The traditional model of selling apartment towers in Colombia, and many other places around the world, is based on pre-sales. The builder buys a lot, constructs a sales office that doubles as a demo unit, and begin to sell apartments until they reach a breakeven point and begin the construction. Anything sold after construction has begun usually equals profits for the builder.
For investment purposes, I would never buy a new or even semi-new apartment in Colombia and here is why:
Many Colombians like to buy in the pre-construction phase, wait 2-3 years and then sell upon completion, which is why you will often see a lot of “Se Vende” signs in brand-new buildings. Even if pre-construction “flippers” may earn 20% on their deal, they fail to recognize that there are a lot of expenses involved with flipping these properties, including double closing costs, property tax, capital gains tax, opportunity cost (investments that you are passing by because your capital is tied up in a project), and in some cases interest payments to the bank as well. In a country where you can safely earn 7% annual interest by leaving your money in a Fidecuenta with Bancolombia, it just makes no sense to get involved in this type of transaction, unless you’re looking to buy a personal residence for the long term.
That brings us to the benefits of buying an older apartment instead…
Price per m2
In Cali, which is the market I know the best, the new construction projects in the best stratus 5-6 neighborhoods, are selling for $3-5 million pesos per m2. By taking my time to carefully look around, I’ve been able to buy older apartments in the most attractive areas such as El Peñon and Granada, in some cases for as little as $1 million pesos per m2. Big difference, huh?
Sure, the building is older, maybe there is no elevator, nor swimming pool, but often you will find that the older units have something that the newer ones can not compete with, which brings me to rule #1 in real estate…
Location, location, location…
My business is tourism and most tourists want to be at the heart of the action within walking distance to most major attractions, restaurants, nightlife, etc. In premium locations like El Peñon and San Antonio, there are simply no available land for the big builders to buy and develop. This means that if you want to buy something you’ll have to go for something older, the benefit being the great location, something unattainable in most new projects. It’s the simple economics of supply and demand. Why do you think prices in Manhatten are so high?
Get it just like you want it and add value at the same time
If you are saving $2 million per m2 by buying something older, you’ll have a lot of money in excess to perform a stunning renovation, choose your own finish and get the place exactly like you want it.
I just did a total gut job on an older apartment. We tore out the floors, ceilings, old electrical grid, all the carpentry, all plumbing, moved several walls, opened the kitchen, installed natural gas, changed all the windows, installed A/C in all bedrooms and hot water in all bathrooms. Here’s the result. Total cost (without furniture) was about $600.000 pesos per m2. So I saved approximately $1.4 million pesos per m2 and got a killer location in the middle of the premium hotel district with most things worthwhile accessible by foot. For that kind of savings, I can live without the elevator. Not only is this property perfect for generating rental income, I’ve also added tremendous value to the unit. It looks like the places that sell for double or even triple the price without having the location – and I have no doubt that it will be worth at least 50% more within a few years.
The layouts of most new units are just plain boring. I look at real estate every day, and most new projects feature something like 3 bedrooms and 2 bathrooms crammed into an 80 m2 apartment. You’ll need a rear sensor just to enter to bathrooms and it’s impossible for two people to pass each other in the bedrooms without knocking your knee into the footboard or stepping on the other person.
Older apartments, by comparison, tend to be a lot larger: bigger spaces, bigger balconies, bigger terraces, bigger bedrooms, bigger everything. They were built in a different era when fewer people were around, prices were different and the premium locations were something reserved for the high-society. Today many of these older buildings in premium locations are being overlooked because a big portion of buyers who can afford to live in stratus 5 and 6 are looking to buy something new.
If you want to buy new and spacious – which is almost impossible to find, expect to pay exorbitant prices. In Cali, there are a few such places by the zoo in Santa Teresita, like Solevante, where prices START at $1000 million pesos… and you still will not be able to find a Coca-Cola in a 5 block radius even if you tried.
Brick vs. Concrete walls
One of the things I love about the older buildings is the ability to configure your floorplans easily according to your liking. Most older (30-50 years old) buildings have been built on a traditional structural system based on large steel-reinforced columns of concrete that carry the building. Divisions are subsequently made in brick, but these walls are (normally) not load-bearing and for that reason, they can be torn down in order to open up the kitchen, make bathrooms bigger, demolish maid’s quarters, etc.
Many newer buildings in Colombia are built either as prefabrication or entirely out of concrete. Everything is poured: columns, slabs, and walls – this is known as the industrial system. They do this because it is a lot faster and allow builders to cast up 5 apartments per week. But, not only is it almost impossible to tear down a concrete wall, these walls usually make up part of the structural system of the building and therefore may not be (re)moved without risking the floor above you collapsing. It severely limits your future options for modifications.
Hint: Always make sure to consult with a structural engineer before (re)moving any walls in any building.
What is your personal experience? Have you flipped or fixed up anything in Colombia with success? Can you relate to any of the things I mention above? I’d love to hear from you in the comments below.