QUESTIONS TO ASK BEFORE BUYING IN THE DR
IS IT A GOOD INVESTMENT TO BUY A PROPERTY IN THE DR?
There are many reasons that may prompt the decision to buy a house in the Dominican Republic. The process of acquiring land or building property has been reduced to its simplest form to encourage real estate purchases. But the most important reason is surely economic. Indeed, the country is in strong economic growth favouring an atmosphere conducive to business affecting all sectors, including real estate. Many expats chose to buy an apartment which they use a few months and rent out the rest of the year for profitable returns. Here is a list of turnkey properties offering nice rental returns.
The development of tourism, which is one of the country's currency providers, is not outdone and the government is now focusing on high-end tourism. This form of tourism requires privative accommodation facilities away from busy hotels. The construction of luxurious homes is an ideal solution for people looking to invest, relax and enjoy an extra passive income. In the North of the island, in the village of Las Terrenas, an increasing number of real estate projects are being developed every year.
WHY BUY A PROPERTY IN THE DOMINICAN REPUBLIC?
Interests are divided into two parts, either a personal interest or a commercial interest. As for personal interest, the beaches of the Dominican Republic will delight you. For those who can afford it, the construction of a luxury home on the Dominican residential neighbourhoods guarantees a dream accommodation.
It is also possible to take advantage by renting the property. And this is the second interest because the Dominican real estate sector is evolving; the real estate gains are constantly increasing, so if a property is destined only for a summer residence, the best way of profitability is to rent it out. And the Dominican government, aware of the investment that could be made by the luxury real estate sector, adopts a proactive policy by setting up areas of settlement for residential areas.
The high season is the DR is quite long compare to Spain and other countries where people vacation. In fact all in all you can count approximately 6 months of high season where rental prices rise by 20 to 50% percent boosting further you chances of profit.
On top of that of a meagre 1% of annual property taxes, expect to pay no taxes on the revenues made from your rentals. Aside from the favourable general conjuncture, you’ll need to consider the location of your future property. Some places are seeing more growth that others… For example, Las Terrenas is one of the hottest spot in the DR in terms of real estate investments and growth at the moment. The market is fuelled by the local expats who invested and keep investing here and growing middle class from the big cities bored of Punta Cana and looking a piece of paradise at still an affordable price.
HOW TO GET A LOAN WITH A LOCAL BANK?
After years of experience with several lenders, we advise our clients to work with Scotia bank for two reasons.
Firstly, the mortgage loans are quickly available to US / Canada / English and Dominican citizens with Scotia Bank, our local financial partner for real estate transactions.
Secondly, they offer the best interest rates than any other national banks we’ve been in touch with.
The first thing to do when looking to buy a property in the DR (with a loan) is to verify if you can actually apply for a loan. It will makes things move faster if you are decided on a specific property and also help your negotiation with the seller. The documents required by Scotia Bank are the following:
Copy of your passport plus other identification
Two last tax returns
Employment letter if employed
A bank reference from your main bank
For other foreigners, loans are also available with a few additional documents required. All these documents can be send via email.
The bank will usually lend you up 70% of the value of the property, or less if you wish so… Meaning that a down payment of at least 30% of the value of the property will be necessary from your side.
The value of the property taken into account is the lowest amount between either the estimated value or the agreed buying price of that property. The estimated value is the value given by the "assessor" from the bank who will estimate the property according to a set of criteria such as lot size, built size, built year, location, number of bedrooms, materials used, etc. By experience, this value is usually close to the selling price, still expect 10% variation to be on the safe side.
Once the bank notifies you that you pre-qualify for a mortgage loan or a loan for a new construction (this verification takes 1 to 2 weeks) you will be given access to an online form available in English which you must fill in. At this point, there is 99% of chance that you will qualify for the loan.
Once the terms are satisfying for both parties, you’ll have to be in the Dominican Republic to sign the actual contract in person. You might be able to discuss with the bank to send someone with a power of attorney to sign in your name.
Most national banks have higher interest rate than our home country. It is usually at 7 to 10% and sometimes even greater, but Scotia Bank offers a preferential between 5 and 6% (Dec. 2019) for a period up to 25 years which is standard and quite reasonable.
If you decide to build a house with a local constructor, you are able to take 2 separate loans, one to buy the land itself and one to build your house. Before or after having reserved the lot you set your eyes on (with usually 10% of selling price), you’ll need to secure financing if needed.
