Buy in Brazil? You might want to read this first.

[peter amil]

This isn't the first time I've warned investors of the glossed over risks of investing in BR. But who am I. This time I'd like to share an opinion from Live & Invest Overseas. Take the following advice and do with it what you will. Best - Peter


April 19, 2010
Fortaleza, Brazil

Earlier this month, resident global real estate investing expert Lief Simon shared his insights into the property investment market in Brazil. That report triggered a barrage of response, both from readers, including a number who have already invested in Brazil, and from agent and attorney contacts in the country. Lief struck a nerve.

I've resisted following up Lief's market overview until now, as I wanted to amass as much feedback and intelligence as possible before stepping out again into the line of fire.

Lief first looked at the Brazil market about seven years ago and wrote it off. "Too much hassle," he concluded after his initial two scouting trips. "Too much trouble, too much risk for the average individual property investor. The institutional investor and others with big resources supporting them should be taking positions. But the average guy looking to diversify into international real estate? He can make his money easier with less uncertainty elsewhere."

I hadn't joined Lief on his reconnaissance missions to Brazil, and I resisted coming to any position one way or the other. About two years ago, colleagues I trust invested personally in real estate in the Fortaleza region and made good cases for why. I listened, keeping an open mind.

Meantime, developers began contacting me directly, hoping to interest us in promoting their offerings to you, and readers, too, were writing regularly asking why we were ignoring such a big marketplace. Didn't we, like so many others at the time, recognize a window of opportunity?

Finally, about a year ago, I addressed these questions in a report titled, "Should You Buy In Brazil?", in which I addressed what I perceived at the time to be the concerns and caveats associated with the idea of investing in real estate in Brazil.

Those risks laid out, I proceeded to report on a couple of particular pre-construction opportunities in the Fortaleza region that seemed reasonable buys to me.

In the 10 ½ months since, two things have happened. First, the U.S. dollar has lost considerable buying power versus the Brazilian real. Second, those colleagues I mentioned earlier are now a couple of years into their respective investments. With the benefits of real-world experience and a little distance from the buys, they're adjusting their positions.

Lief took all this into account when he wrote his follow-up Brazil market report 10 days ago...which he titled, "Frankly, The Real Estate Investor Is Better Off Looking Elsewhere."

In other words, Lief's position is unchanged.

Me? I've finally taken a position...as follows:

Lief was right all along.

If you want to live on the beach (or elsewhere) in Brazil and are prepared to pay cash for your second or retirement home, go for it. This country's coast is beautiful, and beach life here could be everything you're looking for in a new life on the water.

If you're a big-time investor with deep pockets and the time and inclination to figure out how to navigate this market, again, go for it. This is a lively marketplace, and, as a friend says, lively marketplaces are the best places to make money.

If, however, you're an average individual investor, certainly if you're a novice international real estate investor, I'm with Lief. You're better off seeking opportunity elsewhere. And here's why:

1. They speak Portuguese in Brazil. You probably don't. On the face of it, that may seem a silly comment. They speak Spanish in Panama, Nicaragua, Ecuador, Uruguay, etc., and chances are good that you don't speak Spanish either. But Spanish is easier to pick up than Portuguese. Plus, many English-speakers around the world do speak some Spanish, which can help facilitate dealings in Spanish-speaking markets. Any Spanish you speak, though, will not help you in Brazil. Spanish is not Portuguese.

2. Americans need a visa to travel to Brazil. Again, this may seem a silly, minor detail. And, sure, visas are a part of your life once you make the leap into this live-and-invest-overseas world. Typically, though, visas become an issue when you're interested in living full-time in a country. Having to apply for a visa simply to travel to the country, as an American must for travel to Brazil, is another layer of hassle.

3. It's practically not possible for a foreign resident or a non-resident to open a bank account in Brazil. Legally, it's possible. And three attorneys have written to us since Lief published his You're Better Off Looking Elsewhere report last week to tell us that we've got this wrong. It is, in fact, legal for a foreign resident or a non-resident to open a bank account in this country. Another contact in the country wrote to say that, yes, it's legal, and, should a bank refuse to open an account for you as a foreigner, you should go to court to argue the point.

