How to finance vacation rental investment in Costa Rica
Potential buyers often ask how to finance vacation rental investment in Costa Rica. Owning a vacation home in paradise is a beautiful dream but not always financially possible.
Does having a vacation rental make sense financially or not? You can expect an annual net return of 4 – 6% on a vacation rental investment in Costa Rica. This is a very important fact that is essential to making an investment in a vacation rental.
Bank CD’s in Costa Rica pay 2 – 2.5% annually. Therefore, investing in a vacation home in Costa Rica can be an interesting venture.
First, it is important to decide on your goal. Which group do you think you belong to:
1. Cash buyer who want to own a vacation home in Costa Rica for their own use primarily,
2. Cash buyer who wants to make a vacation rental investment to generate revenue,
3. A buyer who wants to purchase a vacation home primarily for their own leisure but needs a mortgage,
4. A buyer looking to buy a vacation home to generate revenue only but needs a mortgage.
Cash vs Mortgage
A cash buyer has the advantage that the financials do not necessarily have to generate a positive cash flow. Maintenance cost, HOA fees, advertising and property management fees come in second place. Maximum enjoyment comes first place. Often this kind of vacation rental investment is made by corporations for client and employee entertainment. Others make this type of investment think about their future retirement.
A mortgage buyer needs to make the financials work to his/her favor. At a 4 – 6% net ROI, you’d be losing money quickly if your operating cost is not covered by your income. For that simple reason, it is important to learn all you can about your options to finance vacation rental investment in Costa Rica before you start looking at property with a real estate agent.
Not all financing options might be viable for you. It all starts with the question if you are a citizen or legal resident. Often buyers who need a mortgage in Costa Rica do not realize that you need to be a citizen or legal resident to be eligible for a bank mortgage. More about that topic in this article on the MLS. There are a few banks that say they will finance a vacation home to a non-resident. Unfortunately, I have experienced the contrary, so do your homework.
Costa Rican banks lend 80% LTV (Loan to Value) on a primary property (where you live) and 70% LTV to finance vacation rental investment property, including a vacation rental investment.
Interest rates go anywhere between 7 – 10% per annum. Rates are usually fixed for the first 2 years and will be adjusted after that every year.
The bank will lend based on the debtor’s income, not on the future vacation rental income.
Owner or developer financing in Costa Rica is usually at bank rate level or even a little higher. Developers particularly will lend a high LTV at low-interest rates when they are starting to sell the project. Your risk, as a buyer can be high, so stipulate future payments in case of the project’s failure in the mortgage agreement.
Normal owner and developer financing are 50 – 60% LTV for 2 – 3 years. This loan type might buy you enough time to become a resident and apply for bank financing.
Private financing also called hard money loans, run interest rates anywhere between 12 – 18% per annum. This is not a viable avenue to finance vacation rental investment in Costa Rica unless it’s needed for a very short term.
The use of retirement funds is probably the smartest way to finance vacation rental investment if you have access to it. Those who own an IRA or 401(k) can find more information on this topic on the MLS blogs.
When planning to finance vacation rental investment, you need to first look at the operating expenses of this investment. The high operating expenses can reduce revenue to the point of turning a purchase into a bad business decision, especially if mortgage payments have to be included.
Buying a vacation rental investment
We can assist in your vacation rental investment in the Central Valley:
- For a golf vacation rental purchase, contact our golf specialist Shell.
- Atenas and Grecia are perfect vacation rental – short-term rental destinations, contact our agents Marian in Atenas and Brooke in Grecia.
- Contact Andres for any vacation rental investment options in Escazu – Santa Ana
We also have many affiliate agents in all the beach areas of Costa Rica, contact us now for any referral.
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I DO want to remind our readers that we appreciate any referrals you can send us. Also, please remember the GoDutch Realty agents when you talk about your home in Costa Rica, we appreciate it.