Once the total value of the land is paid at the signature of the Act of Sale, the title of ownership is transferred to you. Then when you decide to start the construction, the bank will loan you the money by instalments as the construction progresses.
At each step of the construction (generally 3 or 4 phases divided in payments of 20 to 30%), the bank will send an expert "assessor" to assess that the money loaned did go into the construction and not the pocket of the constructor. Only when all the boxes are checked, the bank will send you the next instalment which you will send to the constructor, thus retaining the control over the process and your money.
The interests to be paid will be calculated only on the amount loaned and at the end of the construction the loan will switch into a classic mortgage loan.
SHOULD I BUY IN MY OWN NAME OR WITH A COMPANY?
Under company name:
(-) First you need to consider the initial extra fees related the constitution of the company itself. Eventually extra corporate taxes if the company makes benefits (27%).
Commercial Real Estate: Buy and Sell (with profit): It is the most advantageous solution as you will pay less taxes because the company is able to deduct all expenses such as construction, maintenance, accounting and insurance before profits.
Protection: The property is more protected in the case if you have financial, legal issues because nobody can claim the property under the company name because it is the owned by the company and not you directly.
Real Estate Developer: For example, in the case you buy a piece of land, divide it and sell lots afterwards you will benefit from more advantages if the land is owned under company name because you will have to handle different contracts, risks, responsibilities with the future buyers.
Avoid future conflicts with partner: In case of divorce, the property remains under the company name and is separated from the marriage contract.
Under individual name:
Properties which are in the name of an individual are subject the “IPI”, an annual property tax of 1% of the value of the property estimated by the government. That 1% is to be paid on the excess amount over US$147,000 US.
There is exception for unbuilt lots or farms outside city limits and properties whose owner is 65 years old or older, who has registered it in his or her name for more than 15 years and has no other property. Also you don't have to deal with the company's legal requirements and documents.
WHAT IS THE ACTUAL PROCESS FOR OBTAINING DOMINICAN RESIDENCY?
In case an individual wants to obtain Dominican residency, this person needs to apply for a Residence Visa at a Dominican consulate in his/hers country of origin. The applicant also needs to present a birth certificate, bank references, marriage certificate, and a police report. All of the mentioned documents must be apostilled.
After all the documents are approved, the consulate will put a stamp of the Residence Visa in the passport of the applicant. The Residence Visa is valid for one year. Keep in mind that the time to process the visa can take from a couple of days to a month. It really all depends on the consulate. As soon as the applicant obtains the Residence Visa in the passport, the consulate will immediately return all of the mentioned documents. The next step for the applicant is to take all these documents and papers to an attorney in the Dominican Republic.
The applicant will have to head out to Santo Domingo for a brief medical exam and go once again so he or she could pick up the residency card. Since the residency card is valid for a year, the applicant needs to renew the residency every year for the next 5 years. All applicants should be aware of the fact that the cost of a professional attorney who will handle the first residency process will be around $1,200. Luckily, renewals cost less.
WHAT’S THE BEST PLACE TO BUY A PROPERTY IN DOMINICAN REPUBLIC
The answer to that question will vary depending on the purpose of your future investment and your personal lifestyle.
If it’s for rental purposes, getting money back on your investment as well as enjoying your property a few weeks per year. The rental rates you can get with a beachfront unit in the up & coming beach town of Las Terrenas are very good. Moreover, the local real estate market is developing towards projects such as condominium with rental pools and hotel like services so that the owners don’t have to worry about anything. Other beach towns like Las Galleras, Sosua and Cabarete also offer good returns, but their market is less developed. Here is a list of good turnkey investment properties in Las Terrenas.
In Santo Domingo, the overall minimum investment requirement is lower because the supply is bigger and you' cannot buy an a condo or villa right in front of the beach but if you manage to get your hands on a nice piece of property you will be able to rent it to regular tourists, but also business travelers.
For living if you are a business man, then Santo Domingo or Punta Cana. If you are looking at a more relax way of life and less noises, contamination, then Las Terrenas, Cabarete or Las Galleras are good options for you. Cap Cana for the people with a large budget and prefer the most exclusive place of the Dominican Republic. More about where to live in the Dominican Republic.
HOW TO CHOOSE THE RIGHT REAL ESTATE AGENCY?
The truth is that everyone from a cab driver to a guy who works in beachfront bar will try to present himself/herself as a right person for the job who can help you purchase a property in the Dominican Republic. Therefore, it is very important to choose a professional real-estate agency when buying a property here.
