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Heating up in Honduras

Successful real estate portfolios are not built overnight. It can sometimes take years of research and deals before a portfolio produces the big numbers that investors seek.

It took Randy Jorgensen 16 years before he found the answers he had been looking for. A frequent visitor to Honduras, particularly the city of Trujillo, Jorgensen realized there was money to be made there. The area had a productive real estate market, and to Jorgensen, it seemed like a perfect match.

“After 16 years of vacationing and visiting, becoming familiar with the local regulations and developing relationships, the opportunity presented itself, as Honduras began to encourage foreign investment with a focus on tourism,” recounts the CEO of Life Vision Properties.

“I felt that if Honduras met all the criteria and Trujillo specifically met the ambience and location expectations I had, it would for others as well.”

In addition to being a great area for investing, the country’s economy is relatively strong. According to the IMF, the GDP is forecast to expand by 3.3 per cent in 2013 and three per cent the following year.

The first purchase

Originally from Moosomin, Saskatchewan, Jorgensen took the first step in 1992 and built a vacation home.

“My initial purchase was 42 acres with 1,000 feet of beachfront,” says Jorgensen. “The property was covered with extremely thick jungle that could only be walked across by blazing a trail with a machete.”

Although optimistic, Jorgensen knew that he faced an uphill battle with the undeveloped land.“The property was raw land with no services or infrastructure with a large swampy, low area,” he says. “The purchase price was $50,000 USD, and the original documentation stated 50 acres.”

He initially faced issues with the size of the land, a figure that saw numerous changes made to it due to conflicting results from surveys.  

“It is common in Honduras for land size to be significantly different from documents to actual survey,” he continues. “The final size should only be accepted if a recent survey by a qualified surveyor and reviewed by a qualified civil engineer.”

Once the land survey process was complete, the next step for Jorgensen was to perform an extensive cleanup of the area. “After purchasing the land, plans were made to clear the property so topography could be conducted and further plans for road access, power, water, drainage where required, and choosing a site for the home,” says Jorgensen.

Jorgensen generally prefers to focus on areas that have had some development, as it makes the entire process easier for both investors and developers. However, there was none available in Honduras when Jorgensen bought his land.

“Clearing and infrastructure costs initially cost about $60,000,” Jorgensen says. “The low cost was mainly due to the ability to perform most of the work myself without paying outside contractors, and the luxury of taking four years to complete.”

Hotspot: Trujillo

Since entering the market 21 years ago, Jorgensen has always focused his attention on the city of Trujillo, one of the largest markets in Honduras.

“I personally have begun developing property producing serviced acreages to enable ease of acquisition for foreign property owners, specifically Canadians,” Jorgensen says. “Currently, 1,500 acres are under development with 500 lots sold to date.”

Two key factors are responsible for Trujillo’s growth.

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The first is affordable average prices. Many properties in Trujillo can be purchased for between $200,000 and $250,000, according to the Global Property Guide.

However, there is also a large inventory of higher-end properties available.

The second reason is an expected influx of retirees and vacationers. “In-migration of vacationers and retirees will be significant over the next 15 years as baby boomers inflate the volume of retirees each year,” says the veteran investor.

“The time to purchase at an affordable cost grows shorter each year, so anyone considering a tropical property should take action sooner than later to enjoy the lower pricing still available.”

Developing a strategy

As Jorgensen began to add to his portfolio, he developed an investment strategy that would best fit his personal needs. “When purchasing property as an investment, I first decide if it’s a short-term (three to five years) or a long-term (10 to 20 years) project,” he adds.

He prefers the long-term approach when it comes to his holdings. He says he finds this method more financially stable and less susceptible to changes that may occur in the market, such as hedges against inflation, currency, market fluctuations, business and economy cycles.

Before entering a foreign market, Jorgensen advises investors to perform a detailed analysis of the area they’ll be targeting.

“In both short- and long-term investments, use of the property needs to be clear, exit strategy developed, target market identified, and improvements to add value begin immediately,” says Jorgensen. “Carrying costs need to be included in the projections and personal use needs a value assigned.”

Obtaining finance

One of the biggest obstacles Canadian investors face with international properties is obtaining financing. Some countries place certain restrictions on foreigners, while many banks may refuse to provide loans or mortgages outright.

But this doesn’t mean that Canadians should give up on the chance to own foreign property. Jorgensen experienced a litany of financial issues when he began investing in Honduras, but he was able to find some solutions over time.

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“Leveraging equity in current assets, [and] then using the funds to purchase the investment property is the most common [solution], followed closely by paying cash from [your] savings,” he says.

“Vendor financing is sometimes available, particularly on serviced lots and raw land, but improvements, such as home building, will need financing as above, or be paid by cash.

“I usually only leverage the property when a clear income is being, or can be, realized that will carry the debt,” he continues.

“I usually only consider this [for] commercial properties or long-term residential rental properties, and only if I need the cash for a specific purpose. Otherwise, I just enjoy the cash flow and income they produce.”

Looking ahead and giving back

Jorgensen believes that one of the best ways to plan for the future is to have an exit strategy. “Each property has its own exit strategy, most with best- and worst-case scenarios,” he says.

“Some are sales to individuals, some to existing business partners or tenants who currently use the property, and some are sales to industry corporations that would use the property as it was intended.”

Jorgensen intends to use his holdings “to create a sustainable tourism economy in the Bay of Trujillo, reaching a total investment value of $300 million within 20 years.”

Although his portfolio has been profitable, Jorgensen believes his holdings have the potential to boost the Honduran economy.

“[They] will provide a much-needed industry that will support local residents, create reasonably-paying jobs for young people, create government revenue to improve public services, improve and expand recreational activities for vacationers and visitors, and expand product and service selection to improve living conditions for local residents,” he says.

Jorgensen’s plan is ambitious, but “if done correctly it will be a win for everyone involved, creating a common goal, and preserving the [country’s] natural, cultural and historical assets.”

This article was first published in the October 2013 issue of CREW magazine.

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