What Taxes and Regulations are Doing to ROI

 

As a real estate company who also offers investor services, we get a lot of questions surrounding investment opportunities here in Ecuador.

 

And there are several great ones – people are doing quite well in cacao and shrimp farming for example.

 

We have found some very interesting opportunities in developing raw land for resale.

 

However, for many, the investment easiest to understand – so common in most places in the world is income-producing properties (rental properties).  This was my business in New York and is something we have explored extensively here.

 

And unfortunately, my conclusion is that you are just better off doing that elsewhere.

 

First of all, Ecuador has an extremely unfortunate 5% ‘capital flight’ tax.  Meaning if you are planning on wiring money out of Ecuador you are going to get 5% wacked off the top (there are some exceptions, but not many).  And with new proposals even attempting to limit physical cash leaving the country, this tax damages the expected ROI of all investments.

 

Additionally, the current administration is socialist leaning.  They have implemented sky-high import taxes and are very much unafraid to attempt to control the marketplace in whatever way they desire.  Some businesses have left for greener pastures – setting up in neighboring Peru or Columbia where the stance towards business is friendlier.

 

These import taxes and increased regulations have skewed the ratio of cost to build vs. what the market will bear in rent – making buying properties for rental income a lousy investment when compared to other parts of the world.

 

Increased minimum wage requirements and several taxes similar to social security and payroll tax have made the legal amount you can hire someone for, above the market wage.

 

Additionally, Ecuador does not produce a large amount of finished goods and even the ones they do produce have several layers of the 12% value added tax built into there price before they reach consumers.  For goods not produced in Ecuador, because of the import taxes, they can be as many as 3 or 4 times the price you would expect to pay in the US for the same product.

 

This adds up to developers’ costs for building being higher than it should be.  Yet Ecuador is not a wealthy country.  Minimum wage is $365/mo.  And while there has been some inflation, prices are still relatively very low.

 

Because of all this intervention, the ratio between what a developer can produce a building for and what the rental market will bear in rental income is out of wack.

 

So an $80K-$90K apartment will only fetch $300-$450 in rent (these numbers are based on Loja, prices vary greatly by region).

 

That means as an investor, you’re paying something like 15-25X rent roll for a building.

 

An astronomical figure considering the lack of expected appreciation due to the current economic situation.

 

While there are many other examples of the tax and regulatory policy of the Ecuadorian (and anywhere in the world) government stifling the economy, this is a good example of how they have skewed the ratio of property value to rent roll in such a way as to make investing in income producing properties a poor choice when compared to other markets.

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