Purchasing Investment Property

The first questions to ask yourself when considering the purchase of real estate in Puerto Rico are: "to what use is the property going to be put?" "Will it be purely a vacation home? If so, "will you want to rent out the property when not being used by your family, friends, or yourself?" And, if so, "how important is that rental income?"

If you are seeking to live permanently in Puerto Rico either by retiring or working, be aware that knowledge of Spanish is essential. Though many younger Puerto Rican's have been taught and use English as a second language, many older Puerto Rican's are not bi-lingual. As in any country, even a U.S. Commonwealth were Spanish still rules, it is considered respectful and cordial to speak the language of hosts, or at least try. You'll be surprised how many older 'locals' are also quite versed in English, but wait to get to 'know' you before they open up and allow you to relax and not have to struggle through the translation. Also English is essential for hooking up utilities, applying and obtaining the required permits, working with construction workers, and contractors.

No passport or visa is required for travel to the island, since Puerto Rico is a U.S. Territory and Offical Commonwealth and as such, Puerto Rican's are also U.S. Citizens. U.S. citizens are allowed to purchase property in Puerto Rico so long as such transactions are governed by the appropriate federal and local real estate laws. We will be happy to discuss this further if you are interested. Just send us an e-mail or call us at 787-823-0806.

If property is being purchased as a primary residence or for business purposes, the property's location will most probably be dictated by either proximity to employment or target customer population. If the property is to be a vacation home where rental income is of little or no importance, then the entire western half of Puerto Rico is an excellent choice. Price ranges vary from less expensive toward the interior (@$65,000-$150,000), to more expensive toward beach fronts (@$200,000-$1,500,000). Raw land is also available for custom home construction or development of multiple homes or condos.

When rental income is important however, the correct location of the property is crucial, and rental income will be maximized when the property is located within 2 miles of popular beaches. Outside this area, and even marginally outside, rental demand will fall off very quickly and very substantially.

The amount and timing of a deposit payment on a new or used vacation property will vary from builder to builder, and by owners and their agents. It is not unusual for any transaction to require a deposit that amounts to 5% of the total purchase price at the time that contracts are signed and submitted. A typical purchase price is @$375,000, for a comfortably sized beach-front property.

There are circumstances however where a lesser deposit (nominally $5000.00) will be accepted, with the remaining funds payable through borrowed mortgage funds or a combination of promissory deeds. A nominal deposit of say $1000.00 will be acceptable to most new home builders and will enable you to write a contract, thus fixing the price and protecting your investment choice, pending the appropriate amount of financing or cash funds for any remaining balance(s).

Closing costs are made up of several elements, many of which are fees payable to government entities, registration fees, appraisal, loan document processing fees, points, prepaid interest, etc. Points can be the biggest single item in a mortgage contract. This alone can amount to 3-4% of the mortage sum, and will be clarified once the appropriate source of finance is determined.

It is possible for a builder to contribute toward these costs. It is typical for a builder to offer a cash discount, typically 3%. In most cases, the buyer will have to make a contribution toward closing costs; around $1,500 will normally cover these along with other prepaid charges.

Finally, if the property is being managed and rented out as an income producing vacation property, apart from a $1,000 float required to cover operating expenses; funds to cover the costs of security and safety devices and lodging licenses will be required.

In total, a prudent buyer/investor should have cash available over and above the deposit and furniture monies of approximately $10,000.

Property tax generally amounts to approximately 1 1/2% if the property's value. This amount is typically a prepaid escrow item within the closing costs. An estimated monthly amount is also included as part of the borrower's mortgage payment. Sales tax must be collected as part of rental charges. These monies are usually at the rate of 1 1/2% of rental charges.

Rental income is declarable in the US for income tax purposes. Please consult a tax accountant for advice on this subject. We can make one available to you if you desire at a specially negotiated competitive rate.

Good used properties (especially beachfront properties) do not remain on the market for long. While a "bargain" may become available just as you are ready to buy, a true bargain in a prime location can be difficult to find. It is important to ensure that what you chose to buy is indeed in a "prime" sought after location. This is crucial if the property is to be purchased for vacation property rental income. There are services and merchant billing recurring payment tools online that can help you with your rental income billing systems.

Newer properties contain ammenities and conveniences that may not be available with an older property. New home builders are also more flexible than property owners when it comes to purchase and financing. But there are also benefits to purchasing an existing property, such as landscaping; established neighborhoods; proximity to ocean; etc.

If you are considering purchasing your property for use as both pleasure and income generation, then we advise not to spend money on furniture of inferior quality which may not stand up to the rigors of a rental property.

We also do not consider it necessary or advisable to spend excessive sums on furniture. We do however suggest that the furniture be pleasing and comfortable. This will ensure repeat business through word of mouth advertising. It is possible to completely furnish a 3 bedroom, 2 bath home with a modest budget of approximately $12,000 which includes all rooms, major appliances, small appliances, cookware and flatware.


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For further information on Purchasing Real Estate in Puerto Rico give us a call at 787-823-4039, or send email.

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