fbpx

Property Investment in Costa Rica: The 3-Year Lease Law and How it Impacts Your Investment

Costa Rica property investment main photo

Whether you plan to invest in a vacation rental property, temporarily rent your future retirement home or full-time residence, or are considering other types of property investment in Costa Rica, you know that this is a strategic investment decision. You want to make it wisely.

There are about a million ways I could answer the next question: “But why choose Costa Rica?”. For brevity, I’ll restrict myself to a few of the most important whys for investment purposes: the foremost reasons why real estate in Costa Rica can make a good investment, both for today and into tomorrow.

Why Choose Costa Rica for Property Investment?

If the world is your oyster, then Costa Rica may just be the pearl. Here’s why:  

Location & Proximity

Location & Proximity

If you’re from the U.S. or Canada, Costa Rica is an easy choice: Located in the same or similar time zone as friends, family, and business, and a short flight – often, a 3- to 6-hour direct flight – to/from wherever you currently call home, Costa Rica is about as close as you can be, while also investing abroad.

Tourism Infrastructure

When You’re Purchasing a Second Home or Future Residence

I’ll get into this more in-depth, below, but when you’re investing with short-term rentability goals (vacation rental or year+ lease), Costa Rica has a strong market for both: A favorite the world over for eco-tourism and outdoor adventure, Costa Rica is one of the planet’s most recognizable country brands. 

In fact, tourism accounts for over 13% of the country’s direct and indirect employment; in other words, it’s a huge driver of the local economy. People want to visit and Costa Rica wants to welcome them. 

Our natural beauty is a big draw. Consider that Costa Rica is a small country, occupying just 0.03% of the world’s total surface and housing about 6% of the planet’s total biodiversity. What’s more, over 25% of Costa Rica is protected – housed within national parks, wildlife preserves, refuges, conservation areas, and other designated protections. 

Beyond that, Costa Rica is working beyond sustainability and toward regeneration, which will help fuel green tourism for years to come. Suffice it to say, Costa Rica’s short-term vacation rental market is strong, in many towns. 

Stable Democracy

When you consider investing anywhere, especially when purchasing real estate for investment purposes, politics may not be the first thing that comes to mind.

And yet, Costa Rica’s stable political situation makes the country a more attractive investment destination: Non-citizens have full property rights. Your investment is safe from government seizure. The banking system is good. Etc. etc. Bottom line: Costa Rica’s stable democracy guarantees your investment.

Healthcare

If you’re looking into a someday future in Costa Rica (and even if you’re not, see the next sentence), you should know that the nation offers a robust public and private healthcare system. And that means that, whether you plan to live here or someday sell your home or business for a healthy profit to an investor who does plan to live here, Costa Rica will long remain an attractive investment. 

The Costa Rican Real Estate Market: An Upward Trend

The Costa Rican Real Estate Market_ An Upward Trend

There are different kinds of people in this world. I’m a numbers kind. I guess it goes with the territory. And so, every quarter and every year, I find myself reviewing, crunching, and interpreting the numbers. They help me get a handle on today’s Costa Rican real estate market and evaluate current and near-future trends.

The numbers also help me see where my brokerage, Blue Water Properties of Costa Rica, stands currently and where we’re going. They help me help my clients identify upcoming trends and investment breaks. They help us all get in on the ground floor of opportunity.

Two of my most applicable takeaways from 2023

  • Rising global interest rates are affecting lower- to mid-priced property, which means that investors in the price range may be able to secure great deals.
  • New construction is supplying a strong market demand for brand-new residences, again carving out an opportunity for savvy investors and developers willing to take the plunge into new construction.

Costa Rica’s Short- and Long-Term Rental Market

Costa Rica’s Short- and Long-Term Rental Market

In recent years, Costa Rica has witnessed a surge in foreign investments, particularly in real estate. And while the Costa Rica property market presents a plethora of investment avenues, ranging from residential and commercial properties to development land, we’re going to focus here on rental properties

Specifically, on short-term rentals (aka vacation rentals) and long-term rentals – and especially, as they apply to the Landlord and Tenant Act, which is often also referred to as the three-year lease law

I know – that probably caused you to pause in your tracks. That’s exactly why I’m writing this! But first, take a deep break; it’s not quite what it sounds like. 

