Real Estate In Brazil

April 19, 2010
Fortaleza, Brazil

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Dear Live and Invest Overseas Reader,

Earlier this month, resident global real estate investing expert Lief Simon shared his insights into the property investment market in Brazil. That report triggered a barrage of response, both from readers, including a number who have already invested in Brazil, and from agent and attorney contacts in the country. Lief struck a nerve.

I've resisted following up Lief's market overview until now, as I wanted to amass as much feedback and intelligence as possible before stepping out again into the line of fire.

Lief first looked at the Brazil market about seven years ago and wrote it off. "Too much hassle," he concluded after his initial two scouting trips. "Too much trouble, too much risk for the average individual property investor. The institutional investor and others with big resources supporting them should be taking positions. But the average guy looking to diversify into international real estate? He can make his money easier with less uncertainty elsewhere."

I hadn't joined Lief on his reconnaissance missions to Brazil, and I resisted coming to any position one way or the other. About two years ago, colleagues I trust invested personally in real estate in the Fortaleza region and made good cases for why. I listened, keeping an open mind.

Meantime, developers began contacting me directly, hoping to interest us in promoting their offerings to you, and readers, too, were writing regularly asking why we were ignoring such a big marketplace. Didn't we, like so many others at the time, recognize a window of opportunity?

Finally, about a year ago, I addressed these questions in a report titled, "Should You Buy In Brazil?", in which I addressed what I perceived at the time to be the concerns and caveats associated with the idea of investing in real estate in Brazil.

Those risks laid out, I proceeded to report on a couple of particular pre-construction opportunities in the Fortaleza region that seemed reasonable buys to me.

In the 10 ½ months since, two things have happened. First, the U.S. dollar has lost considerable buying power versus the Brazilian real. Second, those colleagues I mentioned earlier are now a couple of years into their respective investments. With the benefits of real-world experience and a little distance from the buys, they're adjusting their positions.

Lief took all this into account when he wrote his follow-up Brazil market report 10 days ago...which he titled, "Frankly, The Real Estate Investor Is Better Off Looking Elsewhere."

In other words, Lief's position is unchanged.

Me? I've finally taken a position...as follows:

Lief was right all along.

If you want to live on the beach (or elsewhere) in Brazil and are prepared to pay cash for your second or retirement home, go for it. This country's coast is beautiful, and beach life here could be everything you're looking for in a new life on the water.

If you're a big-time investor with deep pockets and the time and inclination to figure out how to navigate this market, again, go for it. This is a lively marketplace, and, as a friend says, lively marketplaces are the best places to make money.

If, however, you're an average individual investor, certainly if you're a novice international real estate investor, I'm with Lief. You're better off seeking opportunity elsewhere. And here's why:

1. They speak Portuguese in Brazil. You probably don't. On the face of it, that may seem a silly comment. They speak Spanish in Panama, Nicaragua, Ecuador, Uruguay, etc., and chances are good that you don't speak Spanish either. But Spanish is easier to pick up than Portuguese. Plus, many English-speakers around the world do speak some Spanish, which can help facilitate dealings in Spanish-speaking markets. Any Spanish you speak, though, will not help you in Brazil. Spanish is not Portuguese.

2. Americans need a visa to travel to Brazil. Again, this may seem a silly, minor detail. And, sure, visas are a part of your life once you make the leap into this live-and-invest-overseas world. Typically, though, visas become an issue when you're interested in living full-time in a country. Having to apply for a visa simply to travel to the country, as an American must for travel to Brazil, is another layer of hassle.

3. It's practically not possible for a foreign resident or a non-resident to open a bank account in Brazil. Legally, it's possible. And three attorneys have written to us since Lief published his You're Better Off Looking Elsewhere report last week to tell us that we've got this wrong. It is, in fact, legal for a foreign resident or a non-resident to open a bank account in this country. Another contact in the country wrote to say that, yes, it's legal, and, should a bank refuse to open an account for you as a foreigner, you should go to court to argue the point.

Go to court to argue your right to open a bank account? Huh?

Whether or not it's legal for a foreigner to have a bank account isn't the point. The point is, can a foreigner in fact open a bank account? Here's the real answer: Yes...if you're willing to pay an upfront fee (from US$500 to as much as US$3,000, according to different sources in the country); if you're willing to keep a minimum balance (that, at today's exchange rates, amounts to about US$40,000); and if you're willing to assign power of attorney to some local representative. Maybe you'll find someone you trust well enough to assign power of attorney for your account. And maybe you'd be willing to pay US$500 for the privilege of opening an account in the first place.