Go to court to argue your right to open a bank account? Huh?

Whether or not it's legal for a foreigner to have a bank account isn't the point. The point is, can a foreigner in fact open a bank account? Here's the real answer: Yes...if you're willing to pay an upfront fee (from US$500 to as much as US$3,000, according to different sources in the country); if you're willing to keep a minimum balance (that, at today's exchange rates, amounts to about US$40,000); and if you're willing to assign power of attorney to some local representative. Maybe you'll find someone you trust well enough to assign power of attorney for your account. And maybe you'd be willing to pay US$500 for the privilege of opening an account in the first place.

But I'd maintain that you'd be out of your mind to keep tens of thousands of dollars on account in a Brazil bank...because of Reason #4 why you shouldn't try to go into this market as an average individual investor...which is:

4. It's not an easy thing to take money out of the country. Again, there's the legal line and there's the reality. The legal line is that, while exchange controls were in place, they've been removed. The reality, however, is that you can't take for granted that you'll be able to take funds (money in a bank account, proceeds from a real estate transaction, rental income from an investment property, etc.) out of the country when you want to. In the past 10 days, since Lief's report, I've heard stories from people who say they had to fight for months to be able to move their money out of Brazil. One poor guy enlisted help from the American Embassy. Another says he still hasn't managed to move his money.

An attorney will tell you that you should be fine as long as you have the proper paper trail to prove where the funds came from. Again, as far as I can tell, this is the theory, not the reality.

5. The currency risk can be more than you, as an average individual investor, bargained for. Of course, anytime you invest in a country where the currency is other than the currency from which you're drawing your capital funds, you have currency risk. And it can work for you as well as against you. That's not my point.

My point here comes into play when buying on terms and paying for your real estate purchase over time, as so many people are doing in this market. The practical consequence of how the real/U.S. dollar exchange rate has fluctuated over the past year is that the U.S. dollar cost of a pre-construction condo being paid for in monthly installments has increased by thousands, maybe tens of thousands of dollars.

I say again, the average individual investor, certainly the investor with limited capital resources, can be unprepared for what this means from a cash flow point of view.

You could learn to speak Portuguese (I know at least one investor who has), and, sure, you can get a visa. You could buy an investment property using cash, thereby avoiding the potential currency-exchange cash-flow issues created by paying over time. Or you could buy on time but buy your reais ahead to try to hedge currency moves.

But here's the real kicker in my mind: At the end of the day, what's your exit strategy? To flip...or to rent, right? If you intend to flip, you're going to have to look for a buyer who can pay you outside Brazil, otherwise, you're going to have to do battle to get your funds out of the country. I have a friend who bought and then sold a year later (for a handsome profit) to a buyer who paid for his purchase outside Brazil. That works. But it's yet another restriction, limiting your potential buyer pool.

What, though, if your exit strategy is to rent out your condo? How do you manage this without a Brazil bank account? Yes, it's possible. Years ago, we knew someone with multiple Paris rental apartments but no French bank account. He made it work...but it was a hassle. You have to find a rental manager you trust who can accept rental payments and pay all your in-country expenses for you.

What happens, though, when the time comes for that rental manager to send you your rental proceeds? I haven't found anyone who has tried this, but I'm guessing the answer to that question is that you'll come head-to-head again with those exchange-control issues that so many real estate agents in the country insist don't exist.

As a friend with considerable firsthand experience in this country wrote over the weekend:

"It's not just the visa issue, it's not just the tax ID number that you have to obtain as a property owner, it's not just the fact that the language is Portuguese, it's not just the risk of dealing with reais, it's not just the big question mark associated with the exchange-control issues, and on and on.

"It's when you add all these things together. The more you dig into how everything plays out, the more you look beyond the theory to the reality of this market, the more road blocks you realize."

I say again, for the record, Lief was right all along.

Kathleen Peddicord

[robh]

Thanks for the good laugh.

It sounds like Lief Simon has never invested in anything remotely international....

