We finished construction on our first 30 condominium units at The Oaks Tamarindo before Easter, and some of our owners already have begun renting out their units. Out of 30 units completed, 5 units are being rented out on either a short term or a long term basis. We are using the 3 units that we are not selling as model units, a home for our manager of guest services, Ana Lorena, and as VIP units for local dignitaries. One of our owners even has set up his own web site.
First, let's start by stating the obvious. (It makes blogging so much easier.) Renting is extremely attractive from an economic point of view. Prices are going up while phase two is under construction, making renting an attractive option to cover one's costs while enjoying the benefits of price appreciation.
We recommend that owners enter into short term rentals whenever possible. Rates are attractive, at $900 per week during the low season, pretty much the same as renting two rooms at the new Best Western Motel one mile down the road. Additionally, an owner can schedule personal and family use during the year, and we can keep a close eye on the unit's use when it is rented out.
Still, some owners have told us that they believe that long term rentals are more attractive to them, because their income is more stable, and because there is less wear and tear on their units. In our opinion, both beliefs are questionable.
From the point of view of stability of income, the law limits a landlord to only one month's rent in advance and one additional month's deposit for damages. As a nice trap for the unwary landlord or lawyer, a tenant can cancel his lease with three months' advance notice unless the lease explicitly provides otherwise. Moreover, a long term lease really is long term. Under Costa Rica law, every residential lease has a term of 3 years (even if the lease itself says otherwise). So, if you enter into a lease for any term (other than a short term tourist lease), you have entered into a three year lease. Combined with the discussion in the following paragraph, think of this as a form of rent control.
If rent payments are stipulated in a foreign currency, such as U.S. or Canadian dollars, the rent cannot be increased for three years (even if the lease says otherwise). Only if rent payments are stipulated in Costa Rica colones can the rent be increased, once a year, by an amount equal to the annual rate of inflation, up to 15%.
This actually is a pretty good deal for the landlord, since the colon is going up against the U.S. dollar, and inflation is running around 10% per year. So, your lease payable in colones will have two nice annual increases in rent, while your lease payable in dollars is fixed for three years.
What can go wrong? You negotiate a three month lease in October, during the rainy season, for a low rent, payable in dollars. You neglect to register yourself or your company as a tourist establishment, thereby attempting to avoid charging your tenant Costa Rica's 16.39% sales and tourist tax. You figure, no worries, I am covering my costs, the lease is only until December, and I'll raise the rent during the high season. WHAMMO. An unscrupulous tenant will stick you with the low fixed rent for three full years, during low season and high. Never mind that the lease says it is for three months. Costa Rican rent control.
What about wear and tear? Isn't it easier on your unit to have a nice, stable, long term tenant? Well, you own a vacation home, within minutes of the best beaches in the country. So, even though your tenant is a professional architect, engineer or lawyer who lives and works in the area full time,with a wife and no children, he has two parents, six brothers and sisters, and20 cousins, and their families, all of whom want to come visit him at the beach. And there is nothing you can do about that. Do you think one month's security deposit will cover three years of wear and tear?KEY POINTS
• You are better off as a short term landlord to foreign tourists, by and large.
• If you decide on short term rentals, you should register as a tourist establishment, publish notice of your registration and collect and pay your 16.39% sales and tourist taxes.
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