There’s a corny joke about getting rich in Costa Rica. It goes like this…

Hey, wanna know how to become a millionaire in Costa Rica?

Yea how?

Bring 2 with you…

badum tish.

There is some reality to that. Because if you want to do something in Costa Rica, like start a business, or buy some real estate, you’d better bring plenty of cash.

I get asked often about Costa Rica real estate financing. Is it available? Well, if you’re asking me if you can come fresh to Costa Rica, find that perfect home, and then walk into a Costa Rican bank and get a mortgage to purchase it, the answer is a resounding no!

After all, one of the key principles for bank lending is to know your customer, right? And how in the world is that Costa Rican bank going to know anything about you? You don’t have any history in Costa Rica. Certainly no credit history, but beyond that no history whatsoever. You could be an international terrorist!

Of course, I’m being a tad facetious, but I believe you know what I mean. In order to get a mortgage from a Costa Rican bank you first have to become a resident. You have to at least have that much tie into the country for a bank here to even remotely consider it. Costa Rican banks are more risk adverse than banks in the U.S. There really is no established mortgage market here. Yes, banks do grant mortgages to citizens and even to residents, but on terms that are harsher than what you’re used to back in the U.S. And with more frustrating bureaucratic hoops to jump through.

Many folks these days are getting residency via the purchase of Costa Rica real estate. It “only” takes a $200,000 investment and snap you’re a resident, along with your spouse and any minor kids you bring with you. The problem with that is you have to buy the home first. And with what? The answer generally is with cash.

Buying with Cash

Cash is king in the Costa Rica real estate market. Most deals are done with it. That almost always entails setting up an escrow account in Costa Rica to receive the funds for the purchase. That’s because Costa Rican banks will neither allow you to waltz in as a foreigner and open a bank account to receive a $200,000 wire in order to purchase your home. And you certainly can’t just bring the money with you in a suitcase. I guess that’s what drug-dealers do, but I’d sort of advise caution against it. The escrow account is your solution. Setting one up can be a bit painful as the escrow company will ask for documents that prove where the money came from, as well as exactly who you are. Remember, know your customer applies here too.

An all cash deal is also the best way to get the best deal. Costa Rica real estate prices can have a lot of room to negotiate factored in. And the best way to put yourself in the best negotiating position is via an all cash offer. Discounts from asking price of 10%, or even larger, are not uncommon.

Well, there are some options…

Using IRA Funds

This can get a little complicated and I have written on this topic before. But you certainly can use IRA funds. There is no restriction against an IRA investing in foreign real estate. It will have to be a self-directed IRA. The normal IRA or 401K that you might have invested in stocks and bonds probably won’t cut it. You’ll have to roll that money over into one that is self-directed and that has a custodian familiar with using an IRA to purchase foreign real estate. The other big issue with doing it this way is that you won’t be able to use the property personally. It has to be “investment use only”, at least until you reach retirement age. This type of transaction can work well for someone post retirement, or nearing retirement and who wants to rent the home out for a few years.

Leveraging Home-Based Assets

I just did a deal where the buyer used a home equity loan against her U.S. condo. This is certainly a way to do it, if your bank in the U.S. will go for it.

Seller Financing

Seller financing on a Costa Rica real estate purchase is always potentially available. Most of the time sellers won’t come right out and offer it. But it could be part of a negotiated transaction. Usually seller financing will only be available for a relatively small percentage of the overall deal. It seems the maximum amount usually available is around 50% and more often seller financing is a smaller percentage. I’ve done many deals where the financing has been to close a small gap between what the buyers had available and what the ultimate acceptable price ended up being.

For instance, I sold a home last year with an asking of $325,000. The buyers offered $300,000, but with only $250,000 at close and the balance on a 2-year note. Terms for seller financing are usually relatively short, less than 5 years. Interest rates vary, but seem to usually fall within the 5 to 8% range.

Rent While Obtaining Residency

Renting a home before buying can be a good idea. Some folks who aren’t sure where they want to live in Costa Rica will rent in multiple areas to get a feel for them. If you have another way of obtaining residency, like a pension from your job back home, you can start the process while renting. Once you have your residency, you just might be able to walk into a Costa Rican bank and get a mortgage.

It goes without saying that the easiest and most straightforward way to engage in Costa Rica real estate financing is to use cash, perhaps with limited seller financing. That’s the way most deals are done. However, there are some creative end arounds, such as those discussed briefly above, that might be available to you.