How to Invest in Latin America Real Estate without Looking Stupid

Go anywhere in Latin America today looking to invest in land and the story is the same. The broker will tell you about the next road, a new …

Go anywhere in Latin America today looking to invest in land and the story is the same. The broker will tell you about the next road, a new airport that may have been approved and a new resort on the way. The idea is to buy now while prices are low and make easy money once the project is done.

The north Pacific region of Costa Rica is a good example. It has the volcanoes, the national parks and the beaches. It’s also got the airport in Liberia, Guanacaste, making it the perfect tourist destination.

You’d think anybody investing in this region back in 1977 when the airport was built would’ve made a fortune selling it just a few years later.

You’d be wrong.

See, in the late 70’s there was meager demand for tourism. It took many years for Costa Rica to build itself up as a brand and a tourist destination. This is important because what Costa Rica had to do as a country back then is a macrocosm of what happens these days in small areas of Costa Rica, Panama, and the rest of Latin America: promote the area, improve access and build up infrastructure.

And the degree to which this process is successful is the degree to which a town or area will have success in regards to real estate value.

Why? Regions like Guanacaste and the Pacific coast have to go through the 5 stages of Latin America property development…and you don’t make money investing on property unless you understand where your property is at in those stages…and know the customer for each one of those stages.

What exactly are these stages?

To explain, let’s imagine you are looking to invest in raw land in Latin America. You begin by shopping for land in several different countries. You then narrow down your search to 3 different countries, each with one potential project you like.
How do you compare each deal in these countries? How do you decide which opportunity will make the most money the quickest?

You need a tool to make these comparisons, to know who the customer is for each project and most of all you need to identify the property that will give you the quickest and highest rate of return.

In other words, you need the 5 stages of Latin America property development. Here they are. 

Stage 1

The land is valued based on its value to the local community. Economic potential based on international valuation has yet to occur. So a location with a fantastic view or right next to a beach isn’t any more expensive than a nearby plot with similar value to the local economy.

There are Stage 1 areas all over Central America. Stage 1 areas may have great potential. Some may even be developed one day, but many will never realize the value that a global market would bring.

Buyers at Stage 1

In addition to locals trading property based on its value to the local economy, a Stage 1 buyer is like a pioneer with an eye for potential. They often have to enter on a horse or a boat to find the area, and they realize the difference between an excellent piece of land and a merely adequate piece of land. Sometimes they have a long-term goal for a return, but mostly they just love the area and the land is less investment and more passion.

Signs of Advancing to Stage 2

As international buyers with a new end-use for the land move in to the market, it’s beginning to move to Stage 2.

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Stage 2

Early buyers recognize more global commercial potential and speculate on higher future value. There is no evidence of an international market for these properties at this time.

Buyers are lured to the area by the opportunity to enjoy their own gorgeous piece of land at a ridiculously low price.
Often these properties have no road access or utilities, but buyers at Stage 2 can also heavily influence how the area develops by establishing the tenor of development as other investors seek to build complementary businesses.

Buyers at Stage 2

Speculators who also enjoy adopting an area, influencing how it grows, and then seeing it mature according to their vision.

Signs of Advancing to Stage 3

Word begins to spread locally about the price paid driving the price up as speculative buyers begin to purchase. As the price, and value, goes up, more money is drawn to the area feeding the cycle. Many of the early buyers who purchased larger pieces of land for much less start to sell off small parcels from their property at a much higher price.

Stage 3 buyers who expect infrastructure, services and community to be there or to be arriving soon start purchasing land.

Stage 3

Smaller lots go on sale with a few houses popping up. The region doesn’t look much different from a Stage 2 area as very little building is happening. Most of the transactions are still speculative. Building of very basic amenities begins.

Buyers at Stage 3

Buyers start picking up smaller parcels and lots from the early large-scale speculators. A hand-full of small-scale buyers build houses, but most are speculating and plan to sit on the land a bit before building or selling. Selling of nearby large-scale pieces continues.

Signs of Advancing to Stage 4

Someone begins offering a cohesive residential product, like a subdivision, and people start to move in. The various businesses offering services to that residential base soon follow.

Stage 4

For the first time, you begin to see a critical mass of residents creating community infrastructure including restaurants, grocery stores and tourism businesses. A significant number of tourists decide they like the area so much that they want to settle and a lot more residential housing appears. Larger businesses like supermarkets and hotels start to appear as Stage 4 progresses.

The area begins to be recognized for what it is rather than its potential as businesses and community become established.

Buyers at Stage 4

Individuals, entrepreneurs and businesses looking to live, work and do business in the area start buying the properties. Simply flipping undeveloped land is a much more difficult business model in this stage.

Signs of Advancing to Stage 5

The big chains start building and plans for a full complement of amenities and advanced infrastructure emerge.

Stage 5

A full-scale large town with all of the typical commercial infrastructure, including a range of grocery, restaurant and entertainment options, medical services and maybe even an airport. Tourism is no longer an essential driver of growth as other forms of industries and incomes are established.

Buyers at Stage 5

There are all sorts of buyers mostly with the common characteristic that they plan on using the land.

Why You Should Listen to Us

My partner and I developed the 5 stages of Latin America property development so we could identify where a piece of land is in the development cycle, who its customers are and avoid the stupid “If you buy it, they will come” mistake we’ve seen people make.

And boy, you would be surprised how many people make that mistake.

My partner and I have been working and living in Latin America for a combined 22 years. We’ve seen this model in action in dozens and dozens of towns. We’ve also watched dozens of investors fail, some succeed. Some were our mentors. Some were folks we just met in the industry.

I’ve also been traveling in, watching and measuring development in these markets for the last 15 years, tracing the history of regions and finding out the catalysts that changed the area, like an airport, or a road or a gifted marketer. But these are just catalysts to change, and change happens quickest when several catalysts occur at once.

What I Didn’t Tell You about the 5 Market Stages

Do you know how long it takes a piece of property to go through all five stages? One year? Two? Five? Ten? No. It can take 25 to 30 years.

Seem like a long time? It IS a long time, but it’s a fact. A fact we’ve born out through our time and experience in countries like Nicaragua, Costa Rica and Panama.

And if you don’t understand this and you buy Latin America raw land at the wrong time hoping it will skyrocket in price in two or three years, you’ll look really normal…

Normal? Yeah, because that is what most people do. But normal also ends up costing you a lot of money, which can also make you look stupid.

My Answer to the Original Question I Asked

So, the reason the Guanacaste region didn’t boom in the first five years of the airport arriving is that there were only a couple of places like the town and area of Tamarindo that were positioned to progress to the next market stages the quickest.
Twenty-five years later you can trace the entire Guanacaste regions development and see that development was like a swarm of bees jumping from place to place. Growing quickly or slowly depending on the variables like access, marketing, infrastructure and style of development. The successful development stories matched the product with right customer consistently in each stage of the 5 stages.

Think of it as the law of Latin America property development…it’s never quite exact, because there are too many variables. It’s like an eco system with many functioning parts to create the balance. And using the 5 market stages model will help you navigate that shifting landscape profitably.

In the end, the question you need to ask yourself if you are interested in investing in Latin America raw land is “How do I succeed?”

Well, the short answer is through timing your investment right, plus, adopting the right ROI expectations for the property based on the 5 Latin America market stages.

My partner and I have found this model to serve us and our investors very well, particularly on our two most visible projects, Playa Burica and Boca Chica. Feel free to use this model as you evaluate possible property purchase in Latin America.  

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