All Forum Posts by: Aaron B.

@Sam Singh

I did work with a realtor from the favela. The thing is you can't use any realtor, they specialize in a certain inventory and it will be limited. Favelas are more communal and so you find properties by checking out Facebook Market Place (yes, you can buy a favela through Facebook) and you talk to them and meet them in person if they are selling what you like. The notary you would use is likely going to be a notary in the favela which will make you feel uncomfortable. However, I don't see any reason you can't use a notary that you like. You would also have to choose the bank you are going to use to transfer and convert your funds. I can tell you that the bank process and working with them is a pain in the ***. For example, I recall not being able to convert USD to BRL directly. Instead, I had to buy Euros and then convert to BRL due to their limited exchange options. So you should talk to the banks about their wire and exchange fees, supported currencies, etc. before choosing one. I did everything in the favela using local recommendations (e.g. the bank they use in the favela, the notary in the favela, etc.). I did that because if the locals trusted it, it was probably good enough. But if I did it again, I would choose a different bank, different notary, etc.

So I don't have an attorney or agent I can recommend you, especially if your goal is to buy specifically in Vidigal. You need to get on the Facebook market place and search there to find contacts and properties that are for sale. If you see them for rent, you can offer to buy them. Many owners are open to hearing your offers. 

In regards to an attorney, just find one that speaks  English and can get your CFP for you quickly and for the least amount of money. The one I worked for was 3-years ago and I haven't talked to him since. My options were limited because I tried to do all of this during Carnaval, which is the worst time to get anything productive done. I hired the first attorney who was willing to do it during Carnaval. You have the luxury of time and being able to shop around for an attorney you like. I had spoken with four different English speaking attorneys before hiring one.

In Vidigal, it is one hell of a walk up to the top. To get up there, you pay about $1 to take motorcycle taxi up and down the favela. It is pretty safe, those people are known in their communities, but you should exercise street smarts. The locals aren't happy about the rising costs, partly due to increased tourism and Airbnbs/hostels in the area.

@Sam Singh welcome to bigger pockets! I am relatively new to this site as well, but I wanted to dive right in and start sharing knowledge, meeting people and learning. My natural inclination was to find a nice beachfront condo in Rio de Janeiro around Ipanema or Copacabana, but after looking into the purchase price, rental rates, and history of appreciation - I began to realize that the cheap properties (e.g. favelas) had been appreciating at a better rate than the luxury properties for a decade. Combined with the other perks and relatively low cost of investment, I decided to go for it.

As you mentioned: "No property taxes are huge. Maintenance paid by tenants is huge. Even if you needed management it is dirt cheap and their only real job (I think) would be to collect rent for you. No city inspectors pestering you for small things."

I know Vidigal and it is a very popular favela surrounded by the most expensive areas of Rio de Janeiro. That being said, it is tourist and foreigner-friendly. They have a couple of popular Instagram-worthy restaurants & bars there. It didn't feel dangerous when I was there, however, the neighborhood has had a history of violence and pacification. People there don't like their photos being taken or videos, they get upset if you have your phone out because they think you could be spying on them and they don't know what your intent is. The cost of living in that favela is very cheap, however, the property prices for the Vidigal favela itself were relatively expensive when compared to other favelas. That is because of its newfound popularity and oceanfront views. You can see Copacabana beach from this favela and it's spectacular.

If I were you, I would look at property in Vidigal but higher up the hill, deep into the favela. The infrastructure is bad as you would expect, but you can build something custom and nicer with better quality. It is perhaps the cheapest ocean view property you can find in that area of Rio because it's in a favela. I think the potential for the future there is one that it will eventually become gentrified and the property values will shoot past the moon, just like the surrounding areas of Leblon, Ipanema, and Copacabana.

The USD to BRL is better now and so the property value is more worth it at the moment. There isn't land for sale because it's densely populated. You will likely have to buy a cluster of old properties and rebuild or remodel. I considered buying there when I was there but didn't find a property available that suited what I was looking for. The conditions of the homes there seemed to be worse than in the favela that I bought in and that made me a little too uncomfortable for my first purchase. That is why I bought new construction for my first one.

@Kirk R. we will have to wait until the COVID-19 crisis passes and the borders and international are open for business. The price will vary based on the exchange rate at that time, but generally, for the cost of a downpayment on a USA mortgage, you can buy a favela home outright and start renting it. You don't need to furnish them or even clean them before a tenant moves in. I know that sounds absurd compared to the standards we're used to. However, I like to at least make sure it is clean and ready to move-in. You don't have to buy major appliances or anything either, the tenant will provide their own.

