Is it worth investing with the following conditions????

Question

Hello Everyone! I am Andres Duque, 25 years old and I live in El Salvador, Central America. I have a good job, I am a Product Manager for Industrial Coatings at Sherwin Williams Central America. I have read Robert Kiyosaki's Rich Dad Poor Dad and other books and I am certain that focusing on acquiring assets and passive income is the key to financial success.

However, my country has very different conditions for investors compared to the US conditions, so I wanted advice and see if you think it is a good idea to start a RE portfolio with the following conditions:

Cons:

- The ratio house price / rental income is much worse here as it is in the US. A $110,000 house might rent at $800, a $60,000 can rent at $400.

- Bank loans have a 7% interest

Pros:

- There are no tax for real estate ownership.

- Nearly zero competition in the market for real estate investors at starting level actively buying houses.

- Our economy is not good, so there are a lot of people in need to sell their houses which i believe can present the opportunity to buy houses at a discount.

I am certain that it will not be as quick or profitable as in the US, but do you still believe that it is a good idea to invest in RE in here? Any comments will be appreciate. Thanks a lot!!

Godofredo Garcia calderon · Answer

Hello Andres, I´m 33 years old and from El Salvador too, I was looking for some accountant advise for declaring “rentas diversas”, El Salvador” and I found your fórum question. I haven´t found a local REI club either and since you are the first person I find that shares the same enthusiasm as I do, let me tell you what I'm doing and I hope it might be useful for you.

After doing a Market study about rents within different áreas that I thought would be profitable to invest (and within my possibilities) I used my credit and leverage a 39k, 25 year loan with a 7.25% rate and bought a small one floor house (72m2), the owner agreed to defer the 3k down payment into 10 monthly equal amounts.

My project is placed in Merliot, which I believe has favorable ingredients like job sources, low crime rate, easy Access, universities, commercial malls and I think the “Diego de Holguin” will bring development to the área. Anyway, I turned it into a Fourplex by adding a second floor and dividing 4 independent áreas (durock walls) with 36 square meters each (With another 16k, 10 year loan at a 11.75% rate at another bank)

Each área has one room, kitchen, living room, one bathroom and a laundry place, and since the average rent for just one room in the área is around $160 I´m planing to get at least $280 for each “space”.

I already have a trustful architect, attorney, Handy man and I'm still looking for an accountant who knows about RE…

I had a hard time with OPAMSS (six months to fulfill their estructural requests), but every single problem came with knowledge. I´m determined to make this happen. Right now I´m refunding with a 3rd bank in order to get a lower monthly payment for the full amount and maximize the cash flow expected, (I'm already studying about tenant screening) hopefully everything will go ok…

Wish you luck in your journey, I believe that if you want something so bad and you invest time in acquiring knowledge about it, you have a great shot to succeed.

Account Closed · Answer

Find a mentor and start to build your team. Is there a local REI club or landlord association for networking? If many people want to sell their home, where do they plan to live? Good luck with your investments.

Russ Draper · Answer

I would look to invest in a different area.  For example in the US I invested in property approx 1000mi away because the returns were much better.  If I were in your position I would look into investing farther away.

Arpan Patel · Answer

I probably would figure out how to get more than break even on the cash flow. Up here, most banks commercial banks will not lend unless you make money (1.2 debt coverage or better) so there is that. 2% seems high for here but that may very well be the case in your area. For the insurance, just make sure the coverage is good. The price sounds find but what is the bundle of coverage you are getting? That is, to me, more important than than the dollar amount when evaluating different policies. Lastly, I misunderstood the framework of you original question. I thought you were trying to figure out what was better, El Salvador or US. I think it is always best to start local. I apologize for misunderstanding the question. Happy Hunting!!