[JMBroad]

Hi Peter and thanks for sharing the article with us

Personally I think they didn't do enough research into the marketplace. The difficulties they ran into are classic mistakes from initial investors (so much so that all of the obstacles they ran into are dealt with extensively in the "Absolute Basics" thread on this very forum). If the author is correct, a mere two scouting trips made Lief come to the conclusion that Brazil seven years ago was a bad investment? I can't see how they are possibly not regretting that decision.

I would be interested in reading his "insights" and to know if they were based on his two scouting trips seven years ago or if he has made more recent forays.

Let us look at them one by one:

1. They speak Portuguese in Brazil. You probably don't. On the face of it, that may seem a silly comment. (...) Spanish is not Portuguese.

This is actually a fact (Spanish is in fact not Portuguese) therefore I agree with the author - it is a very silly comment. If you speak Spanish fluently then you will be able to read Portuguese quite easily and vice-versa. You will also be able to communicate. How do I know? Because I know a huge amount of Spaniards who have invested in Brazil and who come here recently and are able to make do with a little effort. I speak both languages and it is very easy to learn one if you are fluent in the other.


2. Americans needing a visa is hardly a reason not to invest - yes it may put you off having holidays in Brazil on a regular basis but it is worth the time to get a visa to come to Brazil and see investment opportunities. If getting a visa is too much work for you then perhaps property investment is not the thing for you.

3. Yes it is annoying not being able to open a bank account in Brazil.

4. The reality is - as long as you follow the correct procedures when investing you can repatriate your funds without problems - read the "Absolute Basics" thread to see what the correct procedures are.

5. Exchange rate - yes the Real has been getting stronger which means that properties in Brazil are more expensive for overseas investors. But it also means that people who have put money into Brazil are watching their investments grow not only because of capital appreciation but also because of the exchange rate. No one knows what the exchange rate is going to do in the future but looking at the state of the economies of Europe, US and Brazil - ally person I've put all my money into Brazil.

6. Exit strategy. No market in the world today has an exit strategy which makes as much sense as Brazil - this is potentially the strongest factor in favour of the country so the fact that someone would assume that it was a negative means they seriously haven't done their homework.

Unfortunately I don't think Lief and his wife Kathleen had the good fortune of being able to discuss their investment ideas on a forum like this one. Simply reading the "Absolute Basics" thread probably would have helped them with their investments - from that article it sounds like they made the most basic of mistakes.

[JMBroad]

Ok I've just read Lief's report. It is based on his two trips seven years ago and the language barrier thing was because with one developer he visited the English speaking person was not available to show him around so he had to try and make do with a local who didn't speak English - understandable.

But the best quote I saw on his report was this:

Sadly, many investors don’t realize that their speculative investment strategy has let them down until it’s time to sell...and, by that point, it’s too late

This boom-time speculative strategy used to work. In the golden age of international property investing that we’ve just moved out of, there’s no doubt...this strategy could make you rich. I’ve used it frequently myself with great success.

But it’s not working today.

Bubble investment markets feel good. There are plenty of investors with enough money to buy and support prices. This is happening even now in some markets. What’s missing today, however, are the retail buyers, to buy these investment properties down the line...when the time comes for the investor to sell.

Sure, some people will get lucky. But successful, experienced investors don’t trust their portfolios to luck. They shift their strategies to keep up with the economic realities."

Further on in the article Mr Simon says:

"I profited from each opportunity because I was “in the market,” pounding the pavement, and making my presence known. I made every connection I could...followed up on every lead I encountered...considered every opportunity that presented itself. Then I held out until I found just the right deal, and I persisted until I was able to make the buy on my own terms"


For Exactly these reasons - Mr Lief Simon - it's time you spent some more time in Brazil to find out exactly what IS going on in the country today. Brazil has changed a great deal in the past seven years - five years ago, Brazil owed the IMF 33.9 billion US$ whereas in 2010 Brazil lent the IMF 10 billion US$. Two years ago mortgages became available to the average Brazilians whereas seven years ago people didn't even dare dream this would ever be a possibility. Last year the Brazilian government launched the "My House My Life" program to try and eradicate the massive housing debt. Last year Brazil proved the strength of their economy by being the last country into the recession and the first one out again.

I look forward to reading an updated report after Mr Simon has had the opportunity to come back to Brazil to see what is going on today.

