#281 – The Expat Files: Pensionado Programs, Real Estate Bubbles, and Cultural Immersion in Latin America

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

[00:14] 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. Now before I get started today I want to tell you that if you go to expatwisdom.com right on the main page you'll see posted a 10 minute slideshow and audio presentation put together by two of my newest friends Dean and Heather who came down to Central America for my last Expat Wisdom seminar and stayed on for a while to explore a bit on their own. So all you guys and gals out there wondering about what we did and saw on the boots on the ground part of the seminar, Dean and Heather put together a nice little slideshow of the seminar and some of their own adventures too.

[01:02] So just go to expatwisdom.com and on the main page you'll see the link and you'll get to see all the cool things that we saw and you missed. Okay here's something we don't talk about much, those deals that certain Latin American countries are offering to first world people who specifically want to come down to their country and retire. You've heard about those pensionado programs right? Now no matter what you've heard about those pensionado programs, I'm going to give you some figures on the subject that'll blow your mind, I think. Now you hear rags and mags like international living and dozens of retirement websites talking about those pensionado plans like they're some great gift to mankind. Supposedly if you do qualify for one of those plans and you get that pensionado residency, the government is supposed to give you certain deals like letting you bring in a container

[01:47] full of furniture without duty as well as bringing your car in without duty and you're allowed to sign up for the country's national health plan, which believe me is more a curse than a blessing, since you absolutely want to choose private medical coverage, but that's another story. Anyway, you're supposed to get certain discounts in retail establishments and such, including restaurants and public transportation and bus fares too, which again could very well be more a curse than a blessing, since public transportation in Latin America is well, pretty much as pathetic as everything else Latin governments do, which is just a few degrees more pathetic than the way the government runs things up in the states, just to make a reasonable comparison here. Anyway, these pensionado programs promise a lot and you read about them everywhere, but

[02:32] are they really worth it? And the way international living and some of those websites talk about these programs, you'd think the gray-haired crowd would be rushing down here by the tens of thousands to get in on the game before the government's down here slam the door shut, or wipe out some of the benefits that they initially started with. And believe me, as time has gone on, nearly all of the pensionado programs have been watered down to milk the gringos that have already landed and settled. I mean, come on, that is every politician's job description now, isn't it? Well, let me just tell you right now, when I heard the real figures regarding the actual numbers of gringos and foreigners who've taken advantage of these programs, it shocked me too. In fact, I can't for the life of me think why these programs are so unsuccessful. You heard me, I said unsuccessful because, listen to this, now let's talk about Costa

[03:21] Rica, which had one of the first and most famous pensionado plans going for more than 30 years now. Well, I want you to take a guess right now, how many people total in all of Costa Rica are on that pensionado plan? How many foreigners? Guess what? There are only 5,000 people in the whole country on that pensionado plan. And that's not just the ones that signed up this year or in 2012. That's the total number. Now the last debt I have for pensionado signups in Costa Rica is 2011. And guess what? Only 550 people got on that program the whole year. Is that anything to write home about? Does that justify all the publicity that program gets? I don't think so. And listen to this, you hear about that great Panama pensionado program, everybody's talking

[04:08] about that one, right? And the last collected debt on that was 2011 too. And guess what? In the whole country of Panama, up to 2011, there's only 2,164 people on the pensionado program. And according to the government, for the last few years, only about 400 people a year actually apply for the program. Is that a great measure of success? I don't think so. Not for a country of 3.5 million people, come on. Now Nicaragua has a pensionado program too, and people are talking about that one. Since Nicaragua is just now getting on the radar as a nice, cheap, relatively safe and very hot place to retire. Hot, I mean climate wise. And as of 2011, in the whole country of Nicaragua, there are only 1,322 people on the pensionado