Costa Rica’s Property Market

Renowned for its stability, the Costa Rica property market has witnessed a consistent uptrend in property values over the past decade. That said, recognize that property valuations may fluctuate depending on location and prevailing market dynamics. One of the standout advantages of investing in Costa Rica’s real estate sector is the potential for lucrative rental yields, with investors often reaping returns of up to 8 percent.

Beyond the promise of substantial returns, investing in Costa Rica’s property market provides investors with a means to diversify their investment portfolios and mitigate currency risks. The nation’s currency, the colón, has maintained historical stability, exhibiting lower volatility compared to other regional currencies. 

Finding Representation

However, as I mentioned, it’s critical for prospective investors to familiarize themselves with the legal and regulatory framework governing foreign investment and rental property in Costa Rica. Foreign investors are subject to the same laws as Costa Rican citizens, including property tax obligations

Engaging with a licensed, expert real estate versed in property rentals is highly recommended to navigate the investment landscape effectively. 

Additionally, you’ll want to hire an expert real estate attorney to represent your interests in everything from purchasing a property to writing a lease contract. 

And if you’ll be an absentee or hands-off investor, you’ll also want to engage a property management company to take care of your investment, manage your guests, and handle all things related to your property. Effective property management is fundamental, as a competent management team can handle tenant screening, property maintenance, and other tasks, freeing up investors’ time and energy.

Considerations for Successful Investment in Costa Rica Property

Considerations for Successful Investment in Costa Rica Property

If you’re considering diversifying your portfolio via a Costa Rican property investment, then there are several crucial factors to take into account to ensure success. 

Location:

Location is a pivotal factor in Costa Rican property investment. My advice is to target areas with robust rental markets and growth potential. This might encompass sought-after vacation spots like Tamarindo-Playa Flamingo-Playa Conchal or specific communities, such as Las Catalinas or Hacienda Pinilla. Safety, accessibility, local amenities, and attractions are also key considerations to attract potential renters or buyers. 

Rental Potential:

Assessing rental potential is paramount. You must gauge demand for rental properties in your chosen location and project potential rental income, whether for a short-term rental or a long-term lease. When doing this, don’t forget to factor in property management and maintenance costs, along with taxes or fees associated with rental income in Costa Rica.

Return on Investment (ROI)

Carefully evaluating ROI is critical. This involves analyzing current property values, appreciation potential, and all associated costs—from acquisition to maintenance to eventual sale and capital gains. Consulting with financial advisors or real estate professionals can aid in making informed investment decisions. 

Legal Considerations:

Understanding the legal and regulatory landscape is imperative. Investors must be aware of any taxes and fees, as well as local short-term and long-term lease laws. Engaging a real estate attorney can ensure compliance with relevant laws and regulations.

And with that in mind, I will now share a Q&A on Costa Rica’s Landlord and Tenant Act and the 3-Year Lease Law, courtesy of ECIJA Costa Rica, the first I use personally: 

FAQ: Costa Rica’s General Law of Urban and Suburban Leases

FAQ_ Costa Rica’s General Law of Urban and Suburban Leases

What is the applicable Law?

General Law of Urban and Suburban Leases, Law No. 7527.

What types of leases does this law regulate?

This law applies to both landlords and tenants and essentially regulates two types of leases: residential or commercial. In housing, we can say that two general concepts of short-term leases or the minimum term of three years are used; however, the term short-term is not used correctly since this is something that the law does not regulate.

So: What is the minimum term established by law?

The term minimum is 3 years for housing (art. 70). Although the contract indicates a shorter period, as it is a provision of public policy, it is considered not established and the 3 years will apply. This limitation does not exist in terms of commercial leases.

In what type of currency should a lease be paid?

4.1 Regarding residential rentals:

In accordance with Law 7527, in Costa Rica, the agreed price of rentals that are designated for housing can only be updated at the end of the term of each lease contract. Article 67 of the law establishes that in the absence of agreement between the parties on how much this increase is, some rules related to the accumulated inflation table must be applied according to the official consumer price index of the General Directorate of Statistics and Censuses.