[robh]

"Plus, many English-speakers around the world do speak some Spanish"

This pretty well proves to me Leif Simon has no idea what he is talking about.

[robh]

Rather than just laugh at this ill informed article I thought I should answer the points raised one by one.


1. They speak Portuguese in Brazil. You probably don't. On the face of it, that may seem a silly comment. They speak Spanish in Panama, Nicaragua, Ecuador, Uruguay, etc., and chances are good that you don't speak Spanish either. But Spanish is easier to pick up than Portuguese. Plus, many English-speakers around the world do speak some Spanish, which can help facilitate dealings in Spanish-speaking markets. Any Spanish you speak, though, will not help you in Brazil. Spanish is not Portuguese.

As John said if you can read Spanish you can read Portuguese. I don't know where Lief has been in the world but other than the US the vast majority of english speakers do not speak any Spanish. Portuguese is just as easy to learn as Spanish. A lot of Brazilians also can speak Spanish.

Using a good english speaking lawyer will make things a lot easier for you.

2. Americans need a visa to travel to Brazil. Again, this may seem a silly, minor detail. And, sure, visas are a part of your life once you make the leap into this live-and-invest-overseas world. Typically, though, visas become an issue when you're interested in living full-time in a country. Having to apply for a visa simply to travel to the country, as an American must for travel to Brazil, is another layer of hassle.

Unfortunately this problem came about because of the US. Brazilians are not allowed to travel to the US without a visa being issued before traveling, so this policy is reciprocated. If you have a European (and a lot of other countries) passport you can get a 90 day tourist visa on arrival.


3. It's practically not possible for a foreign resident or a non-resident to open a bank account in Brazil. Legally, it's possible. And three attorneys have written to us since Lief published his You're Better Off Looking Elsewhere report last week to tell us that we've got this wrong. It is, in fact, legal for a foreign resident or a non-resident to open a bank account in this country. Another contact in the country wrote to say that, yes, it's legal, and, should a bank refuse to open an account for you as a foreigner, you should go to court to argue the point.

Go to court to argue your right to open a bank account? Huh?

Whether or not it's legal for a foreigner to have a bank account isn't the point. The point is, can a foreigner in fact open a bank account? Here's the real answer: Yes...if you're willing to pay an upfront fee (from US$500 to as much as US$3,000, according to different sources in the country); if you're willing to keep a minimum balance (that, at today's exchange rates, amounts to about US$40,000); and if you're willing to assign power of attorney to some local representative. Maybe you'll find someone you trust well enough to assign power of attorney for your account. And maybe you'd be willing to pay US$500 for the privilege of opening an account in the first place.

But I'd maintain that you'd be out of your mind to keep tens of thousands of dollars on account in a Brazil bank...because of Reason #4 why you shouldn't try to go into this market as an average individual investor...which is:

This is very true, but if you really want a bank account at a reasonable cost talk to Moneycorp.

4. It's not an easy thing to take money out of the country. Again, there's the legal line and there's the reality. The legal line is that, while exchange controls were in place, they've been removed. The reality, however, is that you can't take for granted that you'll be able to take funds (money in a bank account, proceeds from a real estate transaction, rental income from an investment property, etc.) out of the country when you want to. In the past 10 days, since Lief's report, I've heard stories from people who say they had to fight for months to be able to move their money out of Brazil. One poor guy enlisted help from the American Embassy. Another says he still hasn't managed to move his money.

An attorney will tell you that you should be fine as long as you have the proper paper trail to prove where the funds came from. Again, as far as I can tell, this is the theory, not the reality.

A lot of people don't use an accountant and wonder why their money gets stuck. There are taxes to pay in Brazil so there is paperwork required to ensure that everything is up to date. Problems will arise on occasion, this happens in every country.

5. The currency risk can be more than you, as an average individual investor, bargained for. Of course, anytime you invest in a country where the currency is other than the currency from which you're drawing your capital funds, you have currency risk. And it can work for you as well as against you. That's not my point.