Correct. But that only matters if your goal is to get it back to USD, in which case, you just have to wait for forex to swing the other direction. However, the properties are appreciating in the local currency and you can sell them later at the appreciated price and take that money and reinvest it locally. There are international equivalents (though not exact) to 1031 exchanges from what I have discovered but I haven't had to do one yet and don't plan on selling assets anytime soon. It's nice to know that it's an option!

How does anyone truly assure rent will be paid by a tenant? The best you can do is find a reliable tenant and build a relationship with them. So far, I've been lucky and have not any issues with tenants not paying rent. 

@Kirk R.Actually, I am already taking advantage now. 1) my cost of living outside the USA became about 15-20% cheaper this month. 2) I am remodeling a beautiful property I acquired at a good price recently and the remodeling just got about 15-20% cheaper because of the favorable exchange rate due to COVID-19. That makes my investment better and brings by remodel costs down. I am also furnishing another place and that merchandise is also cheaper right now. It is also a perfect time to convert USD to local currency and pay my contractors for the rest of the project at this discounted price. They are getting paid the same amount in their local currency, but for me, the timing of the exchange is perfect right now. I am locking in these rates!

@Benjamin A Ersing concerning a Forex risk, if you intend to convert it to USD, then you have to hold the currency and wait to wire & exchange at a time that is ideal to maximize your exchange rate.

@Kirk R. I am looking for opportunities now, but the developers and sellers are not hurting enough yet and so the prices have not yet dropped. I am waiting because if this continues longer, some will be hurting to sell their assets and I am hoping to get a good deal on a property. I will be able to negotiate something advantageous.

My biggest concern in foreign countries is political stability. After researching Brazil, I felt that my risk was low enough relative to the capital that was invested.  Because I don't actually need the rent money in USD, I don't exchange BRL to USD because I would lose money on the exchange and bank fees. Instead, I just have vacation/fun money when I return to Brazil. It's a country that I love to visit.

Insurance for political stability seems like a waste of money, especially for this type of investment.

With respect to management overhead, there virtually is none. No repairs, no utility bills, no insurance, no property tax, and no property manager. It's such a beautiful thing when you are used to the complete opposite. If this property required all of that overhead for $250-275/month, it's still comparable to what would be required in the USA for a property producing the same amount of net rental income. The tenant simply deposits cash into their local bank in their favela.

This model could work in other countries, but the main considerations are 1) What currency do you want/need? 2) Political stability 3) Economic health. All of these things can be researched. Governments and independent groups put out these kinds of reports for many countries. You can also research tourism growth, job growth, foreign investment (think the USA, European, Asian hedge funds), etc.

I invest in real estate for fun, but it turns out I am pretty good at it. I have stopped investing in the USA and started investing internationally, but everyone single one of my properties performs. Part luck, part education, part experience, and taking risks.

This is a crazy story of where I broke all the rules and still managed to come out with a good investment. Almost a decade ago I sat next to a guy on an airplane between Texas to California and he told me about his business as a "slum lord". He owned and managed properties ranging from Section 8 housing to project housing in "ghettos" from Compton to Oakland. He told me that they were the best tenants because they always pay their rent on time and they do the maintenance themselves. The reasoning made sense. I decided that one day I would diversify my portfolio with some properties as this guy had. Fast forward to 2018.

Background Context

1. At the time I had bought a property in a favela in Brazil, I had never even been to Brazil
2. I was visiting Rio de Janeiro for the annual Carnaval celebration in 2018 and bought on a whim
3. I had no experience with properties in a Class C or D in the USA, and not abroad
4. I knew very little about investing in Brazil and didn't begin to research until I arrived
5. Within 2-weeks I had spent about $400 with a local attorney to expedite and acquire the necessary tax registration number (CPF) to buy property
6. Favelas are appreciating faster than luxury property in Rio de Janeiro, rent is inflating relatively fast for all property types. This is a result of the economic downturn after the corruption crackdown years ago: Odebrecht corruption scandal,m Petrobras scandal, & Operation Car Wash. These crackdowns have made Brazil safer in many respects. You can watch documentaries/shows on Netflix and YouTube about it.

The Property

1. Cost: 65,000 BRL (for the "best" house in the area)
   Construction: New in 2018
   
2. Class: D (USA approximation) in a favela (sometimes called shantytowns by foreigners)
3. Location: Best area in Maré, Rio de Janeiro, Brazil
4. Monthly Rent (Net): 700 BRL (increasing to 750 BRL for 2020) 
5. Utilities (Monthly): $0
6. Internet (Monthly): $0
7. Maintenance Costs (Annual): $0
8. Annual Property Tax: $0
9. Annual Income Tax: $0
10. Property Management: $0

It considerably beats the 1% Rule since there is no mortgage or cost of ownership. It's pretty ridiculous.

Additional Upside

Favelas are built as stackable housing. They are designed as brick rectangles. Subsequent apartment additions are about half the cost of the initial investment.

