Financing Your Dream Home in Paradise

7 Ways in Which You Can Own Property in Costa Rica.

Financing Your Dream Home in Paradise Costa Rica

There is very little availability of financing real estate purchases in Costa Rica. Not everyone has up front money to make large property investments. In fact, few do. Nonetheless, there are many ways to finance your Costa Rican real estate. The following is a guide to the many ways you can finance your dream of owning property in Costa Rica.

1. Cash – Cash is always “King.” If you have the ability to make a cash purpose, it is obviously the easiest way of purchasing a home or property.

2. Mortgage – Costa Rica banks will not finance private real estate purchases for non-citizens. In some instances, sellers will offer “owner financing” alternatives check with your realtor.

The companies who do write mortgages in Costa Rica charge excessive interest (12% or more) and will only finance up to 50% of the purchase. Paying usurious (yet legal) rates of interest is not recommended.

3. Friends and/or Family – You may have family members or friends who are have considerable savings who are willing to help you finance your real estate purchase, usually at a reasonable rate of interest. Or, in the alternative, you may wish to combine your resources to make the purchase, especially if the purchase is a vacation home which will only be used periodically by the owners.

4. Home Equity/Line of Credit – If you have substantial equity in your home or other property in the United States or possess a substantial investment portfolio, a bank will readily give you a line of credit at a rate slightly higher than a mortgage rate of interest from which you can finance your Costa Rica property purchase.

5. Whole Life Insurance – If you have a large sum of money paid into a whole life insurance policy, you can borrow from your policy at a reasonable rate of interest and still keep the policy active. In the end, you are just borrowing from yourself.

6. IRA or 401K

Withdrawing Funds –
If You Are Over Age 59 and ½ Years of Age – you are legally permitted to withdraw funds from your IRA or 401K. You will be required to pay taxes at your current taxable rate on all funds withdrawn as this funding was done with pre-tax dollar initially.
If You Are Under Age 59 and ½ Years of Age – you are still permitted to withdraw funds from your IRA or 401K. Although, you will have to pay a 10% early withdrawal penalty in addition to 20% withholding tax to insure that you pay taxes on withdrawn funds at your current taxable rate. The 10% penalty is waived in cases of “hardship,” which is define as “immediate or heavy financial need,” which is further defined as (1) medical care expenses for yourself, spouse, or dependents, (2) costs directly related to the purchase of a principal place of residence, (3) payments necessary to prevent eviction, (4) burial/funeral expenses for a parent, spouse, or dependents, (5) Expenses relating to damage to a principal place of residence, (6) and tuition for certain beneficiaries. The amount allowed to be withdrawn is limited to the amount necessary to satisfy the particular financial need.

Borrowing Funds – You cannot borrow money from an IRA, but may be able to borrow from a Roth IRA. With your plan administrator’s permission, you can borrow money from your 401(K) savings and set a repayment plan. This functions as a pseudo-mortgage you write for yourself.

Property purchase by the IRA or 401K – This is a more complicated route, but has some tax and financial advantages. First, you need to have a self-directed IRA or 401K to do this. You will need to acquire a “custodian,” an entity specializing in self-directed accounts that will manage the transaction and financial reporting as there are strict rules for these purchases. There will be a fee for this service. The real estate property must be purely “an investment” and cannot be used as a vacation home, second home, or an office for your business. Therefore, a property for the primary purpose of rental income is permissible. You cannot buy the property from a “disqualified” person such as your spouse, parents, grandparents, IRA service provider, or any entity that owns more then 50% of the property. Once your IRA or 401K owns the property, it is responsible for paying all expenses associated with it. As real estate tends to be a good investment over time, it will help you to diversify your portfolio and reduces your risk to volative financial markets.

7. Pension Plan – In general, you are permitted to withdraw funds from your pension plan once you hit the defined age in the plan or have brokered a buy out.


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