How to buy property in Brazil: Top 4 mistakes to avoid when investing in Brazilian property

Introduction

This article aims to educate property investors so that they can avoid making bad investment decisions before buying investment property in Brazil. Along with the fast growing economy in Brazil and increasing international media attention, many foreign property investors are looking at buying real estate in Brazil.

Due to the vast geographical dimensions of Brazil and a weak understanding of the country, unfortunately many foreigners make bad investment decisions. To make matters even worse, many novice investors take the investment decision over the phone without even visiting Brazil.

If a client is buying a holiday home in Brazil purely for personal usage and is not at all concerned about investment potential, it is fair to say that the following points might not be valid as one can not argue about personal taste and preferences.

However, if investment potential is at all relevant, here are our top 4 mistakes to avoid when investing in Brazilian real estate:

1. Buying a property in Brazil because it seems cheap

Many foreigners still have a distorted image of Brazil and expect property prices to be priced as in a "Banana Republic". Hence, it is not uncommon for foreigners to look for the cheapest Brazilian property they can find. However, this can be a very expensive mistake. Like anywhere else in the world, property prices in Brazil are set by demand and supply. If a property in Brazil is selling for a price that might sound cheap, it is always priced so for a reason.

The most usual reasons a property in Brazil is selling for a cheap price are:

- Bad location
- Low-build qualities
- High-density development

Cost of land in Brazil in remote and unpopular areas can be very low and it is possible to price a property development at prices that might look cheap as the developer has an extremely low land cost per unit. Location however is by far the most important criteria when investing in a Brazilian property. Buy a property in the wrong location and you risk being stuck with your investment for the foreseeable future and you will most likely never generate any rental returns for your rental property in Brazil.

Many novice investors lack the ability to tell whether a property (or property development) is built (or will be built in case of an off-plan investment) to good qualities. Building to good build qualities cost money in any country and this applies for Brazil as well. Properties that are not well built will risk loosing value over time, as the property will deteriorate due to being badly built. When a property is brand new this might not show, but during the following years the effects are usually seen. Investors are advised to remember that the only way to make a profit from a property investment in Brazil is for a future client to buy the property from the investor for a higher price than the initial investor paid for the property. Properties in Brazil that are cheaply built rarely accomplish this.

Most end user clients tend not to like high-density developments. This is especially true for holiday homes as end-user clients are not only buying brick and mortar, but is really looking for a "holiday experience" of which the property forms a crucial part. In high-density developments a property developer can spread his land cost over a bigger amounts of properties and thus also lower the sales price. As properties in high-density developments rarely appeal to end-user clients, they also don't have as good investment potential as Brazilian properties in lower density developments.

2. Buying a property in Brazil because it is beachfront

Another big mistake many foreigners do when they consider buying a property in Brazil, is that they have a very fixed idea that the property has to be beachfront. While a beachfront property can be a good option, it is far more important to first select the right area. Even though Brazil has an approx 7500km long coastline, it does not mean that every inch of the coastline has investment potential. Most beachfront properties in Brazil that seem cheap are virtually always in very remote areas with no facilities like bars, restaurants, shops and other amenities.

The already established locations in Brazil usually have very few beachfront properties for sale, and the few beachfront properties for sale are usually too expensive to offer good investment potential. For investment purposes, usually it is far better to be a bit away from the beach in a good and popular area, than being beachfront in a deserted area. Few people will want to rent a property in a remote area and it will be very difficult to resell the property to a future client, as the area is simply not desired.

3. Buying a property in Brazil because payment terms sound good

During the golden years long before the global financial crisis when property prices seemed to increase with no end in sight, it was common for property investors to focus a lot on payment terms. Favorable payment terms when buying a property in Brazil, can indeed offer more leverage on the investment but majority of investors pay too much attention to the payment terms. When investors pays too much attention to payment terms, they risk loosing focus on the really important factors such as location, build qualities and end user appeal for the Brazilian property.

It is worth to remember that if the property is not in the right location or the build qualities are not meeting the end-user expectations, it really makes no difference what the payment terms have been for the initial investor as the property will simply not sell nor rent to future clients.

4. Buying a property in Brazil because it offers rental guarantees

Rental guarantees are one of the oldest "tricks in the book" from overseas property developers to make their development appeal to novice investors. In these "schemes" the developer typically promises "guaranteed rental income" of 6-8% per year for 2-3 years after the completion of the development.

The truth however is that in 100% of the cases this "rental income" is simply put into the sales prices and as the investor is in fact paying an "over price", he is then simply paid back his money in the form of "rental income". After the 2-3 years have passed, the investor will discover that there are in fact virtually no rental clients at all renting his property.

In Brazil, domestic property developers never offer rental guarantees, as they don't understand why a client would fall into such a trap. The projects in Brazil that do offer rental guarantees tend to be foreign owned companies. Very few property developers have the marketing in place for actually sourcing rental clients and they are simply not interested in the business. Even developments that will be operated by a hotel operator never guarantee rental income, reason being that no serious hotel operator can or want to guarantee the future.

Imagine buying shares in a company like Google or Apple and asking the CEO if his company can guarantee dividends of 6-8% for 2-3 years....

The best guarantee there is for rental income in Brazil is to buy a good property in a location that is in high demand. Along with a growing economy in Brazil, this will ensure increasing occupation levels and higher rental income well into the future. The only thing guaranteed when buying a property with rental guarantees, is that the investor is guaranteed to not get the best possible investment property in Brazil.

Conclusion:

In order to make profit from a Brazil property investment, it is all about buying the property for a lower price than the future end-user client will pay for the property. There are two profit sources for Brazilian property investors:

1. Capital growth when selling the property
2. Rental income when renting out the property

In either case, what matters for generating profit is that the property is appealing to end-user clients. The property has to offer the clients with the right location and must offer build qualities that appeal to clients. If the property is in the wrong location or is cheaply built, future end-user clients simply will not be willing to buy or rent the property from the investor.

Investing in a Brazilian property can be very profitable, but as the above 4 points show, buying a property in Brazil purely because it sounds cheap, is beachfront, offers good payment terms or offers guaranteed rental income, can turn out to be a very bad investment decision. It makes far more sense to buy a well-built Brazilian property in a good location that is in high demand. This will ensure that the investor has an exit strategy in place for his investment property in Brazil.