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Currency Arbitrage for Real Estate in Argentina
How to make peso devaluation work for you when buying real estate
Welcome Avatar! Argentina really is the land of currency arbitrage if you have access to foreign income. Everybody thinks they love arbitrage before they move here and then it becomes a passion. In this article I will go over some of the main ways to let devaluation do its work when buying real estate in Buenos Aires or anywhere in the country for that matter.
Argentina Real Estate intro
As you might already know if you follow me on Twitter, the Buenos Aires real estate market and most of the Argentina RE market is exclusively priced in US dollars. Real estate is a store of value, and because there are virtually no mortgages available in the country since there is no credit, most transactions are in cash and paid in full.
The plus side of this is that there is no mortgage bubble or difficulties around interest payments, meaning that even a severe crisis like the ones Argentina goes through every 15-20 years tend to impact real estate pricing to a lesser degree than what we would see with a similar downturn in most leveraged and hypothecated RE markets in the “First World”.
If you haven’t read my two previous guides on real estate investing in Argentina, that would be a good place to start to understand more about market dynamics, regulation and pricing.
For the rest of this article I will exclusively talk about the currency arbitrage possibilities as it relates to local real estate.
New vs Used Property
One thing that is important to keep in mind, is that ANY payment schedule for real estate, is usually tied to new units, or 0km as I call them.
Buying a new property that is still to be constructed is called “Departamento en pozo” (pozo means pit or hole, that is because usually these projects still need to break ground).
For used property that has been on the market with a previous owner, most of the time there will be no option for payment plans (or mortgages for that matter), and you will have to show up with the full bag of Benjamins to purchase it.
So any listings you see of older property, will all mean: this has to be paid in full. You might be able to get an additional -20% off the listing price or more, depending on how desperate the seller is to get rid of the property, but that is about it.
Buying older property = losing a bigger chunk of liquidity at once.
It’s not a bad thing per se, depending on your goals. If you dream of owning a French 19th Century style apartment with high ceilings that would cost millions in Paris or Madrid, you can get it here for less than half the price or pennies on the dollar.
Airbnb / temp rental returns are not half bad either, at about 8% yield, and current occupancy is high given the influx of digital nomads and arb seekers who can work from anywhere. Earn in dollars, spend in pesos is the ideal scenario.
With that out of the way, let’s get into some “credit” structures.
Risks of new construction
First off, it’s important to note that these credit structures with installments are not arranged with a bank, but between private parties. Usually this is between the construction company and you, the buyer.
The key thing to look at here is track record and building contract structure. There are tons of start up construction companies without a track record. In those cases, there is no way to know if they are able to deliver the building on time, or even deliver it at all.
Due diligence of the construction company track record is key when evaluating new construction projects.
How long has this company been active? Have they delivered on time in the past? How long does each project take? Etc.
If you see a company has a solid portfolio, has been active for 10-15+ years, you can assume they ride the turbulent tides in this country without any issues and have seen it all. That is a good lower risk indicator to pay attention to.
It is not super common for buildings not to reach their final stages, but it does happen sometimes. You do not want to have your capital tied up in one of those black holes.
It is virtually impossible to get it out once a construction company goes bust, and you will only have a building skeleton to look at. If enough time passes and the project is not bought up by another company, that money is as good as lost.
Personally I have invested in one construction company buyout, knowing full well that this was a high-risk degen play:
I was able to buy a few apartments at 25-30% of market price because the original company went bust and initial investors were willing to take the haircut.
The company was scrambling for cash and waiting for another buyer. Eventually the project was taken up by another company, and construction resumed.
However, at snail pace because of the structure of the project (Fideicomiso).
This brings us to structures. The two main structures for new building projects are:
Fideicomiso — this is a trust structure, which is widely used. The biggest downside to this is that if the construction company is short of money, it can request more from the initial investors. This can cause delays if that cash does not appear at once (which is almost always the case). Another downside is that this structure enables ponzi dynamics, where a construction company can use funds from one project for another and vice versa. This is exactly why the company in that example above went bust: they were running 4 projects at the same time, shuffling money between these 4 projects.