But I'd maintain that you'd be out of your mind to keep tens of thousands of dollars on account in a Brazil bank...because of Reason #4 why you shouldn't try to go into this market as an average individual investor...which is:

4. It's not an easy thing to take money out of the country. Again, there's the legal line and there's the reality. The legal line is that, while exchange controls were in place, they've been removed. The reality, however, is that you can't take for granted that you'll be able to take funds (money in a bank account, proceeds from a real estate transaction, rental income from an investment property, etc.) out of the country when you want to. In the past 10 days, since Lief's report, I've heard stories from people who say they had to fight for months to be able to move their money out of Brazil. One poor guy enlisted help from the American Embassy. Another says he still hasn't managed to move his money.

An attorney will tell you that you should be fine as long as you have the proper paper trail to prove where the funds came from. Again, as far as I can tell, this is the theory, not the reality.

5. The currency risk can be more than you, as an average individual investor, bargained for. Of course, anytime you invest in a country where the currency is other than the currency from which you're drawing your capital funds, you have currency risk. And it can work for you as well as against you. That's not my point.

My point here comes into play when buying on terms and paying for your real estate purchase over time, as so many people are doing in this market. The practical consequence of how the real/U.S. dollar exchange rate has fluctuated over the past year is that the U.S. dollar cost of a pre-construction condo being paid for in monthly installments has increased by thousands, maybe tens of thousands of dollars.

I say again, the average individual investor, certainly the investor with limited capital resources, can be unprepared for what this means from a cash flow point of view.

You could learn to speak Portuguese (I know at least one investor who has), and, sure, you can get a visa. You could buy an investment property using cash, thereby avoiding the potential currency-exchange cash-flow issues created by paying over time. Or you could buy on time but buy your reais ahead to try to hedge currency moves.

But here's the real kicker in my mind: At the end of the day, what's your exit strategy? To flip...or to rent, right? If you intend to flip, you're going to have to look for a buyer who can pay you outside Brazil, otherwise, you're going to have to do battle to get your funds out of the country. I have a friend who bought and then sold a year later (for a handsome profit) to a buyer who paid for his purchase outside Brazil. That works. But it's yet another restriction, limiting your potential buyer pool.

What, though, if your exit strategy is to rent out your condo? How do you manage this without a Brazil bank account? Yes, it's possible. Years ago, we knew someone with multiple Paris rental apartments but no French bank account. He made it work...but it was a hassle. You have to find a rental manager you trust who can accept rental payments and pay all your in-country expenses for you.

What happens, though, when the time comes for that rental manager to send you your rental proceeds? I haven't found anyone who has tried this, but I'm guessing the answer to that question is that you'll come head-to-head again with those exchange-control issues that so many real estate agents in the country insist don't exist.

As a friend with considerable firsthand experience in this country wrote over the weekend:

"It's not just the visa issue, it's not just the tax ID number that you have to obtain as a property owner, it's not just the fact that the language is Portuguese, it's not just the risk of dealing with reais, it's not just the big question mark associated with the exchange-control issues, and on and on.

"It's when you add all these things together. The more you dig into how everything plays out, the more you look beyond the theory to the reality of this market, the more road blocks you realize."

I say again, for the record, Lief was right all along.

Kathleen Peddicord

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---------- "Kathleen, I love your new book "How to Retire Overseas"!"
 
-- Lu J., United States "Thanks to Lief for the 'Happy Tax Day' article. That is the best simple explanation of these issues that I have seen."

-- Elmore S., Panama Circle Member, United States "Kathleen, I want to see if you can help me with something I am about to do. I am a citizen of the United States living in the Philippines where I have a home, a Pilipino wife, and two boys. If I decide to start a business in the Philippines, will I have to pay taxes there and to the United States, too? If my business is in the Philippines and does not have anything to do with the United States, would I still owe U.S. taxes? I'm afraid that, if I must pay taxes in both countries, then I will not have enough left over to even bother with the business in the first place."
 
-- George D.S., Philippines

I am not an international tax expert, and I strongly recommend you seek help from one before making a big investment of time or money to launch the new business you're imagining.

That said, here's a suggestion: You could set up an offshore corporation for your Philippines business that would qualify for deferred taxation in the United States until any profits are paid out of the company to you personally.

Again, you should have a conversation with an advisor focused on these kinds of issues. However, the good news is that the issue you're worried about isn't as dire as you fear, and, yes, it should be possible for you to avoid and defer U.S. taxes with a proper corporate structure.