For another 30,000 BRL (~$6,200) I can have a second apartment on top of the first one. It would be identical and rent for the same amount in 2020 of 750 BRL. This would considerably boost the return on investment as follows:
Initial investment = 65,000 BRL (750 BRL rent), 2nd story apartment = 30,000 BRL (750 BRL rent). Total Cash Invested = 95,000 BRL; 1,500 BRL monthly rent. 

That pushes the investment up to a 1.5% net monthly return. However, it gets way better. The USD to BRL exchange rate right now is 33% higher than it was in 2018. What that means is my cost to add the additional apartment on top and double the rent only costs me 67% of the construction cost (30,000 BRL) because I am converting USD to BRL right now in this economic downturn of COVID-19. That changes my investment numbers to the following: 20,100 BRL to double the rent for a total cash investment of 86,000 BRL equivalent, with a 1,500 BRL/month rent. That brings the investment up to a 1.7% net monthly return from mid-2020 onwards. 

In terms of dollars, we are talking about <$24,000 invested for a 2-story apartment that is earning a net monthly rent of $300. Now compare that to many of the investments in the United States in Class A-C properties where $24,000 is invested as a downpayment, and if it is a good deal it may earn $300/month net. My investment risk was relatively small in terms of dollars, but risky in a foreign that I knew little about and had nobody or lessons to learn from. It worked out in my favor. I don't know if I'd invest there because I believe in heavy diversification. I have invested in other countries in totally different property types, but those deserve their posts.

Lessons Learned

I chose this favela because it was one of the safest and has clean water. It is a calm neighborhood with relatively lower levels of crime compared to other favelas.

There is no concept of property management at all. Tenants must take care of everything, this is the culture and community way. The house has had several bad roof leaks during heavy rain and the tenant simply tells me about it, but then they pay to have it fixed. The tenant had one attempted break-in and had to replace the broken door and windows, but the robbery failed. Again, no action required on my part, no concept of home insurance. Tenants take care of their homes and take pride in them because they are hard to acquire. Favela tenants tend to stay for life, which is amazing. Once you find that good family tenant, they aren't going anywhere.

I had a property manager at first that I paid about $10/month for the first few months, however, I realized I didn't need them anymore once I had recognized the tenant could handle the property (i.e. the attempted break-in and roof leaks) and nothing was required of me. The property manager was a father/son who had their own business in the favela managing properties and had been there for at least 2 generations. Everyone knew them and that was a good thing.

Favelas have a different sense of community, justice, security, ride-sharing, etc. I hung out in the favela before buying the property. I shopped, I ate, I walked, I rode on the back of local motorcycle taxis, in community van transportation with no doors or air conditioning, etc. People don't mess with each other unless they want problems in their community. That being said, it was surprisingly safe.

Being that it is a favela, there are no property taxes or utility costs. The houses are wired up into the power lines and tenants buy their water and collect it in these giant rain buckets. There is no property insurance.

I checked on the tenant today and they informed me they are going to spend 3,000 BRL to upgrade the roof because it keeps leaking during heavy rain. Right now Brazil is experiencing heavy rains and flooding. They got 3 quotes and will take care of it. Awesome!

The purchase process in the favela was an adrenaline-filled adventure, to say the least.

Last but not least, photos!

New construction. Believe it or not, it is the nicest house in the favela. Notice the wires above the front door? That is the free electricity.

The kitchen before being furnished.

The kitchen and living room area looking from the kitchen towards the living room.

The rooftop and clean water system. This is where the second identical apartment is being built, and the water tanks will be moved onto the new rooftop.

The only bathroom. It was a small efficient electric tankless water heater.

The bedroom has enough space to fit a bunk bed for 2 kids + a bed for the mother. There is a large standing close along the left wall but it is out of view.

I had one reschedule to June, another cancel within time to receive a full refund according to the refund policy set on Airbnb, and the other asking for a full refund after canceling the day before. He has to talk with Airbnb support to get a refund, and Airbnb is currently offering refunds to guests & hosts who have to cancel due to COVID-19. They are also not penalizing anyone's profiles for these extenuating circumstances. 

Read Airbnb's policystance on COVID-19 here: 
https://www.airbnb.com/help/article/2701/extenuating-circumstances-policy-and-the-coronavirus-covid19

"Existing reservations made on or before March 14, 2020 for stays and Airbnb Experiences with a check-in date of April 14, 2020, or earlier, and with at least one night occurring between March 14, 2020, and April 14, 2020, are covered. Guests who cancel will receive a full refund, and hosts will be able to cancel without charge or impact to their Superhost status. The host’s cancellation policy will apply as usual to reservations made after March 14, 2020, and to existing reservations made on or before March 14, 2020 with check-in dates after April 14, 2020."

So if you are talking about Airbnb short-term rentals, it has already been decided for you.