[04:56] plan. I don't get it, what's going on here? And Belize, what about Belize? Everybody's talking about Belize because, well, it's the only country in Latin America that speaks English, or at least 90% of the people do anyway. Well you've heard about their pensionado program, haven't you? That's all over the internet too. And as of 2011, they've got a grand total of 560 foreigners on the pensionado program in the whole damn country. I mean, come on, that's nobody's definition of success. And their government statistics say less than 70 foreigners a year apply. But you know, the first Latin American country of all to have one of those pensionado programs was of course Mexico. I mean, people have been going down to Mexico buying property and having vacations there

[05:41] for something like 100 years or so. And naturally that's exactly what the government of Mexico wanted to encourage. Foreigners with dough moving down permanently. Thus, many years ago they created their pensionado program, which they've watered down quite a bit since then. So here's the 2011 number on that. They've got just about 50,000 gringos on their pensionado program right now, total. But with the huge rise in crime and insecurity in Mexico, almost no one's applying to the pensionado program there anymore. Because of all that bad PR, the active pensionado program is dead in the water. And in fact, over the last 10 years, the total pensionado program numbers have been dropping year over year. So let's talk about Panama's program for a second. A friend of mine who lives in a luxury gringo development in Boquete, Panama, he told me

[06:29] on the side that people who are on those pensionado programs, almost all of them are on fixed retirement incomes from the states and not very big ones. Mostly they'd be considered middle class in the states or slightly less. He told me that all his friends and neighbors who live in Boquete don't care one bit about that pensionado program. And even though he says about half of the foreigners there have Panama residency, and they got their residency the easy way by just buying a property for 200 grand or more. In fact, that's how the vast majority of all foreigners get their residency in a Latin American country. Simply by buying a property for 100 grand or more, or opening a local bank account with a deposit of maybe 25 grand or more. Of course, the amount depends on the country that you're in. Then you just let your lawyer take it from there, and within six months or a year you'll

[07:18] have your temporary residency, and the permanent one will come a year or two after that. Then after five years or so, if you're a good boy or girl, and if you haven't killed anyone, robbed a bank, or impregnated your cleaning lady, you can apply for and receive permanent citizenship and get a passport. Oh, and by the way, I take that back. If you happen to impregnate your cleaning lady, that just might be a fast track to get in a passport. And by the way, that's been known to happen. Many a jilted love-lorn gringo has fallen in love with a cleaning lady. That's why Expat Eddie advises all his single gringo friends to hire an older, homely one. But we'll save that discussion for another show. Anyway, my gringo friend in Panama says, Nobody on the pensionado plan, that is middle-class Americans that have come down, could ever

[08:03] arrive these days and afford to live there anymore. He says it's not like five or even three years ago. Now in his subdivision, a little ways up the mountain, where the weather's nicer and it's not so damn hot. Off the Pan-American highway about an hour's ride from Costa Rica, he says, If you have a decent house with a mountain or a Pacific view, you're going to pay an average of 400 grand for the privilege. Not to mention, because it is a guarded subdivision, you'll pay four to six hundred bucks a month maintenance. And like he says, if you can afford that kind of dough, you do not need to be on the pensionado plan. Nearly all of the people he knows on the pensionado plan in Panama, and for that matter on the pensionado plan in Costa Rica, are on a pretty tight budget because they're only getting a small pension or a social security check.

[08:50] And that's why they applied for it in the first place. And like he says, his high roller friends, they just make a face when someone even mentions the pensionado program. They say conforming to the rules is a much bigger pain in the ass than any benefit you get out of it. Not to mention, when pensionados say, well, I could bring in a container full of my furniture, duty free, and I can bring my car in without paying taxes. Well, when it comes to the furniture, you're still looking at five or ten grand for the insurance and the paperwork and the custom fees and the lawyers, and the shipping itself. And as for the car, there's so much hassle and paperwork bringing that thing in. The shipping duties, the insurance, the paperwork, and the lawyers, everyone says you're better off buying one down here. And you often hear about the discounts you're supposed to get when you're on that pensionado program. For example, in restaurants, cafes, supermarkets, and pharmacies.

