Reason #2 Costa Rica Credit

I don’t have many updates this week. What we are currently working on is:

• Beginning stages of finding the right architect

• Tax strategy

• Finalizing our decision on which developer

• Finalizing approval for the development

Here is my Week 2 post on my reasoning for moving my business to Costa Rica.

Why I moved my business from Utah to Costa Rica

Reason #2 Costa Rica Credit

In 2020-2021 I found myself often scrolling ‘fintwit’ (A term for a group on Twitter that discusses economic topics) 

It was my first attempt at trying to understand investing on a broader level than just real estate.  

During that time, I learned 3 important lessons. 

1. Available credit is the largest influence on the price of an asset.

2. People invest in what is historically stable, not what has real value.

3. Leverage is more readily available on assets with low volatility.

Ironically, the combination of easy credit and low volatility is perfect for ensuring that an asset becomes overvalued. 

As I mentioned in Reason #1 last week, this creates a big problem. Yields were artificially suppressed to stimulate the economy, forcing investors to use leverage on safe assets to increase yield.

This created a sort of “everything bubble” in the US, as that’s where the perceived safety is.

I won’t recap the last email in full. You’ll need to read Reason #1 to understand the full context.

Going into 2022, I’m trying to find a way to balance the 4 parties previously mentioned.

1. Equity Investors

2. Contractors

3. Customers

4. Mortgage lenders

I believe this balance will come back in the U.S., but it will only return after wealth is redistributed. As I highlighted previously, I think inflation will be the mechanism of that rebalancing. 

My guess is that assets would react similarly to 1972-1980, when the CPI was consistently above 5%, and bondholders consistently lost real spending power even during a recession. 

I felt this fiscal path would put my current business model in a risky position since home prices were reliant on very low interest rates. 

This put me on the hunt for a new business or opportunity that was much less rate-sensitive. 

Costa Rica, like many Latin American countries, experienced very high inflation for many years. Inflation didn’t begin to stabilize until Costa Rica commercialized lending in the 1990s.

This led to interest rates dropping from above 25% to below 10%.

Costa Rica has had mortgages for its citizens for decades, but foreigners have not had access to those same mortgages. 

As I began travelling to Costa Rica I spent my time visiting existing developments and talking to agents and people who purchased homes in those developments.

Everyone I talked to had the same desire.

They had bought their homes with minimal, if any, leverage and wanted to get a loan.

I also learned of people who were trying to resolve this lending issue. 

I decided to lend money to someone building a home in Costa Rica, which allowed me to dig into the mortgage laws. This gave me confidence that unlike the tenant laws, which heavily favor the tenant, the mortgage laws favored the lender.

During this time, I realized: 

Lending would soon become available to foreigners buying homes in Costa Rica. 

Unlike in the US, interest rates can be much higher in Costa Rica but still make sense for the customer. Why?

The costs of assets and the labor to build those assets haven’t inflated to levels beyond reason. 

If you look at my four parties again, you can see they are better situated than my previous example in the States.

1. Equity Investor

My margins are much higher (35%), while my upside potential is higher, so assuming nothing changes, their returns will exceed the original expectation of 20% annually.

2. Contractors

Since home prices haven’t had the effects of 3% financing, the standard home price, while still very high in some places, is affordable for most working families.

There also isn’t a preconceived notion with the contractors of a living standard that is now not being met but was being met 15 years earlier, like in the U.S.

Nearly all low skilled labor is being done by immigrants from Nicaragua. 

3. Home Buyer

From the perspective of the foreigners I’m targeting, this is the happiest of the 4. The product and price of that product are very reasonable. 

4. Mortgage Lender

This person in a cash transaction is obviously irrelevant, but what is so great is that the process works without them. 

Let’s explore the likelihood that lenders begin to compete on these loans.

1. The interest rate is much higher. You would be able to lend on these homes at 10-12%

2. The LTV can be much lower since you are starting a ground zero.

If you limit these loans to homes in high-quality developments, then these loans would be extremely safe. There are already a few options for these loans and I believe that they will only get better and more competitive with time as the quality of the asset becomes more apparent.

This brings me back to my original point. 

As credit is introduced more frequently, it will influence asset prices. This leaves a lot of room for upside on sales prices. 

I believe that as many asset groups become destabilized, wealth will look for new opportunities, and Costa Rica, along with similar countries, will be a recipient of that shift.