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Portugal stands out as one of the best markets for the investor in search of rental profitability and property valuation. For investors seeking diversification through the real estate market, Portugal offers above-average returns in euros with a reasonably low-risk profile.

Profitability and rental

 

Property Valuation
Low fixed cost

In Portugal, the condominium fee is much lower or non-existent in most buildings. There is no need for a 24-hour concierge, for example. The low monthly fixed cost significantly reduces the operational risk to the owner.

Demand above supply

The supply of real estate is subject to certain restrictions, especially with respect to the guarantee for the construction of vertical buildings.

Simplified tax system

Renting properties through websites like Air B&B and booking.com has become the practice in several European capitals. Portugal allows the use of the simplified system (presumed profit) for the payment of income tax from short-term rentals.

Customers with high purchasing power

Portugal is a destination for many European retirees looking for a place in the sun, with good weather and food. The Algarve region is considered to be the Florida of Europe for many English, German, French and Scandinavians.

Stability and Low delinquency

A more stable economy and support from the European Community offers less risk compared to countries that depend on the unpredictable cycles of the commodity market (iron ore, oil, etc.).

Incentive programs

Both the Visa program and the non-habitual resident program have attracted many high-income investors and professionals to the country. Learn about the Golden Visa and the non-habitual resident status here.

Portugal also offers advantages in relation to the European Union’s own neighbouring countries. If we compare the data from the luxury real estate market of major cities, Lisbon offers the best profitability with an average of 5.2% per annum (pa).

In addition to superior profitability, the Lusitanian capital has a price per m.sq. competitive with other cities.

While the real estate in London and Paris is overvalued, Lisbon offers small meeting rooms and more accessible spaces.

The combination of high profitability and affordable prices vis-a-vis other capitals makes Lisbon a destination with the best valuation potential in the medium and long-term.

Source: ECB, The Economist, Bloomberg, Confidential Real Estate 2017

How to calculate the profitability of your real estate investment in Portugal

To calculate rental profitability we must first estimate the total investment related to the purchase of the property, including taxes, decoration & furniture and services necessary for short-term lease. For example, for an investment amount of € 400,000  You must invest an average of around €50K in additional costs as follows:

Amounts in Euros

Property Value        400,000.00
Taxes on property purchase [IMT, IS]     23,240.68
Set up of property      2,500.00
Decoration and furniture     30,000.00
Total investment        455,740.68

(I.e. Two taxes are levied on the purchase of real estate in Portugal: IMT and IS

o IMT: Municipal Tax on Onerous Transmissions of Imports, with a variable rate of 1% to 6% depending on the value of the property

o IS: Tax Stamp, with a fixed rate of 0.8% x property value

(I.e. Set up of the property include the following optional services to the buyer: Opening Water, Gas, Light, Internet, coordinating delivery and assembly of appliances and furniture and cleaning

(I.e. Expenses with decoration and real estate can vary between €20K (basic) and €50K (luxury).

The second step is to calculate the annual net profit. For a €400,000 property and good location in Lisbon, the owner can bill an average €40,000 per year with short-term leases [ €150 / day and average occupancy rates of between 70% – 80% ]. The example below explains the costs and taxes levied on the rental activity:

Amounts in Euros

Recipe Annual rental   43,800.00
(-) Expenses  
Individual income tax 3,376.31
Company Management Properties 13,468.50
Commission – online platforms 1,752.00
Annual expenses (water, electricity, gas, internet) 2,100.00
Total expenditure   20,696.81
Net Profit     23,103.19

(I.e. Annual rental income: € 150 / day x 365 days x 80% average occupancy rate.

(I.e. Individual income tax: rates can vary between 7% and 8% depending on the annual billing and according to the progressive table of the simplified system.

(I.e. Real Estate Management includes the following optional services to the owner: photocopy and publication of the property on various rental platforms, check-in and check-out of guests, cleaning, billing, TMT, SEF Communications – All legal processes for this type of rent, mailbox control and maintenance of any incident that happens in the property.

(I.e. Optional costs with Airbnb (4%) or bookings.com (15%).

(I.e. Annual expenses (water, electricity, gas, internet and municipal property tax) are relatively affordable. For example, condo fees are rare. In Portugal, this service is added to the value of the property in most cases.

Thus, if the total investment of €456,000 generates an annual net profit of €23,000, the investor can realize an average profitability of 5% pa. It is worth remembering that if the investor wants to manage his/her investment, the return may increase. The above example relies on an outsourced company that offers all the services needed for the short-term rental activity for the convenience of the owner. Global Citizen Solutions is assisting international investors in Portugal and suggests this service mainly to owners living outside Portugal.

Another important point is that the total return on investment is a combination of rental yield and capital gain (or long-term real estate valuation). For example, if rent profitability (or annual net profit/investment) is 5% pa, and the valuation of the property is 6% pa, the investor can realize a total financial return of 11% pa.

When low-and-medium-risk investments in fixed income assets generate interest of up to 3% pa in Europe, real estate in Portugal can generate a total return of 10% pa or more in the medium and long-term. An added bonus is the perk of owning a property in one of Europe’s trendiest holiday destinations. Furthermore, if the value of this property is €500K+, the international investor may acquire permanent residency and Portuguese citizenship over time.

Contact us today to learn how we can help you with real estate or residency in Portugal.

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