[09:39] But restaurant owners, bowling alleys, and health clubs and such often don't give you the deal you were supposed to get. Because after all, it's the government that's making that promise to the pensionados, not the private businessman. And when someone doesn't give a pensionado his discount when he flashes his pensionado card, you don't see gray-haired pensionados making a stink about it. They don't argue. They don't want to get in a fight. It's not their country. And generally, their Spanish sucks, so they're on shaky ground from the get-go. And you know, in a way, it's like those retirement villages in Arizona and Florida. The gray hairs all kind of stick together and they know where they can get the best deals and the best discounts. And the all-you-can-eat $1.99 greasy spoons. And for some, it becomes kind of a competitive game that they play the rest of their lives. You know, what gas station has the cheapest gas?

[10:25] What restaurant serves the cheapest, biggest portions? Who sells the biggest discount box of Depends or Denture Cream? So yeah, if you want to come down as a pensionado, you can hang with the cut-rate coupon clip and crowd if you want. Because you know, like finds like, right? But the vast majority of expats don't come down to live like that. And the proof of that is the fact that so few people actually enter those pensionado programs. And here's something that'll make you laugh. The very discounts that, for example, in Panama, the pensionados are supposed to get, the average person on the street can get too. Almost always simply by asking. Since Latin America is a bartering society. Now you know, up in the first world, you can often get a 10, 15, or 20% senior discount on certain days, right? Well in Latin America, I can walk into any mom and pop store or restaurant, market or

[11:15] retail shop and negotiate a discount myself. As long as it's not a transnational like Office Depot or McDonald's or Kentucky Fried or Sears that's got a fixed price on everything, then they might not budge. But if you do tell them you're a senior citizen, often they will. And I should talk about gray hairs. Soon enough I'll be in that category and I'll be glad if I do have gray hair. Any kind of hair. So as it turns out, the average foreigner who owns a house or a property, they just came down for a more leisurely lifestyle, better weather and to get away from the states, and they don't need to beg the Panama or Costa Rican government for little favors like 10 or 20 or 25% discount at the pharmacy or at the doctor's office. When first world quality health care and drug prices are already about a fifth, that's 20%

[12:02] of what you'd pay for the same thing up in the first world. And when you're off the tourist trail, it could be up to a tenth of what you pay in the first world. And I know that sounds unbelievable, but I'll be going into a great deal of detail on that subject in my health care report for expats, which is going to be on expatwisdom.com pretty soon within a week or so. So do check it out. And I know I keep saying in a week or two, but actually it's going to be in a week or two. So the point is, when things are so ridiculously cheap as it is, who needs to beg the government for another little discount on top of that? Oh, and another thing. Now that Nicaragua has been in the expat news a lot about the next latest and greatest cheap retirement haven, there's a real estate bubble starting up there too.

[12:48] Well, Remax and Century 21, as well as rich Latin folks with money to develop, are starting to build very expensive housing developments just like Panama and Costa Rica did so many years ago when they started getting written up in international retirement mags and such as a golden cheap retirement expat haven. Anyway, real estate agencies and rich Latin developers are getting ready for what they think is going to be the next big gringo push into Latin America, Nicaragua, of course. And already they're starting to build like crazy. Now for example, about two hours drive from the Managua Nicaragua airport, there's a luxury development going up right now aimed specifically at gringos who are supposed to flood down here in hordes in a place called Guacalito de la Isla. Now, this brand new development's got 600 lots and each house has four bedrooms and

[13:34] a swimming pool, and only about 30 of these lots so far have houses going up on them. So there's still 570 lots available. And the average price of one of those 30 new houses, $700,000. And all of us long-term expats that see this kind of stuff going on, we're thinking, man, this is nuts. Anyone with that kind of money is not going to take a chance on Nicaragua. They're going to go to a much more expensive country that's more stable and more first-world, like Chile, because they can afford to. Now obviously you have to be more than a millionaire to be able to afford a house in that subdivision. So what are you going to do? Come down to Nicaragua and live in a subdivision with 600 other millionaires? Now I want to know, where are the real estate developers going to find all these gullible