This professional real-estate agency needs to have experience with carrying out real-estate businesses. They also need to have a proper office and several employees with professional skills that include getting a better price and clear transactions with no headaches involved. A good real-estate agency needs to have multilingual employees who can speak both Spanish and English. This is very important, as the cooperation between the parties needs to be fluent and knowing both languages means having access to a wider range of properties on the markets.
Franchise agencies with a good reputation may not the best option when purchasing a property abroad. Most of these agencies just care about the profit and have agents who don’t have local connections. It’s always a better option to choose a local professional agency with local ties to ensure that the purchase runs smoothly.
HOW TO BUY A HOUSE IN DOMINICAN REPUBLIC?
In the Dominican Republic, foreigners can easily acquire real estate, the future owners have the choice to buy this property in their name or on behalf of their company domiciled in the Dominican Republic. Whether for individual use during the holidays, or as a secondary home, or for a lucrative use, the purchase of a house in the Dominican Republic requires a minimum of knowledge.
Before any action is taken, a local lawyer must be employed to dig up the most information about the property to be purchased, such as verifying the accuracy of the deeds, or whether the property is cleared of all sorts of property loads. Knowledge of the procedures and services involved, such as the tax administration is a sine qua non. The reliability of the purchase will depend on the seriousness of the lawyer. After more than 20 years of experience, our agency provide clients with a reliable lawyer firm to conclude a deal without bad surprises.
If the house to buy does not present any problem, the purchase can be concluded. Although simplified, procedures require the production of reliable documents. Already the conditions for granting are the same for both premises and for foreigners, the purchaser must simply carry a passport to establish his identity. After agreeing on the price of the property, a compromise of sale is signed between the two parties with a down payment of around 10% of the total amount.
Then, the transaction will take place in the presence of a local notary chosen by the purchaser, so far the purchaser must always rely on his lawyer who must help him in drawing up the sales contract.
Generally, the funds required to acquire the property are deposited by the buyer by bank transfer or by check to the notary's trust account. The funds are then forwarded to the seller once the title to the property is allocated. After the remittance of the funds, the title is transferred in the name of the buyer or the company and then registered in the Dominican title register.
The registration of the transfer of real property with the registration of the securities requires the payment of the following taxes and charges: * 3% of the sale price * 1% of the sale value of the property, (Constitution and cancellation of a mortgage, modification of title, duplicate). The new law of the real estate register guarantees a transparent system for the purchase, sale and registration of real estate in the Dominican Republic. Payment of these fees can be made by bank transfer or by certified check.
WHAT YOU SHOULD CHECK WHEN YOU BUY A PROPERTY UNDER CONSTRUCTION?
1. Translate the Promise of Sale agreement
Before signing the Promise of Sale agreement you or your representative should have the document translated into English or your native language. Please do not take your real estate agent or sales person´s word that everything is ok with the agreement. Most Promise of Sale agreements are drafted to protect the construction company or developer instead of the purchaser. For example please verify if the Promise of Sale agreement has the following clauses:
a) Does it specify when the construction will be concluded?
b) Does it indicate that if the property is not finished by that date that the developer will pay interest on the amount already paid for every month the construction is delayed?
c) Is the lot where the property is going to be built currently owned by the developer or is it in the process of being transferred to the developer?
d) Has the developer obtained the necessary permits and licenses needed to build?
e) Does it indicate that if the property built is a few square meters smaller than what was sold to you that you will receive a refund or credit for the difference in size?
2. If in doubt hire a reputable real estate attorney
An attorney (preferably fluent in English or your native language) should be able to review the agreement and answer the questions posed above. If there is a clause in the contract that you do not agree with then it should be corrected until both sides are satisfied.
3. Please confirm if the property reservation payment is refundable
Often time the amount paid to reserve a unit is not refundable. Prior to paying the reservation amount please perform all the needed due-diligence. Do not allow yourself to be rushed by the salesperson by claims that there are many interested in the same unit or that you may lose it if you do not act quickly.
4. If buying a home or condo for investment purposes ask for the projected ROI
Try to find out the occupancy rate of already built units or of properties nearby. Do not believe (without proof) claims of a high ROI. Ask for proof of the occupancy rates during different seasons of the year (high, low, medium). Run the numbers yourself to see if the projected ROI is reachable with the occupancy rates you have investigated. Make sure you add other fees like furnishings, administration fees, HOA fees, electricity, internet, taxes, and other incidental expenses to your calculations in order to formulate a more realistic projection of your potential return.
