Cashing In On a Second Home in Central America: How to Buy, Rent and Profit in the World's Bargain Zone. Tom Hammond Kelly
“The overwhelming majority of people looking for real estate in Panama have one primary motivating factor—the low cost of living here,’’ McBride said. “This motivation transcends all economic and demographic categories. Everyone is seeking a less expensive place to buy and to live. Fortunately, Panama does truly offer a much lower cost of living and the quality of life is as high as I’ve ever experienced. Although real estate prices have risen significantly over the past two years, they are still a bargain compared to the U.S. or Canada. When you combine the cost of living, the great lifestyle, a U.S. dollar-based economy, a stable government, low crime rates and fabulous weather, you have a country that offers a lot to North Americans seeking an alternative to their home country.’’
According to Prima Panama’s research, the motivations vary for North Americans buying in Panama. The survey revealed that the market can be divided into three groups: primary residents, second-home buyers and investors. Each category has different objectives and, curiously, each category buys in different areas of the country. For example, primary residents tend to cluster in the mountain areas near the border of Costa Rica, where the climate is mild and larger numbers of foreigners reside. Second-home buyers generally look to the beach areas, where they can get an oceanfront condo with rental potential. Investors concentrate almost exclusively in Panama City where an unprecedented construction boom is under way.
“If I were to give any single piece of advice to someone looking to buy or invest in Panama, it would be to remind them that Panama is a developing country and it’s not just the U.S. or Canada in the tropics,’’ McBride said. “Things do not operate the same way here as they do in the U.S. and Canada and you can’t expect the same safeguards as you have in those countries. I often tell people that Panama has one of the highest levels of personal freedom in the world. However, with that freedom comes personal responsibility. If you do something stupid, don’t expect anyone to bail you out.
“We believe that if provided enough information, most people will make a rational and informed decision. However, information can be a precious commodity in Panama and it’s up to the individual to seek out as much as possible before they make their decision. The advice, then, is to do your research, trust but verify and be prepared to take life slowly. But in the end, isn’t the slow pace of life what we’re really after?’’
History of the second-home market in Panama
Although Panama is just emerging as an international second-home destination, the country has always had a market with a foreign presence. After the failure of the French to build the Canal, the Americans stepped in and finished the project in an astonishingly short period of time. From 1908 to 1999, the U.S. military administered the Canal Zone, which cut right across the middle of the country. It was a controversial territory in the eyes of many Panamanians, who were prohibited from entering the Canal Zone because it was deemed a U.S. sovereign territory.
Thousands of soldiers and workers who were stationed in the Canal Zone spawned a U.S. lifestyle in the region, and they easily mixed with locals. The Americans who grew up there, called “zonians,” did not even need a passport to enter into the zone from the United States. Zonians who returned to the mainland U.S. often grew homesick for the Canal Zone because it offered a lifestyle unlike anywhere in the States. A beautiful tropical climate, stunning scenery, friendly locals and a low cost of living were just some of the magnetic factors.
Other than for the select individuals who were exposed to the Canal Zone, Panama was never considered to be a second-home destination. The country was seen merely as a port of call where cruise ships carried curious passengers eager to see how the passage between two great oceans with a difference in height was engineered. Rarely did passengers even leave the decks of the huge vessels that squeezed through the narrow passage. While military personnel often darted away to enjoy a weekend of nightlife in Panama City, only the most adventurous of people ventured to the beaches or interior for a vacation.
In 1977, the Torrijos/Carter accord (signed by President Jimmy Carter and Panamanian leader General Omar Torrijos) initiated the process that would relinquish control of the Canal Zone to Panama. Under the terms of the agreement, the U.S. would give control of the Canal Zone to Panama in 1979 and give complete authority over the operation of the Canal and former U.S. military bases effective December 31, 1999. The treaty also stated that U.S. military intervention in Panama would be justified if free transit through the Canal was ever threatened.
During this period, several incidents produced a doom-and-gloom picture of Panama. The United States military intervened in 1989 to overthrow the military dictatorship of Manuel Noriega, who was accused of narcotics trafficking and endangering U.S. citizens and interests. Noriega, who was removed and jailed in Miami, had a profound impact in creating a negative image of Panama. As the 1999 handover date loomed, uncertainty revolved around whether or not Panama would be able to rise to the challenge of securely managing the Canal. Economic questions surfaced, including how much would a mass exodus of United States citizens depress the real estate market?
More than 10,000 U.S. troops had been stationed in Panama through the mid-1990s. (Troop presence was highest during World War II, when about 65,000 U.S. military personnel were based in the country.) The Canal, and the adjacent Colon Free Zone, generate major economic activity and draw businesses from around the globe. The Free Zone, which began operation in 1948, is the second-largest free-trade area in the world. Companies located within the walled zone area may import goods free from duties and they pay very low taxes. Companies also obtain favorable immigration benefits for executives and other employees.
When the Canal was peacefully turned over in late 1999, Panama began to actively market its so-called “reverted areas,” which were U.S. government properties sitting on valuable real estate. Sales of reverted lands initially were sluggish. But as Panama began to reinvent itself in the years following the Canal turnover, an important economic tool was discovered: residential tourism. Promotions filtered into North America and Europe proclaiming the wonders of vacation spots on two different coasts with miles of available, affordable beachfront for sale.
The boom took hold in 2003, when the first serious buyers came on the scene, mainly as a result of rising property prices in Costa Rica. Speculation now is fueling demand and prices are on the rise. While Panama is poised to become what many call “the next Costa Rica,” its neighbor to the north was developed slowly over dozens of years on a smaller scale and by “word of mouth” of vacationers who turned into homebuyers. Panama’s second-home expansion is a more organized effort on a grander scale with big-time builders and huge government support and incentives. Panama is betting on the international second-home industry. The biggest factors are the increasing number of foreign visitors arriving to vacation and buy, and the expected Canal Zone expansion. An estimated 13,000 new homes are anticipated before 2015—a staggering number given a nation of three million inhabitants. The housing industry is expected to bring more than $15 billion in foreign investment and become one of the largest income generators in Panama.
According to the National Association of Realtors’ report titled Profile of Second Home Buyers, 2005, nearly 40 percent of all residential sales in the United States were for second homes (recreation and investment), up 10 percent from 2003. Fueling the demand are baby boomers, who are turning 50 at a rate of
13,000 every day, or one every seven seconds. According to the survey, the majority prefers to drive to their second home, yet others are not opposed to jumping on a plane to markets such as Panama and trading miles for less expensive real estate. Boomers crave adventure, much more so than previous generations, and don’t mind going the extra mile to find it. The United States Embassy in Panama estimates that more than 30,000 Americans are living in Panama, but no accurate figures are available for the actual number of second-home owners there. These numbers are expected to multiply in the coming years. The Canal expansion is expected to cost an estimated $6 billion and create thousands over the next decade—and a