[14:19] first-world millionaires? Since generally you don't get to be a millionaire by being gullible, and you're even more cautious if you survived the real estate bubble up in the States back in 2008. And think about this one for a while. The developers have been marketing these things specifically to gringos and first-world people. And yet of the 30 houses going up right now, 26 of those new houses were bought by rich Nicaraguans and only four in the development so far were bought by gringos. And that's one way Latin American real estate bubbles get a big boost. From clueless local Latins with money. Who've never been through a real estate bubble and bust before like we have up in the States. So what I'm telling you is that these low low prices for Latin American real estate

[15:06] you've been hearing about on the internet, or you've read about in retirement magazines, Reader's Digest, AARP and International Living, well nowadays anyway you're going to have to go way off the tourist trail to find a good deal. That's why I've been saying rent, don't buy. Because in a year or so, and in some places it's starting to happen already, where there's been such overbuilding, there will be desperate sellers and you'll be able to pick up that stuff at 25 or 50 cents on the dollar. And don't worry, I'll keep you posted as such things develop. And in fact right now you can pick up a newspaper from any medium to large sized city in Latin America and see that little by little desperate sellers are starting to show up. But you really have to have boots on the ground to spot that stuff. And that's why I say rent. Then start learning a little Spanish, enough so that you can read the papers, the classifieds

[15:54] anyway. And you'll start seeing some of the things I see almost every day. Like for example, every once in a while, once a month or so, you'll see some very strange things going down in those real estate classified ads. And I've cut examples of this phenomena out of the newspaper to show in my seminars to prove to people that there are desperate sellers and how you can spot them. And what I'm talking about is this. If you pick a city, let's say for example, Managua, Nicaragua, after you've lived there and rented for like six months or so, you'll really know the good, the bad, and the ugly of the town. You'll know the good areas, the bad areas, etc. And you'll also know the good, the mediocre, and the bad real estate developments. The old ones, the new ones, and all the ones that are just breaking ground and there's plenty of those. Anyway, if you keep your eye on the real estate sections in the newspapers, you'll notice

[16:39] that there still are vacancies in a lot of those newer developments that are only a year or two old. And by rights, after a year at least, they should have sold out. And you'll wonder the whole time why they're building more of these things and adding extra phases to existing projects when they haven't sold out the first phase yet. Now, for example, there's a project called the Mediterranean. It's a high-end, beautifully built luxury project. It's about 15 stories in a nice area of town. It's in a neighborhood where a lot of embassy people and diplomats live. And when that thing first went up about three years ago, I took a tour through it and it was really beautiful. Rainforest, hardwood, parquet floors, granite, real granite countertops, beautiful views on every floor, courtyard, gardens, water fountains in the lobby, and in little cubby

[17:26] holes on different floors too. Just fantastic. And a 2,000 square foot apartment there was going for about 260,000 bucks when they were first completed. Now, that was about three years ago. Ever since then, about every two months when the new real estate magazines would come out, that same building is always there advertising units for sale. And by the way, every medium to large city in Latin America has their own glossy real estate magazines that come out for free every month just like in the States. And believe me, that's quite a new development for Latin America off the tourist trail. And another sure sign of a real estate bubble. Anyway, a year after that place went up and obviously they didn't sell it out, the ads for that place were coming out like clockwork every month or two in the real estate magazines.