Arpan Patel · Answer

Something to consider is the insurance markets out there. Here in the states we have of course have robust insurances at affordable prices because of the widespread use of real estate insurance products. If that is not the case where you are then your risk profile will look a lot tougher on the tail ends (scenarios that seldom happen such as volcano erupting) and you will want to price that in. Example, if I owned a house that was worth 100k and bought it for 75K with 100% financing but no insurance then if a flood comes through and wipes away the house, I am still liable for the 75K to the bank but no 100K asset to sell or rent out. Pure lose. So first, I'd take a look at the insurance market (I know India basically has no insurance and therefore lending is not not nearly as ubiquitous as it is in the states). Then the lending environment matters. you mentioned that rates are high in the 7% area. This is an indication that sovereign risk is higher for the country as compared to the states (makes sense, US has a strong credit rating as a whole) so the world itself is saying to you that is less of a sure thing. But hey, if you can still cash flow then okay. Lastly, It is about preference. I personally would not invest where there are total loss scenarios (on the building, the land will always be worth something if you can in fact buy the land. In London you don't actually buy the land at all. You get long long leases)  due to the lack of good affordable insurance. Also, I'd stay away from regions who have a bad credit rating abroad and lastly you mentioned the county itself not being strong economically. I get that people will need a place to rent but they also still have to make money to pay you rent. If the economy has a downward trajectory, then they may not even be able to pay as much rent as you asked for in the past. Just some factors to consider: insurance, interest rates, land ownership, and the countries macroeconomics. I hope this helps and doesn't paralyze you. Just somethings to think about. Once you make a decision on what country then all the normal just starting out stuff will start up. Again, I hope that helped.

Jassem A. · Answer

At 7% interest and these prices I would probably only buy with cash homes that may need some work

Russ Draper · Answer

@Andres Duque I don't think banks typically lend for foreign investments, you'll have to find a local bank and likely put down a larger down payment to finance a deal.  Keep an eye out for other creative real estate options, such as seller financing to get deals.  Just be careful!

Andres Duque · Answer

@Russ Draper Thanks for your advice! I think its easier in the US to do so as your bank can lend you money to buy in another city or state as it is part of the same country. In here, it is a small country and the banks does not lend you money to invest in foreign real estate.

Andres Duque · Answer

@Arpan Patel Thank you very much! In this case, as it is my first investment and have good credit the bank has no problem lending me, but it is very probable that in future deals I would have more trouble justifying the loans. As for the insurance, I will look into it, you have made me realize that I might be missing something out. No problem about the misunderstanding Arpan. Best Regards!

Andres Duque · Answer

@Arpan Patel Thank you for taking the time to point out this potential risks.

Concerning the insurance, in our country it is mandatory to take a life insurance and a real estate insurance in order to get a loan from the bank for real estate. In the case of this apartment, there is a collective real estate insurance that every owner in the building has to pay that covers the building, the commons areas and the unit itself. It is around $50 a month for apartments worth 130K, not sure if this is much worse as insurance costs in the US.

Regarding the macroeconomics of the country, it is true that there is poverty as in any third world country. However, I am investing in the capital (San Salvador) where you can find all the multinationals (Walmart, Unilever, Avianca, Sherwin Williams, Bayer, 3M, Banks, etc...) so there is a middle class that has stable good jobs and income that is interested in living in good neighborhoods and having a 24/7 security in place in the building.

In conclusion, I am certain that building a real estate investment portfolio in here is not nearly as profitable as in the US. But in my case, moving away to build a portfolio is not in my interest as I am happy living near family, friends and I like my city. Taking this things into consideration, I believe that paying down10K for an apartment + 5K in closing costs and taxes and rent the it out, and the rent is able to pay for mortgage, insurances, capital expenditures, vacancy and maintenance costs so that the net cashflow is 0 in the first year, at the end of 20 years I would have an apartment fully paid worth 189K (taking into consideration a 2% appreciation and 2% increase in rent for inflation) that I only really paid 15K.

If anyone experienced in RE reading this see some flaws in this analysis I would appreciate if you comment, as I am planning on making one or two of this deals every year for maybe 5 years, thinking in the long run for them to be paid when I am 45 years old. I know it is a bumpy road but that would be the big picture.

Is it worth investing with the following conditions????

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