Is Medellin The World’s Top Real Estate Investment Market?
Medellin, Colombia, is perhaps the best place in the world today to invest in real estate.
That’s a bold statement but one that I make with confidence.
In Medellin’s highest-end neighborhood of El Poblado– this city’s equivalent to Bel Air or Beverly Hills–you can enjoy solid rental returns immediately and a gradually but surely appreciating market short, mid-, and long term. I see no other market in the world that compares right now.
Specifically, the best potential for return in Medellin is from this city’s short-term rental market.
However, technically, short-term rentals (that is, rentals of 30 days or less) are illegal in this city.
That’s a limitation but not an insurmountable one for reasons I’ll explain. However, the real question is, if it’s complicated, why bother with short-term rentals at all?
The answer is simple: higher returns. A short-term rental with only 50% occupancy can earn more than a long-term rental that’s fully occupied. If you’re in the market for an income-producing property (as I strongly recommend you should be right now), it’s worth figuring this out.
Let’s take a look at the short-term rentals market in El Poblado, this city’s highest-earning sector.
When I came to Medellin for the first time, in early 2010, I recognized this city as a goldmine for the short-term rental investor. Occupancies were high, and double-digit returns were commonplace, even in the less-than-prime areas of El Poblado.
Then, in May 2010, a law was pushed through by the hotel lobby that made it illegal to rent apartments for periods of fewer than 30 days. Since then, it’s legal to rent your apartment short-term only if you’re in a building whose by-laws specifically allow for short-term rentals. If this permission is not included in the building’s original by-laws, it can be added only with the approval of 70% of the homeowners.
Not surprisingly, very few buildings have this provision today.
Since the passage of the 2010 law, the city’s two top property managers report a dramatic change. In 2010, about 75% of their inventory was available for short-term rental. Today, only 40% of First American Realty Medellin’s inventory is available for periods of fewer than 30 days…and The Apartment Medellin’s short-term rental inventory has dropped to 5% of its total rental pool.
Meantime, the demand for short-term apartment rentals continues to increase. Most travelers prefer the convenience, comfort, and privacy of apartment living compared with a hotel. Plus, of course, renting an apartment can cost significantly less than a comparable hotel stay.
Despite the complications, this is very good news for the investor. The inventory of short-term units is down…but demand is up.
Here are your options if you want to take advantage of a beautiful situation:
- Buy a unit in a building built for short-term rentals or one where these rentals are specifically authorized…
- Buy in a building where short-term rentals are informally permitted (which can still be risky)…
- Participate as an investor in a short-term rental project.
Let’s take a look at these options individually.
First, buying in a building designed for short-term rentals. The advantage of owning in such a building is that it’s completely legal and aboveboard. Also, these buildings are usually conveniently located near El Poblado’s major business centers and nightlife areas, so they are where many clients want to be.
The disadvantage is that you’ve got a somewhat limited market to sell into at resale time. These units are sought-after by other short-term landlords–who are willing to pay a premium to get them–but you won’t likely be selling one to a Colombian family or full-time resident professionals, segments that make up much of the market in Medellin.
However, in my view, that’s OK. There’s such a shortage of short-term units in this market that I feel there will be enough demand to move this kind of unit when the time comes.
Your next option is buying in a building where short-term rentals are informally permitted. This is the path taken by most people investing in short-term rentals in this market today. It’s much easier to find a building where short-terms are informally condoned than one allowing for short-term rentals in its by-laws.
Owning in one of these buildings can produce great returns. However, you take the risk that the building’s owners eventually get together and expressly prohibit short-term rentals. This would leave you with a 30-day rental (you’d have no choice) and the correspondingly lower returns. However, I think the risk is reduced at this time.
When the new laws came into effect, it took a while for things to shake out. Full-time residents and families resist short-term rentals because they prefer more stable neighbors and a “neighborly” environment for their children. Short-term rentals bring business travelers, vacationers, and sometimes men with call girls who want the privacy of an apartment rather than a more public hotel. (Prostitution is legal in Colombia, by the way. Still, understandably, some folks would prefer not to have it as a neighbor.)
Some Homeowner’s Associations (HOAs) took a stand right away to keep short-term rentals out. Other HOAs waited until residents complained and then took action. A third group allowed short-term rentals to go on. In this final category, I’ve watched as families have gradually moved from these buildings and short-term landlords, part-time homeowners, and expats have moved in.
Now–three years after the short-term law took effect–most of the HOAs who were going to take action have done so. And most of the residents who would have objected have moved on.
Of course, it takes only one loud, partying tenant to stir up the short-term debate in these buildings. Accordingly, property managers are strict with regards to codes of conduct for tenants they place in these properties, and they intervene quickly if neighbors complain.
Bottom line, right now, owning a rental property in a building where short-term rentals are unofficially permitted is a viable option, with only a slight risk that the 30-day rule might at some point be enforced.
That said, I’d seek the guidance of a real estate agent who is experienced in this market before making a building choice. An agent actively engaged in the city’s rental market will be your best source of information about where you can rent short-term and where you might have problems.
Which brings us to your third option, which is participating as an investor in a short-term rental project. This approach was born as a result of the growing shortage of available short-term rental units. In a nutshell, a developer seeks investors and then purchases a building that is then re-purposed into short-term rental units. Investors typically own shares of a company that owns the complex and receive payouts from the rental income.
I was introduced to this idea by Rich Holman (founder of First American Realty Medellin) and his business partner Joe Greco. Their first such project, Poblado Suites, was a success, with investor units selling quickly, showing that the idea was a winner. The building restoration came in under budget, and, thanks to conservative estimates, earnings have been higher than projected.
Rich and Joe are now offering a second short-term investment opportunity, in a property named Casa Provenza. They’re offering 40 investor units in Casa Provenza, at US$35,000 per unit. They’re forecasting a 4% to 6% after-tax annual return. Plus, as an owner, you enjoy discounted rates if you want to stay there yourself. The most unique benefit, however, is that your investment qualifies you for a Colombian residency visa, and the application cost is covered by the developers. So you not only get the investment and the returns, but Colombian residency as well.
The advantage of this type of project is that you can invest in Medellin’s short-term market without the hassle of buying and owning a piece of real estate here independently. In addition, the cost of entry is low compared with the cost of buying an apartment on your own. Also, this approach allows you to sidestep the short-term rental restrictions. The disadvantage is that your returns likely would be higher if you bought an apartment for US$100k to US$200k and rented it short term yourself.