[18:12] And at the bottom of the page, it always said in kind of exaggerated prose, don't wait, don't get left out, reserve your unit today. We're down to the last few units. Now, you figure in a building like that with 15 stories with four corner units on each floor, that's 62,000 square foot apartments for sale, right? And already two years ago, they were saying there are only a few units left and you got to imagine five or six units, who knows? But I'm guessing it was just a big lie. Yet I continued to see these ads every couple months and it always said at the bottom, act now, only a handful of units left. And then not so suddenly, about six months ago, they changed their ad in that glossy magazine just slightly, adding that if you buy now, you only pay a thousand dollars per square meter. Now, a square meter is very close to 10 square feet, so we're talking about a hundred dollars

[19:03] a square foot now for brand new, very high quality construction. And if you recall, when those apartments first went up for sale three years ago, a 2000 square foot apartment went for 260,000 bucks or $130 a square foot. So in effect, it took the developer three years, but obviously in desperation, they dropped their price 25%. And now you could get a 2000 square foot apartment for 200 grand. That's what the ad said six months ago anyway. But the question is, in today's market, is that a good deal? Well, I'd say that would be a very equitable price for the quality and the project and the area if we weren't in a real estate bubble. But what I think is very soon within a year or two, you should be able to pick that thing up for about 130,000, maybe less.

[19:50] And what makes me stick out my neck like that? Well, because right across the street, there are two brand new luxury residential towers under construction right now that won't be finished for another six months to a year. So in another year, there's going to be a massive oversupply of similar units right across the street. Now remember, that ad reducing the price 25% was six months ago, and still an ad for that project keeps showing up every month in the real estate magazines with the same lettering that says, get in now only a few luxury units left, and it still says get in for $1,000 a square meter. So obviously, that shows me that the brains who put that ad out six months ago, most likely haven't sold another unit yet, even slashing the price 60K.

[20:35] Obviously they're going to have to drop it even more. So in fact, what you've got all throughout Latin America in the big and medium sized cities is a huge oversupply of luxury apartments right now, and many more of them just starting to break ground, and the dozens and dozens that are nearly done and coming online in six months to a year. Not to mention all the ads you see in the newspapers and in the real estate mags of projects that are still on the drawing board, and all they've got is the raw land, trying to entice people to buy in the pre-construction phase. And you know, it just absolutely blows my mind when I see pre-construction buy-in deals like that. What are these people thinking? Anyway, that's just one of hundreds, if not thousands of examples. In fact, another one of those real estate newspaper ad examples that I show in my seminar

[21:23] is a great case worth studying too. You could really learn a lot from this one. It's another luxury condominium, this time in Guatemala City, that I happen to see that made my eyes bug out. It was stuffed in the Sunday newspaper with about 100 other little real estate ads of the same size. Anyway, while scanning the paper, I run into a RE-MAX ad, you know, with a lot of houses and condos and apartments for sale. And I recognize that some of them are in new or recently built luxury residential towers. Anyway, I see an ad in the RE-MAX column for an 1,800 square foot luxury apartment in a building that I'm kind of familiar with in a very nice upscale subdivision about 10 or 15 miles outside of Guatemala City. Very nice. Anyway, RE-MAX had this place listed for 195,000 bucks, which to me is no great deal, though

[22:12] not terrible either. But I know that in a real estate bubble, when things really hit the skids, you should be able to pick this place up for around 100. So anyway, I skipped down through the listings and guess what? In another part of the real estate section, I happened to notice a unit for sale in the same building, 1,800 square feet, even located on the same floor that the one RE-MAX was selling in another part of the paper that day. Obviously listed by an owner because it said, no agents or resellers, please. So anyway, like I said, he had a unit in the very same building, in fact on the very same floor, and these are all identical units, for 159,000. And that ad was in on the same day in the same newspaper. So if you wanted to go to RE-MAX and buy that unit, you could pay about 40,000 bucks more.