Company SA/SRL — in this structure, the construction company creates a separate company just for a particular building under a holding company, and all finances related to that building are completely managed within that child company. This has the additional benefit of “clean” books, and doesn’t allow for Ponzi dynamics of shuffling funds from one building project to the next if one project is short of cash.
Fixed USD Installments without interest
These kind of payment plans are ideal for stability, to know how much you have to pay each month, and if you are outside of the country and don’t necessarily get to access the parallel peso market.
Many developers with these kind of plans will have a US or EU bank account, and can receive the monthly payments there. Set it and forget it.
Usually, the structure for these is as follows:
20-30% down payment;
Monthly installments for the duration of the project (24-36 months, depending on the building size);
At 50% building completion another 10% down payment
Monthly installments (continues, still the same timeline)
Building is finished and escritura / title deed inscription in municipal register.
As a rule of thumb, the pricing on these units that still need to be constructed are -15% compared to a fully finished apartment, so there’s some gain there as well.
Another thing that is a net positive is that if you sign one of these plans directly with the construction company, they will have an in-house notary. So no additional contract admin costs or realtor commissions. This saves you an additional 5-8% on the total sale.
Real life example
Let’s dive into a real life example. About 4-5 months ago, I dipped into another opportunity in fixed USD installments.
It’s a project in Palermo/Chacarita, a building with 2 bodies on 2 streets:
Since this is a bigger project, the timeline is about 36 months to completion. Now, the beauty of this project is that this construction company allows for only 20% down, and 80 FIXED installments in USD, payable abroad.
As you can understand, this rodent couldn’t let 80 installments without interest go to waste. This is an example of the calculator to more or less see how different amounts would work (link is in the caption):
The fact that this project works with 80 installments, means that after month 36, the rent basically pays for the rest of the 44 installments.
Usually project financing is only available for the duration of the construction until completion, but not after the building is finished. This is an exception and that’s why it was so appealing to me.
Their portfolio was solid, they’ve been around for 15+ years, and before investing I visited one project that was a little bit more advanced and the construction quality and materials used are A+.
My particular deal was as follows:
20% down - no additional fees since in-house notary and no real estate agent
80 fixed installments in USD, no interest, payable in a US account
10% additional at 50% completion
Full disclosure: If you’re interested, this is the project website to get an idea of what the project looks like. If you plan on investing and let them know the Patagonian mara sent you, I will receive a commission. But this is by no means an endorsement of their project per se, and this is serves just as an example. This is their only project with 80 installments, the rest of their portfolio under construction is with installments during the remainder of the construction, usually 24 installments.
Usually, USD installment plans for pozo investments do not tend to have additional interest, but they are usually only 24-36 installments max, making the monthly amount significantly higher.
Peso installments at the CAC rate
Now, so far so good for the USD installments. 20-30% down, rest in fixed dollar installments.
For payment plans in pesos, you can imagine the story is a little different because the construction company has to factor in inflation and devaluations to some extent, otherwise they would go broke within a few months.
So for peso installments, the structure of the payment schedule is the same, with the big difference being that the buy price is pesified, and then broken up into installments that are adjusted at the CAC rate (chamber of construction rate, or Índice CAC). See the evaluation of those MoM increases here.
A typical transaction would look something like this:
20-30% down, can be in pesos or USD
Pending rest value in USD is converted into pesos at the Blue or MEP rate and divided by the number of months to get the base installment amount (divided by 24 or 36);
Monthly amount increases MoM with the CAC rate;
At 50% completion, 10% down in USD or pesos (this is optional)
Building is finished and escritura / title deed inscription in municipal register.
The monthly amount increases usually +7-10% MoM, and this rate tends to accompany inflation. BUT the big plus is: it doesn’t account for peso devaluations against the USD. This is where you can make a big difference.
To put it mildly, in my opinion it is a miracle that these peso installment plans even exist. But they do, and so far I have done 2, one for a rural property, and one for an apartment in Palermo.
