Airbnb's & Reason #3

I spend a lot of time considering who my potential customers are at Playa Negra. I try to envision their lives and put myself in their shoes.

I bought the property under the premise that there was an undersupply of higher-end homes in the area.

I’ve had the vision of building a more affordable product here for people who want to live long-term, but this property simply doesn’t fit that profile.

This property is a vacation destination. It has a world-class surfing beach and a cozy beach town.

Who is my target market?

My target market is someone who wants to buy a vacation home in Costa Rica that also functions as an investment. My goal would be to build these homes and facilitate the first year's bookings myself before I sell the home.

For that reason, I am focusing our design around rental value and ensuring that the numbers work for someone who wants to get a return on their capital.

Our plan is to manage the properties in-house so that we can provide the buyer with a turnkey experience that allows them to simply pick the dates they want to be at their home and not worry about anything else.

As I’ve been researching my customer's financing options, I believe that Lafise has recently made strides in creating a viable product for foreigners.

They have a product that provides up to 70% LTV at 8.5% with a 20-year Amt. The limitation is that they need to stay within a 40% debt-to-income ratio.

The bankers I talked to were very confident in a 2-week approval process. If this is true, then it means that my potential buyer has a much smaller down payment than I had originally anticipated.

Assuming our customers go through this program, let’s look at what their investment could potentially look like.

I want to be clear that these assumptions need to be vetted more thoroughly, but this is my current best guess.

My assumption is an average nightly rental of $600, 65% occupancy, and a 40% expense ratio. 

One thing to remember is that labor is significantly cheaper, which helps with these assumptions, as insurance, repairs, and maintenance significantly benefit from lower labor costs.

• Sales Price (furnishings included): $800,000 

• Down Payment: $240,000 

• Rental Income: $142,000 

• Expenses: $57,000 

• NOI: $85,000

• Loan Payment: $58,000 

• Cash Flow: $27,000

Overall, it’s a great way to diversify for someone who wants to own a rental property outside the U.S.

Why I moved my business from Utah to Costa Rica.

Reason #3 The Sovereign Individual

In 2007, Tim Ferris published the 4-hour work week. 

He brought to light a whole new set of possibilities if you benefit from what we now call ‘Work-From-Home.’ 

Many of these new possibilities were actually predicted a decade earlier in the book “The Sovereign Individual.”

In 1997, James Davidson and William Rees-Mogg did an amazing job of predicting what the new world would look like in ‘the information age.’

I want to zero in on 2 ideas that they predicted would arrive because of the internet and the consequences of those ideas. 

1. People will become more mobile as work is done through cyberspace.

2. Governments will be forced to compete for citizens.

Migration

In 2020, companies suddenly forced everyone to stay home, unlocking Pandora's box of Work-from-Home Opportunities. 

People's paradigms changed as they asked

Why do I live where I live?

This set off a mass migration. People moved for a multitude of reasons.

• More affordable markets

• Get closer to nature

• Be closer to family 

• Better climate

• Politics

• Etc

Many believe this trend is a one-time event and its effects will reverse. 

I share the opposing view that James and William were correct in their prediction.

For the first time in human history, people can migrate anywhere in the world without losing their means to provide & this will only accelerate migration over time. 

This creates a massive shift in Real Estate value. We’ve seen this in destination locations like Colorado Springs or Park City, Utah, which are supply-constrained markets but have a lot to offer if traveling into the office isn’t a priority. 

There are also towns that have boomed in the rust belt or midwest based entirely on affordability. 

This creates a large opportunity if you can predict where people will opt to migrate. 

Government Competition

I remember when my dad came home and told me he bought stock in Blockbuster! 

We were already big fans of Netflix and would pick new movies every week to watch as a family. At the time, you were restrained by the turnaround time for mailing and receiving new DVDs. 

In its new heated competition with Netflix, Blockbuster had just delivered what my dad thought would be a knockout blow. 

Their idea is in the commercial below.

As we know, this investment idea didn’t turn out too well. 

How come?

At the same time this commercial was released, Netflix started gathering a limited library of shows and movies that could be streamed instantly.

Streaming was SO convenient. I could watch exactly what I was in the mood for at any moment (which ended up always being the office).

I’m sure you can think of many examples of companies that fall into this same category of industry Goliaths being eliminated or shrunk as macro forces change. 

• Lowes

• GM

• Barnes & Noble

• Kodak

• BlackBerry

• Toys “R” US

• etc.

What causes this dynamic to play out over and over? 

There are many reasons, but I will take a shot at summarizing it in one word. 

Complacency. 

The top dogs of any industry have every advantage when new competitors begin to sneak into the space, but they aren’t hungry anymore. 

Things are going well. Why would they change? Why take risks? 

When they awake to what's happening, it’s almost always too late to make the necessary adjustments. 

One thing that ultimately brings down these large industry leaders is their constant resort to forceful practices instead of service. They try to hold the old paradigm in place instead of adjusting to the changing world. 

These decisions ultimately always ensure their downfall.

Consider examples like

• How cable TV now competes with online streaming 

• News outlets compete with independent journalism 

• Hotels compete with short-term rentals

Previous industry leaders who have resources often try to trap people into contracts or use legislation to prevent the growth of competitors instead of working to compete fairly for customer loyalty.

Can this same pattern play out between competing countries?

Any country’s goal is to create prosperity for its citizens. This can be done in many ways. 

• Economic growth

• Safety

• Freedom

• Social Benefits

• Etc

One of the most popular ways governments compete is by attracting business or growing their own industries.

We see this with Texas attracting companies like Tesla or Tiawan subsiding chip manufacturing. We see the same thing with Safety in El Salvador, where Nayib Bukele has turned around crime. 

As mobility becomes easier for businesses and individuals, municipalities will be forced to compete on merit. 

As the concepts in Tim Ferris's book The 4-Hour Work Week gain momentum, many countries see the benefits of these ‘Digital Nomads.’

The benefits are good enough that many countries have started amending laws to facilitate their new arrival. 

Smaller economies are benefiting from all the new revenue. Many locals are amazed to see foreigners wanting to live in their country, and there is a pride that comes along with that. 

They are beginning to facilitate the move.

Of course, with any change, there is always pushback, but from my experience, I think these trends will at least continue at their current pace.

It won’t take a lot of migration to tip the economic scales.

Costa Rica is very favorable in many ways for those considering relocating.

Costa Rica has a large undersupply of homes with American Standards. Digital nomads are willing to spend more to have the same luxuries they’re used to. 

This opens up a big opportunity to build homes at these standards. I can create larger margins for myself as I believe the market hasn’t priced in these macro changes.

These first 3 reasons for my 10-part series have centered around macro forces. The final 7 will be deeper dives into Costa Rica specifically and why they will be one of the winners as we transition into this new age. 

One final thought.

I don’t know who the quote is owed to, but I once heard an investor say.

I don’t believe anything I have said in this post is a prediction; It’s already happening.