Frankly, The Real Estate Investor Is Better Off Looking Elsewhere
The idea of investing in real estate, especially preconstruction real estate, along the north coast of Brazil has been receiving a lot of attention over the last handful of years. The argument in favor goes like this:
Brazil is self-sufficient for energy, has a rapidly growing middle class, will host the World Cup in 2014 and the Olympics in 2016, and boasts miles and miles of sandy beaches.
What more could a real estate investor want?
I looked at Brazil before all the recent frenzy, back in 2003 and 2004. After a couple of trips, I decided that, while an argument could be made for why to invest in real estate in this country, I could identify far easier places to make money buying, holding, and selling property. While you could find opportunities in Brazil, I concluded that the average investor was better off looking elsewhere.
The only reasons to put in the time and energy required to deal with all the hassles involved with buying in this market (more on this in a minute) are if you are prepared to invest heavily…or if want to spend time in the country yourself.
The barriers to investment are simply too many to bother with for a single investment or two. Even if your return from a single buy is great in percentage terms, your real payout isn’t enough to compensate time spent.
In addition, you have currency issues. Unlike in many Latin American markets, where real estate prices are set in U.S. dollars, real estate in Brazil is priced in reais. This means you have a currency risk on top of whatever real estate risks you’re assuming. That isn’t necessarily a bad thing and, of course, can work to your advantage, certainly if you’re prepared to buy in cash and can time your purchase to take advantage of currency fluctuations in your favor.
However, if you’re buying on terms and therefore signing on to make monthly payments over an extended period of time on a pre-construction purchase, for example, you’re opening yourself up to the potential for big disappointment and maybe big cash flow troubles. When you make the buy, you have no idea, in fact, how much your payments will be each month throughout the term of the loan in your home currency.
Since the beginning of 2009, the real has strengthened against the U.S. dollar by 30%, moving from about 2.3 reais to US$1 to 1.78 reais to US$1 (in 16 months). If you’ve been making payments over this time using U.S. dollars, your cost has increased.
On the other hand, you could simply have bought reais in January 2009 and held onto them to make a 30% gain. In other words, you could have enjoyed a very appealing level of return without having jumped through the hoops required to invest in Brazil real estate.
Those hoops include getting a local tax ID number. Getting the number isn’t a big deal, but being required to file tax returns each year even if you don’t have any income in Brazil can be.
Opening a bank account in Brazil in your own name is virtually impossible. And make sure you register your investment funds when they enter the country or you may not be able to take them out again.
If you’re an American, you have another hurdle. You must obtain a tourist visa before arriving in the country. Again, on the face of it, not such a big deal. However, you’ll have to ship your passport off to a Brazilian embassy while they process your visa application, an inconvenience or maybe worse if you travel regularly (unless you have two passports).
On the other hand, you can apply for a five-year multi-entrance visa. Get this, and you don’t have to worry about the visa issue for a while.
Of course, all these issues and nuisance factors aside, people are investing in Brazil. A colleague whose judgment I respect has bought three pre-construction apartments in Forteleza.
I’ve given you my take on why you should or shouldn’t think about investing in real estate in Brazil. Later today, I’ll be sharing my colleague’s take on this question, based on his ongoing firsthand investment experience in this market, with Members of my Global Property Investor’s Marketwatch service. If you’re a Marketwatch Member, watch your in-box this afternoon.
Lief Simon