Let’s go over these examples one by one:
1. Urban (Palermo, Buenos Aires)
I bought an apartment in early 2018 on CAC in pesos and finished paying after 24 months in 2020. Even though the CAC rate kept up with inflation, in May of 2018 there was a big devaluation against the dollar.
Thanks to this and further devaluation over time before the last installment in 2020, this apartment was eventually 30% cheaper in dollars for me, while market value was still the same.
A classic example of how to make peso devaluation work for you.
2. Rural (Cafayate, Salta)
Another property I bought was a semi-rural plot in Cafayate. It is still close to the city center, but about 14 blocks from the main square, surrounded by nature in the Calchaquí Valleys.
Right now, there’s still torrontés vines on the property, that get collected by a local bodega.
I bought the plot in 2019 within a similar CAC structure. The price in USD at the time was $15,000 for the 250m2 piece of land.
I paid 33% down in USD ($5,000), and the $10k left over was converted to 60 installments of sweet depreciating pesos (adjusted for construction inflation).
The blue dollar rate in April 2019 was $45 pesos per USD, so that left a total of $450,000 pesos/60 = $7,500 pesos or $166 USD for the initial installment.
I am currently paying almost $100k/pesos/month with only 8 months left to go. These are the stats so far:
$5,000 USD downpayment
$7,500 USD paid in installments
Average installment: $145 USD/month
So with that math, and 8 more payments of say $150 USD ($1,200), my total payments for this would be $13,700 USD, close to a 10% discount.
Not amazing like the apartment in Palermo, but it didn’t cost me anything extra while keeping that liquidity in my pocket over all this time.
My idea is just to hold on to it, not build anything for now, but maybe some day I’ll drop something like this eventually:
Can non-residents access these payment plans?
Short answer to this often asked question is: yes. At this point in time, any property developer will be more than happy to accommodate you. These payment plans do not require you to be a resident.
The good thing is that for the USD installments you can pay those easily abroad for most bigger construction companies, since they will have a bank account in the US.
For the peso payment plans, you will have to be here to swap dollars to pesos on the parallel blue market, or otherwise know someone trustworthy who could take care of that for you.
0km property flips & taxes
I am not going to go into detail about taxes as a resident or non-resident, because that really depends on a lot of factors. Save to say that UNTIL you get to step 5 of whatever plan, nothing here is registered at the AFIP (local IRS) office usually.
Why? Because the unit you bought doesn’t exist yet. So it is not in the city register, and it cannot be taxed as such on your name.
This is why many Argentines use this to their advantage: they buy an apartment en pozo, and as soon as it is close to completion, they sell the “boleto” (contract) to someone who wants to live in the property or use it for something else, but wasn’t patient enough to enter from the start. Usually this has a 10-15% profit for the initial buyer.
Then, the initial buyer drops that money into a new pozo, and start over with the same thing — without informing the AFIP about the capital gains. Not saying you should do this since it is technically illegal, but it is important to note that there are vast sums of money circulating in this sector, completely under the radar.
The plus of flipping these 0km properties right before they’re finished, is that the demand for a “new” apartment is higher than for used properties. Liquidity is a lot better and sales happen faster.
I have invested in multiple of these, and even though I am currently “good” in terms of real estate, I always stay on the lookout for new opportunities.
The current crisis in Argentina is far from over, and we will see what happens when we enter in a peso debasement spiral, which is bound to happen given the amount of local peso debt outstanding.
The printer will run hot to pay the current 97% interest for peso savings.
The most important thing with this market is to understand that it is not liquid in the slightest. Meaning that if you show up with a bag of cash to invest, you will come across even better deals than you would see online, just because a seller can be desperate for money now.
On the other end of the spectrum once you invested in local property, be prepared to hold on to it for a long period of time. No quick flips in this market, except maybe for 0km property.
For the next “Argy Finance” article, I will go over the used and new car market. I am currently in the process of buying a new car and have bought and sold used cars as well.
See you in the Jungle, anon!
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