The law, however, allows the parties to agree on the type of currency to be used, with the use of the US dollar also being very common. Under these cases, when a foreign currency is agreed upon, that currency will be maintained for the entire rest of the term without the right to negotiate an annual increase as is usually done if paid in colones. If a landlord imposes an annual increase in dollars, it would be illegal since the Law prevails over what was agreed in the lease contract.

4.2 Regarding commercial rent increases:

In matters of commercial leases, the parties self-govern this matter, the parties decide and negotiate what they wish to agree upon in the contract.

What are the landlord’s obligations?

These are some of your obligations:

5.1. Request termination of the contract, in the event that the tenant fails to comply with his or her duties.

5.2 Demand repairs and payment for them when the damages were carried out by the tenant.

5.3 Demand repair of damages and deterioration by the tenant’s visitors.

5.4  Carry out monthly inspections of the property or when circumstances warrant it. 

What are the landlord’s obligations?

These are some of the rights and obligations of the landlord:

  • Pay the agreed price for the lease on the date agreed in the contract.
  • Use the property only for the destination agreed in the contract.
  • Keep the property in good condition, that is, do not damage it, deteriorate it or carry out harmful works that alter its form or destiny.
  • If the property is damaged, the tenant can demand repairs and charge the cost of the repairs to the rent.
  • Advise if there is a serious defect in the property or if measures are needed against foreseeable danger or damage.
  • Comply with the law and the contract.
  • Require proof of payment from the landlord.
  • Exercise the right to use and enjoy the property.

What is meant when we talk about short-term rentals?

This is understood as the lease that is intended to be covered by the Urban Leases Law for a shorter period (3 months or a year for example). 

These “short-term rentals” is governed, according to different regulations, either the Civil Code and the Framework Law for the Regularization of Non-Traditional Accommodation and its Intermediation through Digital Platforms No. 9742 (2019), which has a scope of application to those periods no longer than one year, nor less than twenty-four hours.

Download Profit In Paradise: The Investor’s Guide To Costa Rica

Download Profit In Paradise_ The Investor’s Guide To Costa Rica

If you’ve made it this far, then it’s safe to say you’re seriously interested in Costa Rican property investment. 

And that means you’re just the type of person for whom I wrote Profit in Paradise: The Investor’s Guide to Costa Rica, my newest free eBook. This info-packed guide covers all the basics and beyond – from investment incentives and market indicators to the various types of investment, including property investment, businesses, and development opportunities.

Bottom line: There’s no one way to do Costa Rican investment – but there are wrong ways! So, whether you plan to retire here, manage a vacation rental property, invest in development, or dedicate your hard-earned cash to anything in between, your purchase is more than just a lifelong dream to fulfill: It’s a strategic investment decision. This eBook will help you make it wisely.  

Download

 

Ready to Purchase an Investment Property in Costa Rica?

Ready to Sell Your Costa Rican Development Quickly and for Top Dollar

Whether you’re a buyer/seller, an investor, or a developer, you’re on the right track and in the right place. Researching the market and understanding your prospects is an essential aspect of the decision-making process.

Hi, I’m Becky Clower, and the answers to your questions are what I do: I’m a real estate broker, agent, and owner of Blue Water Properties, as well as a real estate investor and developer. I’m also your expert and ally in this red-hot market.

I have the credentials – the HGTV appearances, the personal experience, the business prowess – to put me on the map, but what really sets me and my company apart is my expertise: I don’t learn from others; I learn for myself. I’ve built over a dozen homes, including two spec homes, and after selling out my highly successful Mango Walk project in just five months, I began developing two more projects: a 16-unit condominium development and a 12-unit commercial project in highly competitive Playa Flamingo.

Bottom line: I offer real, honest advice and expertise. So, if you’re looking for a broker, an agent, an investor, a developer, or simply a trusted advisor to stand by your side as you navigate your Costa Rican journey, however it manifests, then please get in touch. Let’s get started!

More to explorer

Leave a Reply

Your email address will not be published. Required fields are marked *

Subscribe To My Newsletter