Growing Demand Creates Opportunity In This White-Sand Paradise
My recent visit to Las Terrenas confirmed the reports I’ve been receiving from sources on the ground there for some time: The supply of rentals, both long- and short-term, hasn’t kept up with demand in this Caribbean seaside town on the Dominican Republic’s northeast coast.
Las Terrenas is an established and popular destination among European expats, especially the French. The impact of this influence is everywhere. People greet each other with kisses on both cheeks, play pétanque on the beach, and shop for fresh baguettes each morning. Their grocery stores are stocked with French and other European imports, and they enjoy access to an inordinate number of fine-dining restaurants for a small Caribbean beach town.
The Europeans keep coming. In addition, today, more North Americans and even wealthy Dominicans from Santo Domingo are also finding their way to Las Terrenas. The new highway has improved access from the capital and helped to fuel steady tourist growth.
The growing attention has translated into many new construction projects—condos and hotels—in and around town. Still, prices remain a bargain for the region. In fact, I conclude from my recent scouting trip that Las Terrenas offers one of the best real estate investment opportunities not only in the region but in the world right now. Prices are low, rental returns are good, the market is expanding, and local financing is possible.
Depending on proximity to the water, prices range from as little as US$1,000 per square meter to a high of US$2,500 (right on the beach). This translates to as little as US$100,000 for a one-bedroom apartment.
Rental rates follow the same curve. More local-style units back from the beach rent for as little as US$400 per month long-term, while a two-bedroom apartment in a high-end condo building on the water can rent for as much as US$450 a night.
The Dominican Republic is one of few countries where nonresident foreigners can be eligible for financing, meaning you wouldn’t have to come up with 100% cash to purchase. As a nonresident foreigner, you could borrow up to 80% loan to value (LTV) from a local bank (though 50% is more likely). Don’t expect the cheap mortgage rates you see in the United States and Europe. A U.S. dollar mortgage in this country comes with an interest rate of 7% to 9%.
Assuming a 50% LTV and 8% interest over 20 years, your monthly payment for that US$100,000 condo would be US$370. On top of this, figure condo fees of US$75 a month.
Throw in utilities of US$200 a month, and your monthly nut is still only US$645. You can be exempt from property taxes for 15 years thanks to government incentives for approved projects.
Thinking through the math for a US$100,000 rental condo investment, your initial capital requirement would be US$50,000 plus closing costs. You’d need to furnish the apartment. You could do this for US$10,000 to US$15,000.
Using an average nightly rental rate of US$90 and assuming a very conservative 45% annual occupancy rate, your cash-on-cash return would be 5.1% after rental management expense. Push occupancy up to just 55% (still realistic, even conservative), and the cash-on-cash return jumps to 9.6%.
Those figures represent the cash returns on your cash out of pocket. You’d also be gaining equity as you paid down the mortgage each month, and you’d have potential appreciation, as well. When I make an investment like this one, though, I leave those additional returns aside and focus on increasing occupancy to maximize the cash flow. Other, longer-term returns are gravy… and also less certain.
In this case, the cash-on-cash return goes to 14.3% if you can get occupancy up to 65%, which isn’t out of the question. Rental managers I spoke with reported that their clients are seeing occupancy rates in the range of 70% to 80% when they put even a small amount of effort into promoting their properties.
All the while, of course, you’d have your own Caribbean getaway, a second home in the sun you could escape to anytime you got the urge.
This market checks all my boxes.
For more information about real estate opportunities in Las Terrenas, contact Helen Mitchell of Beachtown Property Real Estate.
Lief Simon
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