My point here comes into play when buying on terms and paying for your real estate purchase over time, as so many people are doing in this market. The practical consequence of how the real/U.S. dollar exchange rate has fluctuated over the past year is that the U.S. dollar cost of a pre-construction condo being paid for in monthly installments has increased by thousands, maybe tens of thousands of dollars.

I say again, the average individual investor, certainly the investor with limited capital resources, can be unprepared for what this means from a cash flow point of view.


I am not sure what his problem is here, there will always be currency fluctuations in any country. From what I can see he is saying that because the value of the real has increased in the last few years then investment here is not worth the trouble. I would have thought that a recommendation to invest would be based on what the future holds for the currency not what has happened in the past.

There are great returns to be had in Brazil and the future for Brazil is very bright. Remember if it was easy then everyone would be doing it and then the returns would be a lot smaller.

[debzor]

Actually there is a little more to this than meets the eye. In the first place JMB is quite right - Lief did visit Brazil years ago, but his English speaking contact failed to turn up, and he was out of his depth. His second visit was also unsuccessful.

Around this time, IL (who Lief's wife Kathleen used to work for), started pushing investments in Fortaleza with huge success amongst the US off-plan investor market. This probably riled them.

Furthermore they push investments in which they also have a financial holding, eg in Panama and Uruguay, and this is not the case with Brazil. I do know of other investors and journalists who have attempted to have corrections to this editorial printed, without success - but this is not in their best interests...

[JMBroad]

Originally Posted by debzor

Actually there is a little more to this than meets the eye. In the first place JMB is quite right - Lief did visit Brazil years ago, but his English speaking contact failed to turn up, and he was out of his depth. His second visit was also unsuccessful.

Around this time, IL (who Lief's wife Kathleen used to work for), started pushing investments in Fortaleza with huge success amongst the US off-plan investor market. This probably riled them.

Furthermore they push investments in which they also have a financial holding, eg in Panama and Uruguay, and this is not the case with Brazil. I do know of other investors and journalists who have attempted to have corrections to this editorial printed, without success - but this is not in their best interests...

The plot thickens.

[peter amil]

As Robh stated "if it was easy then everyone would be doing it" is spot on. An honest investor in Brazil would find it hard to keep a straight face and say otherwise. My reason for posting here from time to time is to wipe some of the lipstick off the pig. Regarding the article I forwarded to members here: Some posters question the motives behind the articles publication. That is fine. Skepticism equals more money in your wallet. I encourage all new investors who have come to this site for advice to focus on only the points it makes. Points, I believe that are worth considering. Brazil is not easy. So, please spend as much time in BR before investing. Above all, when possible, solicit advice from those who could not possibly benefit from giving it.

[JMBroad]

Originally Posted by peter amil

As Robh stated "if it was easy then everyone would be doing it" is spot on. An honest investor in Brazil would find it hard to keep a straight face and say otherwise. My reason for posting here from time to time is to wipe some of the lipstick off the pig. Regarding the article I forwarded to members here: Some posters question the motives behind the articles publication. That is fine. Skepticism equals more money in your wallet. I encourage all new investors who have come to this site for advice to focus on only the points it makes. Points, I believe that are worth considering. Brazil is not easy. So, please spend as much time in BR before investing. Above all, when possible, solicit advice from those who could not possibly benefit from giving it.

Point taken - but again, regardless of how unbiased the article is or not the fact remains that it brings nothing new to these forums - all of the potentially challenging aspects of investing in Brazil are mentioned in the "Absolute Basics" thread stickied on the forums - and I think the Absolute Basics thread is a lot more informative as it is compiled by investors, developers, lawyers, agents, etc who have actually done a lot of work and possibly still do work in Brazil in the real estate industry. Basically it is the view of professionals who have not only found the challenges but have also overcome those challenges.

If you feel that there is an important point in the article which is not mentioned on the "Absolute Basics" thread by all means make a post in that thread and I will update it. Everyone has contributed to making that thread and it is constantly being updated (for example if the Online CPF actually does start in July as is mentioned in todays newspaper in Brazil then I will update the post accordingly)

The truth of the matter is, it is only complicated until you know how it works and (possibly more importantly) understand how the country works. Obviously Lief and his wife Kathleen didn't avail themselves of the appropriate amount of time to learn.