How to Make Money from Real Estate in Brazil

If you want to make money from real estate, look for places where it’s cheap but about to go up in price. Maybe a new highway is coming, or new air links to an inaccessible but stunning area. Something is going to happen that will drive up prices. It may sound obvious, but the trick is to find and correctly analyze these trends and their effect on prices. That’s what I do.

And the latest opportunity I’ve uncovered is in Pecém, Brazil. Here a major government program is set to bring tens of thousands of new, highly paid professionals.

This is a classic “new-middle-class” story, where a surge in demand for upper-middle-class housing is going to be created. And it stands to reason that prices will likely rise, as well.

We can get in at the ground floor by buying a lot in a community these folks will want to build their home in. We can get in with prices from 57,500 reais ($25,800), with $2,705 down and monthly payments of $300. And maybe in three-to five-years’ time we can sell our lot for double.

The lots I’m interested in are 10 minutes from one of the world’s best beaches and one of the Americas’ most charming beach towns. This location makes the lots very attractive to the coming influx of business executives and managers.

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I don’t recommend Pecém as your beach-side retreat. You’ll find better options for that, such as the charming town of Cumbuco, 10 minutes away. But this is a strong opportunity. Demand to buy or rent real estate is set to soar. And I expect prices will follow.

The major government program is just the type of “path-of-progress” situation I look for. It will transform this sleepy backwater into an industrial powerhouse. New road and rail routes, and plans for a major airport, converge here.

For decades Brazil was known as “the country of the future.” Today it has arrived. Brazil is the world’s sixth-biggest economy, having recently overtaken the United Kingdom. Brazil will host the 2014 soccer World Cup and the 2016 summer Olympic Games. It’s the world’s biggest food exporter. And it’s a world leader in renewables and awash with oil.

Brazil has a strong manufacturing sector of planes, trains, and automobiles. And it’s selling not just to the stagnant developed world but to fast-growing China and Africa.

Historically, Brazil’s northeast—where you’ll find Pecém—was its poorest region. But over the past 15 years it’s been playing catch-up. Its economy has been growing at a faster pace than the rest of Brazil.

Pecém is 40 minutes west of Fortaleza, the biggest city in northeast Brazil. Thanks to miles and miles of beaches, Fortaleza is the biggest domestic tourism destination. Fortaleza is a modern city with all the amenities businesses and tourists need. Fortaleza is also the region’s industrial and manufacturing powerhouse. Manufacturing industries and port activities will move from Fortaleza and surrounds to Pecém’s new industrial zone. And new manufacturers will locate here from across Brazil.

Real estate prices in Rio de Janeiro and São Paulo are among the highest on earth. They have peaked and the market looks frothy. But in Pecém we’re looking at a “ground-floor” opportunity.

Pecém’s Zone for Processing of Exports (ZPE) was announced in May 2010. This is a duty-free zone established next to the port of Pecém, 40 minutes west of Fortaleza and 10 minutes from the beach town of Cumbuco. The scale is massive; the zone is more than 10,500 acres.

Businesses located within this area will pay practically no taxes on inputs purchased…and on finished goods exported. There will also be less bureaucracy and customs procedures for its exporters. The ZPE will have its own customs office. It will also have its own cargo airport (talk on the ground is that the cargo airport will be expanded to include a major international passenger element) and the world-class port is getting a major upgrade.

Pecém port had already been slated for a multi-billion-dollar investment. The ZPE announcement means that an additional 200 export-oriented companies are expected to set up extensive operations here.

This isn’t just a duty-free port zone. It’s part of a major integrated infrastructure plan. A series of canals is being built to bring water north from Bahia to improve agricultural productivity in the hinterland. Pecém will be the hub for a new national railway system. New shipping routes are opening up with Africa, Europe and Asia. The cargo airport will ship goods all around the world. Pecém’s location is strategic…Brazil’s closest trade hub to North America, Europe, Africa and China (via the Panama canal).

Three years after this announcement, you might expect the bureaucrats would still be working on the plans. Not with this project. It’s full steam ahead. Billions of dollars are being invested. Not in planning but on the ground.

This is a region with a strong manufacturing and shipping tradition. But the manufacturing has been distributed around the region in small towns and suburbs of Fortaleza like Maracanaú and Pacatuba. The distribution is not as efficient as it could be. Not scalable enough to match this region’s potential and ambition.

Pecém is set to become a world-class, integrated-manufacturing hub. The new world-class port will get product out. Inputs like oil derivatives, steel, and electricity will be made onsite. There will be new manufacturers. There will be some consolidation from other locations in the region. There will even be four enormous conveyor belts that run for seven-and-a-half miles through the facility.

The steel plant and oil refinery will operate to the highest international standards. What these produce will be used as inputs in manufacturing or will be exported. Brazil’s federal government is following through on its commitment to create incentives for balanced regional development. The major urban areas of the south, like Rio and São Paulo, are bursting at the seams. Long left behind, the northeast is racing to catch up.

Volume at the Pecém port last January was 82% up from January the previous year. An additional $1 billion is being invested in the port right now. This is the third expansion. Each time an upgrade is complete, demand makes another leap. One of billionaire Eike Batista’s power plants is up and running. No sooner was it built than he started work on another. Production of wind power turbines, cement, and fertilizers is already underway.

Of the 100,000 or more jobs that will be created, tens of thousands will be highly skilled and highly paid. Companies are aggressively recruiting. Pecém has to compete in a global labor market for the skills it needs. Engineers, managers, chemists…they’re all in demand. Already, some employees are being offered 50% salary raises to come. And they do…from the south of Brazil, Spain, Portugal, South Korea…

Our opportunity is to buy where the new management will want to live. And then we wait.

Villa do Porto is a gated, amenity-rich community where we can buy that lot with $2,705 down and monthly payments of $300.

It has been painstakingly designed with this market in mind. It is 10 minutes from work and 10 minutes from Cumbuco and its stunning, white-sand beach. A new road under construction along the dunes will bring this drive time down to six minutes.

Plans for this community call for two social clubs with grill area; bars; a gym; playgrounds; grass soccer fields; hard-surface, multi-sport courts; adult and children’s swimming pools; jogging tracks; green areas; and even an orchard.

This is just the type of community where these new engineers and managers would like to make a home with their family. Buy a lot now and wait for three to five years. By then I expect opportunities like this will be scarce, and demand and prices much higher. For the full details, see: Pathfinder International.

Real estate in Brazil is priced in the local currency, the Brazilian real. Your monthly rental income will also be in local currency. This means the dollar amount of your payments can go up or down. But it also means you are getting diversification from the dollar.

As is the norm in Brazil, the government applies an inflation adjustment to any outstanding balance on a pre-construction or pre-infrastructure purchase like this. (The inflation index is the Indice Nacional da Construçao Civil, or INCC.) When the infrastructure is delivered in two years’ time, you can either pay off the outstanding balance or continue with the payment terms. After the infrastructure is completed, interest of 1% per month is applied to your monthly payments. If you pay upfront, of course, neither of these applies.

About the author: Ronan McMahon is a director of Pathfinder, IL’s preferred real estate advertiser.#

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