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Unlicensed Vacation Rentals

Why Costa Rica Must Regulate Untaxed and Unlicensed Vacation Rentals

An argument to regulate unlicensed vacation rentals in Costa Rica before overpricing and gentrification ends up breaking up beach communities and ruining tourism.

I’ve worked in Costa Rica travel for a while and seen the industry take a few hits over the years.

We were a fledgling company when the dotcom bubble burst in 2000. The resulting recession left us wondering if online businesses even had a future in the first place (they did). A year later, 9/11 left many people wondering if they’d ever fly again (they did).

Then there’s been the financial crash, swine flu, bird flu, Zika, and, of course, the granddaddy of them all, Covid. Did I miss anything out? Add in the cost of living crisis and global uncertainty, it’s a wonder how we survived at all.

But survive we did, over and over, although it wasn’t easy. I put it down to a combination of leadership, skill, luck, the importance of having a fantastic team, and, crucially, Costa Rica itself.

What do I mean by that when I say that our survival is, to a large part, down to Costa Rica itself?

Do I mean that if we were someplace else and focused on another country, we may not have survived? Yes, I do.

After all, after each one of the hits mentioned above over the past 20+ years, Costa Rica has been a retreat, a place to escape to. Costa Rica is a soothing balm on a sunburnt skin. It’s that kind of country. There’s a vibe to Costa Rica that only the most hard-hearted fail to notice and makes things feel alright. I imagine that’s what pura vida is.

This is why Costa Rica’s tourism industry always survives. It always finds a way because people always want to visit because Costa Rica makes you feel good. The Costa Rican tourism industry leads the way in sustainability, not only environmentally, but also in creating prosperity for people.

Unlike many Latin American countries, Costa Rica doesn’t have an influx of poverty-stricken people heading into the cities because there’s no work in the countryside. Costa Rica found a way to lift many citizens into prosperity through tourism, especially in rural areas.

As the editor of this website wrote a couple of years back, “I know Ticos with no college education who’ve set up successful transport businesses, car rental operations, surf schools, rafting centers, boutique stores, and property management businesses. All in parts of rural and coastal Costa Rica where jobs would be non-existent otherwise… I know successful, independent Costa Rican tour guides, private chefs, surf instructors, beachwear designers, bikini-store owners, hoteliers, rental home owners, restaurant owners, and zipline-operators. All these people live in rural and beach communities creating opportunities and prosperity.”

Tourism in Costa Rica has been a tide that has lifted all ships. It’s helped combat much of the inequality and poverty you see dividing town and countryside in Latin America.

But there’s a growing threat to Costa Rican tourism

It’s not as dramatic as the pandemic, but it’s a threat nonetheless to the livelihoods of so many Costa Ricans who’ve created good lives for themselves in hospitality. And that threat is the growing prevalence of unlicensed vacation rentals in Costa Rica.

As someone with natural libertarian leanings, I generally root for less regulations in life, not more. But the concept of fair play trumps everything for me. An equal playing field and all that, which is not what we’re seeing right now. So it’s clear, that to preserve the unique tourism model we have in Costa Rica, we need to regulate these unlicensed rentals. Here are the main reasons why:

1. Unrealized tax revenue

The vacation rental industry in Costa Rica is worth approximately $800 million annually, yet it remains largely untaxed and unregulated. If the government collected a 13% IVA, it could generate an extra $100 million in tax revenue each year. This new revenue could help solve budgetary constraints in rural areas and provide new tools for addressing crime, water infrastructure, and ecological challenges.

2. Level playing field with licensed lodging

Vacation rentals often offer cheaper rates than licensed lodging options. This is largely due to the fact that unlicensed rentals avoid expenses such as IVA, renta, CCSS, patentes, licenses, and Ley 7600. These expenses can represent a 25-35% cost advantage for unlicensed rentals. Additionally, a significant part of rental income is not kept in Costa Rica, but instead ends up in foreign bank accounts. Regulating the vacation rental industry would level the playing field for licensed lodging operators and ensure fair competition.

3. Sharing the wealth

Costa Rica’s tourism industry has been successful in distributing wealth among local stakeholders. We see this every day at small and midsize hotels where employees receive good wages, benefits, and contribute to social welfare. This is not the case with vacation rentals, where staff is often employed “informally”.

Luxury home owners are often non-resident foreigners who lack a connection to the community. As such, many feel less compelled to participate in the social welfare programs that are a central part of Costa Rican society.

4. Bridge the rich vs poor divide

Post-pandemic economic stimulus has led to a surge in real estate investment in Costa Rica, particularly in luxury homes. Investors see unlicensed rentals as a sound investment due to low costs of operation and access to cheap capital. This has led to a massive increase in available room nights in vacation rentals, diverting tourism dollars away from high-tax lodging towards low-tax paying rental properties.

It has also resulted in a growing divide between the ultra-rich foreign investors and locals, leading to resentment and increased crime in some areas. The shortage of rental property available to locals has also led to soaring rental prices, making it difficult for working-class professionals to earn a living and for the tourism industry to find quality support staff.

If the trend of growing inequality between locals and tourists continues, Costa Rican tourist towns may follow the path of places like San Francisco or Hawaii where a two-class society has emerged (the beginnings of this are already evident in some Costa Rican beach communities).

Examples in Latin America include Mexico City and Buenos Aires. where North Americans and Europeans, freed from the shackles of office life by the pandemic come south and price out locals from their neighborhoods. Costa Rica does not want to become the next Mexico City.

We need to define what/who we are in Costa Rica and act on it

To be blunt, tourist communities in Costa Rica are in danger. They could become divided if the trend of luxury home construction and unregulated vacation rentals continues.

This goes against the ethos of “pura vida” tourism, where locals and tourists can socialize together. While some may argue that this is inevitable progress, it’s crucial to consider what kind of destination we want to be. And if we want to stay a welcoming place or not, a “soothing balm of a country” or not. If we do, we must align our incentives accordingly. We must act now before it’s too late.

Casey Halloran is the co-founder and CEO of the Namu Travel Group. He lives in San Jose, Costa Rica with his wife and children.

Casey Halloran

Casey Halloran

Casey Halloran is the co-founder and CEO of the Namu Travel Group. Born and bred in Pennsylvania, he arrived in Costa Rica in 1998, after graduating from the University of Richmond in Virginia. A lover of all things Latin, he's also lived in Spain and Panama, but Costa Rica is where his heart is at. He lives in San Jose, Costa Rica with his wife and two children.