Real estate is now everyones' favorite hobby. Real estate prices have risen dramatically since 2008 in the wake of the prime mortgage crisis. Yields on residential real estate have plummetted in the United States with most of the "smart money" exiting the market as investment property has proven difficult to manage and scale. Warren Buffet himself said he would love to buy a few thousand houses but he doesn't believe the investment can be efficiently managed in a large scale.
Puerto Rico is in an interesting situation given their unique status and positioning within the hierarchy of the United States. The population is extremely literate with over 94% of the island having the ability to read and write (with most also having a decent grasp on the english language). Unfortunately a lack of jobs has caused the island to experience a "brain drain" with may Puerto Ricans leaving for the US and elsewhere to pursue careers that better reflect their education. A distressed credit market and lack of capital have hurt the price of real estate and investment in much needed infrastructure all over the island, including some of the most desirable areas.
One example is the fact that beach front property outside of the major metro areas can be acquired for pennies on the dollar relative to comparable beach front property in many areas of the United States. The price per square foot of beach front land does not coincide with what has been realized in the US in recent periods.
To kick off the blog, let's start small. Dip your feet in, the waters warm.
The following parcel is located 20-30 minutes east of the capital San Juan in the neighborhood of Islote and the neighborhood of Arecibo. It is located 4 minutes from the beach and is about 698 cubic meters (about 7000 sq ft or 1/6 acre). Water, electricity, and utilities are available on site.
Priced at 20,000 USD, the property is selling for approximately $2.85/sq ft. A home can be built on this property for roughly 80$/ft. A standard beach house, ranch style, runs about 1,000 - 1,500 sq ft. The all-in cost of acquiring the property and building a nice, new, quaint beach house will be 100,000 to 140,000 USD. The home can be rented for roughly $1,200/month. This would yield a GROSS return in the neighborhood of 10.3 to 14.4%. Of course, taxes and insurance must be considered so your return will be slightly less. That being said, leverage is not included in this model so we are not observing a return on leveraged equity (as you would with a loan).
In future posts, more elaborate financial models will be included but a few concepts need to be demonstrated. So what is the upside? Where can you get a 10% return in the equity or real estate markets? The S&P500 has returned on average 10-11% over the past few decades but equities can't be leveraged (unless you want to talk about derivatives). We have also not considered tax implications. More on this later, but as mentioned, we are only dipping our feet in the water.
THE UPSIDE: Ask yourself what will happen if more and more mainland Americans (high net worth individuals) move to Puerto Rico. Stay tuned.
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