[23:00] How's that for a laugh? Now, you might be thinking, you're never going to offer full price anyway. And RE-MAX has its commission, so maybe you could get RE-MAX down from 195 to 185, maybe. But there's an even better chance that you could get that desperate seller down to 150K. So bottom line, the unit that was for sale by owner was 20% cheaper than the RE-MAX listing. But wait a minute, it doesn't end there. So farther down in the listings that day, guess what? I come across another one of those units for sale in the same building, the same square footage, the same everything. And by the way, this is a guarded luxury residential high-rise too with pool and gymnasium and all that stuff. Anyway, this guy was obviously an even more desperate seller, and he had his listed for

[23:47] 145,000, which is a full 25% below the RE-MAX listing in the same paper the same day. Now it sounds to me when a guy's that desperate, you could probably walk in and offer him 125 and he'd take it. But who knows? Anyway, I hope that gives you a little taste of what's happening with the real estate bubble down here in Latin America. As you can see, desperate sellers are creeping out of the woodwork, which means the market is cracking around the edges. So yes, if you hang around for a while, like I said, about six months in any given area, and you begin to understand the local real estate market, you will find desperate sellers like that if you keep your eyes open. And then again, you really have to know enough Spanish to read at maybe the third or fourth grade level to be able to decipher what's happening in the classifieds.

[24:33] And if you're really diligent, that'll only take you about two months, whether you take a full immersion course or you do it on your own by moving way off the tourist trail and communicating as much as you can with the locals. And don't forget to only watch Spanish language TV, but only on an empty stomach. But back to that condo. So again, the question is, is 125,000 a good deal for that place? Well, I don't know about you, but I'm not looking for a good deal. I'm looking for a fantastic deal. I want a steal because they're coming and there are going to be all kinds of great deals out there, even fantastic ones. However, there is one big problem when a real estate bubble bursts. That is, everything will be pretty cheap, but no matter how nice or well-located or how much of a luxury building you're in, you don't want to live in a place that's only

[25:21] 20 or 30 or 40 percent occupied because then there won't be enough residents to support the maintenance on that building. And it's not hard to predict what's going to happen when the bubble blows. A lot of these newer developments are just going to fall into disrepair and most projects under construction are just going to be abandoned. And no matter how nice your house or townhouse is, you don't want to be living next door to an abandoned project. I mean, that's how the ghettoization of America's big cities started, right? So you can't just buy a beautiful, cheap property at a fire sale. You got to inspect the immediate area around you and have a critical eye about what's going to happen if real estate implodes even more. And now let's talk about maintenance. Now I can tell you, if you're on the tourist trail and you live in a gated community or a luxury apartment or residential tower with elevators and maintenance guys and gardeners

[26:10] and a staff of guards, you're going to pay about two or three dollars a square foot for your monthly maintenance. So if you have a 2,000 square foot condo or townhouse, which to some expense is rather large, you'll be paying four to six hundred bucks a month on the tourist trail like in Costa Rica or Panama. However, if you're well off the tourist trail, those rates drop dramatically. For an equivalent property in Bolivia or Salvador or Honduras, Guatemala, Nicaragua, then even with brand new luxury construction, you're still going to pay only about fifty cents to a dollar a square foot per month. So for a 2,000 square foot townhouse or apartment, your monthly maintenance charge might only be a hundred to two hundred dollars a month. And often, that maintenance charge will include your water and your garbage pickup and sometimes

[26:56] cable TV, too. And by the way, if you live in an older subdivision or in a residential tower that's ten years old or more, don't be surprised when you find out that the cable TV you get free with your rent has been pirated. Often the owner of an apartment complex will have a single cable line brought into his building that's paid for, of course, and the guy from the cable company will cut a side deal to split it off for everyone else in the building, too. So are you going to turn him in and piss off all the other residents in the building who are getting it for free, too? Well, you know what they say, the road to hell is paved with good intentions, but they don't say that in Spanish. You've been listening to The Expat Files, living in Latin America, coming to you twice a week from somewhere south of the border.

[27:43] Email me, theexpatfiles at gmail.com. And don't forget to check out expatwisdom.com to sign up for your free reports on Latin America. See you next time. Nos vemos. Ah, she was a picture.