This was an answer to someone in a RE forum who pointed out the fact foreigners can't use Colombian sourced debt, in Colombia to increase ROI.
Here's my response…
Colombian sourced debt is not going to happen
Yes, you're not going to be able to use Colombian sourced debt in Colombia.
leverage your US equity
That said, I've leveraged the equity on my US assets several times to remodel and flip properties in Colombia.
If I can take out fixed-rate debt at 5%, and a 70% LTV, and put it to work making 30% returns, the numbers make sense all day.
USD debt to buy peso assets
Especially when you using USD debt to buy peso assets when the peso is extremely cheap, historically speaking, against the dollar.
So you can get your 30% return while at the same time taking a high probability to bet you'll make another 10%-40% on the currency, if and when, you take the pesos and buy back dollars.
It's not what you bring in, it's what you send back out
Also, remember that you're not exchanging the amount you brought into Colombia but the amount you're taking back to the US that's compounded at 30% clip.
So send $1,000,000 USD down, when the peso is 3200/1, compound it at 30% per annum, and then after a few years, take $2,000,000 (doubled money with a few years of flips) in pesos back to the US when the peso is 2000/1. You're $2,000,000 now buys $3,200,000 worth of dollars.
Remember the initial $1,000,000 could have been leveraged off the equity in US assets…OPM.
What if the peso goes to 4000/1? Great, the purchasing power of your USD cash flow increases dramatically to redeploy at the 4000/1 rate.
When Your expenses are denominated in pesos
If your expenses are denominated in pesos it's a huge win assuming local inflation doesn't get out of hand. In which case, the nominal value of your peso Real Estate would increase, maintaining purchasing power.
And one extremely important fact most/all investors overlook
Tremendous returns can be made simply by an asset increasing with the rate of inflation.
Example: If your cost basis on an asset is 100k and its value is 200k, a 10% inflation raises the value to 220k, in real terms the asset didn't increase in value, but your cost basis is 100k so you gained purchasing power because the asset increased at 20k (10% value), not 10k (10% cost.)
My point is, you're 100% correct that there's no access to Colombian based debt, but if you get creative, ways exist to achieve the same type of returns, with the benefit of the reduced downside, due to the lack of credit in the existing Colombian housing market.
I would love to compare notes and happy to debate ANY BP members with you. 😉
Hey George, first – let me say this: I really love your content! But for the investing thing in Columbia.. ouh.. Its a huge bet on currencies and taking into account that you get paid in weak currencies and need to pay your morgage payments in dollars for me seems pretty risky. Sure, given that the weak currency catches up against a shitty USD seems a pretty nice deal. But for me it has too many variables in the game. I recently had a client ramping up a business in Argentina..financed in USD and got paid his production… Read more »
Can you discuss the potential legal and tax pitfalls of bringing dollars into Colombia and then later repatriating them?
Nice work George. I built a website down in Argentina back in 2003 when the peso collapsed. The labor was pennies on the dollar. When I eventually moved to buenos aires, I met a former Macquerie investment banker deploying your strategy w equity from his Aussie holdings. He was making 30% unlevered cash returns buying stuff in recoleta for 50k that would net him 15k annually. Then u have the currency arbitrage as well. Its a nice play I primarily seller finance stuff for people in tier 3 and 4 markets in Texas. You make an unlevered 20% all day… Read more »
Hey George, thanks for really great content!
I like the strategy and I am also looking into Medellin; however, if I understood correctly your strategy assumes that the COP will appreciate against the USD. If that is the case great; however, I have some reservations about it: If the COP depreciates against the USD then you better make more than the depreciation rate to make it work, otherwise your profits will be diluted when you bring the money back home.
This is way I am hesitant about Medellin…l appreciate your perspective.
Great content again!
So you don’t pay cash in full on properties in medellin?
I live in the Cali Colombia area and doing real estate investing and developing as well. I am moving dollars down here and taking advantage of the exchange rate. But I am not moving it back to the states. I have no need to. I am simply rolling the money over into new projects and building residual income. With the collapse of the US economy, and the strength of this economy, I see no logic in sending money back to the states.