the want ads. Now that's where the real meat is. And that's how you figure out the cost of living in the country. Because you'll see all the real estate stuff. You'll learn about the high end and low end districts of town. And that's because all the real estate listings are conveniently placed under neighborhood

[23:38] headings. In other words, if you see a certain neighborhood, like San Marcos, for example, and all the houses and condos seem to be around $150,000 or more. You know you're in a very high socioeconomic district. And you know there will be a higher class of people living there and it will be much more scenic and prettier and more secure than a neighborhood called Las Palmas, which has some houses and condos for sale for $40,000, $50,000 and $60,000. And of course, always check out the rentals and the square feet of those rentals and the neighborhoods that they're in and you'll get a good idea of what kind of neighborhoods they are too. And by the way, they don't use square feet down here, they use square meters. And one square meter is just under 10 square feet. So someone who's got a 200 square meter apartment for sale or for rent has got about a 2,000 square foot apartment. Just add a zero.

[24:23] It's as easy as that. And another nice thing about reading the one ads and the classified ads, you'll find there's an awful lot of words that are spelled in English or seem very close enough to English that you'll understand them. Like for example, guitara is guitar, trompeta is trumpet, in buen estado means good condition because buen is short for bueno. Bueno means good. Like buenos días which means good day. So buen estado means good state. Estado means state. State means condition. You know the state of things. So buen estado means in good condition. Are you still with me? Are you asleep yet? Well, all I'm saying here is you pick up a one ad and you're going to understand maybe half of the words in there. They're going to be so close to English or near English that you're going to pick out

[25:10] all the high points. And you know, if you do this for 15 minutes a day, just go through the one ads and the classifieds in a big Latin American newspaper. In no time, your Spanish is going to get better and better and better. And a very good place to start is the classified ad section for cars. Because in those ads, even a person who knows no Spanish at all will pick up about 90% of it. They use the words motor, automobile, cuatro por cuatro, you know, four by four. And you'll get all the colors in Spanish like black which is negro, blanco which is white, rojo red, naranja which is orange, well, forget naranja, who wants an orange car, right? Anyway, that's how I suggest you get started. Reading the newspaper on a regular basis is second only to coming down here and hanging around for a while. And once you've been on the classified and one ads for a while, you should finally move

[25:55] over to the op-ed page of the newspaper and the letters to the editor, where you write in to usually complain about things, things like bad service, unresponsive police, government people who blow you off, product defects, you know, all that kind of stuff. And of course, every newspaper, first and third world, has one or two pages devoted to that kind of stuff in every daily edition. And once you start slogging through that kind of stuff, which is kind of fun actually, you really get an idea of the pulse of the people in the city that you're checking out. And in the process, you get to find out the good from the bad. The good and bad doctors, the good and bad hospitals, the good and bad insurance companies, the good and bad car dealers, you know what I mean. If you scan those op-ed pieces and read the letters to the editor, you'll rarely get a handle on that city or country. And though it might seem like everybody's complaining about something, you'll be surprised

[26:41] to find a lot of people are quite complimentary when they do get good service. And you know, the more you read those letters to the editor, you realize good service is practically a rarity in Latin America. In fact, people actually compliment storekeepers and floor walkers for just doing their basic jobs, the thing that they're paid for, which means nothing less than great opportunities for expats and expat wannabes, doesn't it? And just for your information, don't bother wasting your time with the sports pages down here. They're just as big a waste of time, if not more so, than the sports pages up in the first world. And if you want to know why I'm so down on professional sports, well how's this? Just give me a couple hundred million bucks, and about two or three years to buy all my players and get all my doping doctors lined up, and I guarantee you that my team will win the World Series, or the Super Bowl, or the World Cup, or any crown for any championship

[27:30] in any sport. Take your pick. You've been listening to The Expat Files, living in Latin America, coming to you each week from somewhere south of the border. And don't forget you can email me on anything at all about Latin America, The Expat Files at gmail.com. Once again, The Expat Files at gmail.com. See you next time. Nos vemos.