Introduction
This article aims to offer 3 solid tips for making profitable land investments in Brazil. As Brazil is a country of huge geographical size, the whole issue about investing in the "right location" is extremely important. Brazil is in fact almost the size of the USA, and there are obviously huge difference between the different regions. Most foreigners also don't fully understand the Brazilian real estate market Brazil and lack the know-how of how to make a good Brazilian land investment. In order to make a profitable land investment in Brazil, it is crucial that the land investor has at the least a basic understanding of the local property market, which areas in Brazil offer solid investment potential and which are the factors driving demand for land.
Tip 1: Understand what drives demand for land in Brazil
Most people who invest in Brazilian land, do so either for residential or holiday purposes. In either case, what drives the client to buy the land is a real and existing desire to own a property in the given location.
Several large land developers in Brazil have sold very successfully land projects targeting the local population in several of the bigger cities in Brazil. Typically the local land developer invests in excellent infrastructure before launching the land parcels for sale, after which each client contracts a builder for building a house on the plot. These kind of residential land projects usually sell out very quickly as they very clearly satisfy a real need as the local population has a desire to live in the location.
As the Brazilian middle class is growing very fast, the desire to own a property in a good location close to the city centers has also increased dramatically. This is one of the key reasons why these land projects sell out so quickly in Brazil.
Another type of demand for land in Brazil is from clients looking to build a property for holiday purposes. These types of clients usually look for a location that will fulfill their holiday needs and in addition to looking for a beautiful area, clients also demand things like a well working infrastructure, closeness to bars, restaurants and shops etc. The main reason people look for land in such areas is to satisfy a real desire for a vacation home in the location.
The Brazilians that can afford to buy a holiday home, do tend to be quite wealthy. As a result, they are very "picky" with regards to the location, and very few clients are interested in a holiday home in an area that is not seen as popular. Very few Brazilians buy land just because it is "cheap" or might be in a beachfront location.
Tip 2: Choose the area carefully as not all regions in Brazil fulfill the criteria for vacation homes
Many foreigners seem to think that as long as an area in Brazil is by the beach, it is suitable for holiday home purposes. Brazil however has a very long coastline, and many of the coastal towns along the coastline have a very basic or almost no existing infrastructure.
Usually foreigners tend to think of each area in Brazil as "one". If we take the city of Natal as an example (state capital of Rio Grande do Norte), it is very common for foreigners to see the entire coastline around Natal as simply "Natal". The reality is though that Natal has over 20 small fishing villages scattered along its coastline and some of them are over 100 km from the city. Many of these villages have no infrastructure and no influx of tourism at the moment, and it could well be they won't have for at the least another 10 years. As such, these types of areas don't really satisfy the real demand for having a vacation home in the area.
The same applies as well to many other areas in Brazil: Fortaleza, Bahía, Recife, João Pessoa all follow the same concept where the coastline around the state capital is scattered with small fishing villages along the state coastline. Exactly like in the example above with Natal, the other regions in Brazil do follow the same logic where many of the coastal villages are extremely undeveloped and lack infrastructure.
Investing in land in areas in Brazil that not yet fulfill a real demand for holiday homes can be compared to gambling, as there are no guarantees progress will come along with improved infrastructure and an increased end user demand for properties as a result.
However, there are a few well-established holiday areas along the Brazilian coastline. Many of them started out over 20 years ago as small and quiet fishing villages, and have during time slowly evolved into famous tourist destinations. As always, progress attracts increasing investments in infrastructure and after a while the area starts to attract more people, and as a result prices of real estate start to increase as well.
Some of the most famous holiday beach towns in Brazil are Trancoso, Itacaré, Pipa Beach and Porto de Galinhas just to mention a few.
Cost of land in these already proven and sought after areas in Brazil, is obviously higher compared to areas with no demand or infrastructure.
Tip 3: Instead of focusing blindly on the price of the land in Brazil, pay attention to the exit price for a built villa on the plot
Foreigners typically think that the cheaper the land is in Brazil, the better the investment potential will be. It is obviously always good to look for a good price, but focusing too much on a "low price" can unfortunately be a very expensive mistake when buying land in Brazil. This is best showed in a simplified example. Let´s consider the following two scenarios:
1. A client invests in a 500m2 lot for 19 900 Euros in a beachfront location in Brazil with little infrastructure. Since the area is yet very undeveloped, the price if the plot is seen as "low" by the client. The client then decided to construct a 200m2 house on the plot for 500 Euros/m2. The total investment comes out 119 000 Euros, including the cost of land.
2. A land investor purchases a 500m2 plot for 50 000 Euros in a well-established area in Brazil with an existing demand for holiday properties. As build costs are virtually the same anywhere in the northeastern Brazil, the total investment in this case comes out at 150 000 Euros, including the land investment.
Most amateur land investors would argue that scenario 1 would give the land investor with a higher ROI. The problem with that assumption is that it is easy to forget the fact that a land investor only makes profit the day he actually sells his investment to a future client.
Buying land in a "cheap" location in Brazil can mean that there will be no demand for the house the client built on the plot, i.e. even if the client perceived the cost of land as "cheap", it will very likely mean that he will be stuck with his investment as the area is simply not offering end user clients with the holiday experiences the clients are looking for.
In the second scenario, the cost of land was over twice as "expensive", but as the area is in high demand, it is likely that the house can be sold for 250 000 - 300 000 Euros, giving the investor a handsome profit. In a worse case scenario, as the area enjoys from a solid tourist market, the property can always be rented out until being sold, thus giving the owner additional ROI for his investment.
The example above is clearly simplified, but the intention is merely to show that what looks like "cheap" is not always the best land investment in Brazil.
Conclusion and summary:
As cost of land in Brazil is still seen as cheap compared to many other locations, it is not uncommon for foreign land investors to buy Brazilian land over the phone without actually going to Brazil to see the location in real life. When comparing land investment opportunities in Brazil, investors are advised to think about the real reasons why a future client would want to buy the land from the investor.
There are many land projects for sale in Brazil. Many of them might sound cheap only by looking at a "low price", but investors are advice to follow the advice in this article in order to make the best possible land investment in Brazil.
Alexander J Wasastjerna is a director at international and award winning Brazilian real estate agency Brazilian Homes LLC. Besides marketing land for sale in Brazil, the group also offers a wide range of investment property in Brazil. Alexander J Wasastjerna has been working in Brazil since 2005 and is often invited to conferences for sharing his expertize in Brazilian real estate.
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