THE 3 STEPS TO BUY A HOUSE
MAKE A FORMAL OFFER
The procedure when purchasing a property in the Dominican Republic is similar to Canada, Europe, and the US. Once a buyer decides which property he or she likes, all that needs to be done is to have a formal offer written together with a deposit of 1% of the total amount. The seller is presented with the offer and if he decides to accept the proposal, the deposit of 1% becomes a part of the final payment. In case that the offer is not accepted by the seller, the earnest deposit will be returned to the actual buyer.
SIGN THE PROMISE OF SALE
The next step is signing a Promise of Sale, which is a legally binding document that needs to be signed in front of a Notary public. Both parties will sign this document as soon as the buyer’s attorney completes the required due diligence.
All the terms of the transaction are established in the Promise of Sale and the document will include full names of both parties, references that establish identities of both the buyer and the seller-such as valid passports, driver’s license, a default clause, legal description of the property, the date on which the property is delivered, payment terms, purchase price, the exact date of the closing, and most importantly the requirement of the seller party to sign the Deed of Sale once the final payment has been made.
The required deposit is usually around 10% and is placed in the Escrow account. This way, the property is reserved for you and it’s taken off the market, so you don’t have to worry that someone else will purchase the property.
THE DEED OF SALE
When the transaction is fully paid, both parties can finalize the Deed of Sale, which is also a legally binding document that needs to be endorsed by a Notary public. The Deed of Sale allows the transfer of the agreed property from the seller to the buyer and makes the whole process quite simple and less expensive simply because the Promise of Sale step is not needed anymore.
Expect to have closings within 30-60 days, but it all really depends on the agreement between the buyer and the seller. All funds from the buyer need to be in Escrow 3 days before the closing. The buyer and the seller will sign all the necessary documents on the closing date.
The sale will be recorded with the Register of Titles by your lawyer. Expect to find the property in your name in a month.
TAXES AND EXPENSES
Taxes must be paid before filing the purchase at the Title Registry Office. Taxes and expenses on the conveyance of real estate are approximately 3.5% of the government- appraised value of the property, as follows:
3% Transfer Tax (Law # 288-04). Fee for the transfer of the title of ownership, calculated on the highest of estimated value or purchasing price. Meaning that the taxes are paid based on the market value of the property as determined by the tax authorities, not on the price of purchase stated in the deed of sale.
Buyers wishing to lessen the impact of transfer taxes have the option of using a loophole in the law which allows the contribution in kind of property into corporations without paying transfer taxes. For this, cooperation from the seller is essential.
From 0.5% to 1.5% notary fees, depending on the estimated value of the house and the complexity (length) of the transactions.
ANNUAL PROPERTY TAXES
Properties held in the name of an individual are subject to an annual property tax ("IPI") of 1% of government-appraised value in excess of RD$7,138,000 pesos (147,000 US) except for unbuilt lots or farms outside city limits and properties whose owner is 65 years old or older, who has registered it in his or her name for more than 15 years and has no other property.
If the property is held by a corporation, no property tax is due. Instead, the corporation must pay a 1% tax on corporate assets. However, any income tax paid by the corporation will constitute a credit toward the tax on assets, so that if corporate income taxes paid are equal to or higher than the taxes on assets due, the corporation will have no obligation to pay taxes on its assets.
Rentals in the Dominican Republic are exempted of taxes.
COSTS & REVENUES OF OWNING A PROPERTY
In the case of a 4-bedroom villa for rent with capacity of 8 guests in the beach town of Las Terrenas. All prices are in USD and are approximations based on a survey of local realtors and our professional experience.
Avg. rental prices - 2,875 / week x 26 weeks (avg. yearly weeks of rental for villas here in Las Terrenas)
= 75,000 Gross
- Management fees (promoting, messaging, renting, assisting, etc.) = 20% of Gross
- Extra management costs (Maintaining of the house) - 150 / month = 1,800
- HOA fees per year = 4,650
- Other Expenses (electricity, water, gas, cleaning, garden, pool, internet) = 400/month = 5,000
- Insurance for the house = 1,000
Revenues = 47,550
- Maintenance of the house (fixtures, replacements, etc..) = 2,500 / year
Net Profits = 45,000
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