Selling or letting a property

Praia D’El Rey Golf & Beach Resort, Obidos

As the 15th most visited country of the world, Portugal sports quite a strong short-term rental market.

Many second home buyers are capitalising on the buy-to-let market.

Some complement their investments by renting out a few weeks per year, while others want to maximise their return with a more intensive rental plan.

Selling is not advisable during a property slump when prices are depressed, renting the property until the market has recovered might be a wiser alternative.

Selling few years after the purchase might end-up as a negative operation as increase of the property's value might not cover initial buying costs. Again, rental might allow to wait until the operation becomes positive.

Letting

Anybody being in the position to own a second property in Portugal could be interested in letting as a way of covering the property's costs. Depending on the use you plan to have with your new property, you have 2 ways of renting your home: short-term rental or long-term rental. While letting gives you good potential earning income between 4% - 6%, capital appreciation over the years will be the major contributor of your overall ROI (Return on Investment). Moreover you will have a beautiful holiday home to enjoy with your friends and family.

Short-term rental

You can let your home to holidaymakers for a few weeks or even a few months depending on your personal use of the house. The letting season is usually from June until end of September not including Easter and Christmas. Usually, you can only expect to rent from 10 weeks to 12 weeks.

This will depend on the location, the availability of the house and your price strategy. When calculating your budget and the mortgage payment if you need one, do not overestimate the short-term rental return of your home. It surely will help to pay your running cost as well as a part of your mortgage but do not expect to make a living out of it.

In term of net return before tax, you can forecast from 4% to 6%, still keeping the opportunity to occupy it during off-peak season.

You may prefer to enjoy it during summer time instead of letting, so your expected return should be decreased according to your personal occupancy rate during summer time.

Long-term rental

Under the new long-term rental Regime (Arrendamento Urbano) which application started on 28th of June 2006 (lei Nº 6/2006 de 27 de fevreiro and decreto lei Nº 156 – 157 – 158 – 161/2006 de 8 de agosto), the minimum rental period is normally five years but the law permits three exceptions:

A landlord and tenant may agree to terminate the contract earlier, but it should be included in the contract. If the renting term agreed between the landlord and the tenant is less than six months, no written contract is necessary. For longer duration a contract should be signed between the landlord and the tenant and a third copy should be sent to the tax office (serviço das finanças).

The contract should include: Landlord and tenant details, the property’s identification, contract’s duration and the renting value. There are also other clauses that can be added such as, condominium fee and regulation, insurance, house inventory. For more information refer to the government web site documenting the law.

Using an agent or letting yourself

When you are letting your holiday home, you need to decide if you are going to use an agent or if you are going to let it yourself. Your decision depends on many factors. Where is your residence? Do you have somebody you can count on to take care of the property? Do you have spare time to answer quickly to any enquiries?

To help you taking this decision, here is a list of advantages and disadvantages about letting it yourself or through an agent:

Letting through an agency

Short-term Letting

Advantages:

  • Large advertisement coverage.
  • Personal contact with holidaymakers.
  • Strong international contacts.
  • Enquiries handled quickly by professionals.

Disadvantages:

  • Agent fee could be high and range usually between 20%-30%.
  • No control over people renting your property.
  • Need to trust the agency professionalism.

Long-term Letting

Advantages:

  • Good local knowledge and contacts.
  • Arrange legal contact.
  • Easy problems solving, agency being the link between landlord and tenant.
  • Financial control, receive the rent and pay the bills.

Disadvantages:

  • Agent’s fee equal to one month rent.

Letting yourself

Short-term Letting

Advantages:

  • Reduce your cost, No agent fee to pay.
  • Flexibility for deciding to enjoy your home.
  • Control over the letting.
  • Cheap advertisement.

Disadvantages:

  • Time consuming, you have to answer quickly to all enquiries.
  • Coordination of services complicated (cleaner, gardener, pool cleaner).

Long-term Letting

Advantages:

  • Reduce your cost, no agent fee to pay.

Disadvantages:

  • Lack of control over the property.
  • Difficulty to solve problem efficiently.

Letting regulation

A new regulation has been recently introduced in Portugal regarding holiday letting. You should apply at the Local Council (Câmara municipal) for a licence (Licença de Utilização Turística) that would allow you to rent to holidaymakers and you could be fined if you let without having it.

Before buying inside a condominium or apartment block, confirm that the community regulation does not restrict you in terms of letting. For letting on short term base, a written contract is not necessary.

Taxation rules

All rental income, either long-term or short-term, received inside or outside Portugal but related to real estate situated in Portugal is subject to IRS (Individuals) or IRC (Companies) income tax. Non-residents benefit from a flat rate of 15% for this type of income while residents’ income should be reported into the F category of individual income tax declaration (IRS).

Deductible expenses

In fact 3 types of expenses are considered as deductible:

For example: painting, condominium related expenses, plumbing repairs, energy expenses, local property taxes.

Some expenses are not deductible such as: construction which alters the structure of the building, installation of heating or air-conditioning systems, swimming pool, jacuzzi. However, these expenses could be considered as a capital improvement and could enter into the calculation of capital gain taxes if the property is being sold.

Location

If you want to let your holiday home extensively, the importance of choosing the right location is crucial.

The factors that holidaymakers find important when defining their holidays are:

Practical matters

When furnishing your holiday home for letting, it is advisable to choose good quality and strong furniture, appliances (washing machine, microwave, dishwasher and possibly a tumble dryer), crockery and cutlery, bed linen and towels. Sofa beds in living room usually allow accommodating one or two more persons. Multi channel TV and internet access is a must.

You have to find solution for handling the keys to holidaymakers, do the check-in, arrange the cleaning, do the check-out and get the keys back. If applicable you should also take care of the swimming pool and the garden. You have to decide if you will allow smokers, pets, children under five (bed-wetting) and young single groups (parties) in your house.

Letting rates

The letting price you can ask will depend of the type and quality of house you offer, its location and the season. On weekly bases and during peak season, you can ask between 500 and 900 Euros for a 2 bedrooms apartment or townhouse while you can ask between 1.500 and 3.000 Euros for a 4 bedrooms villa with private swimming pool. The seasons could be defined as follows:

Costs & expenses

From the letting value you should deduct the cost involved to get the net yield before tax. When it comes to cost you should also make the difference between fixed costs (mortgage, condominium fee) and variable costs (water, electricity, cleaning, laundry, agent fee if applicable, tax …).

This will help you to define the bottom price at which you can let during low season. Of course, it does not mean that this is the price you must ask during low season but should you face tough competition or enter into hard negotiations, you can establish when a particular letting situation may no longer be of interest to you.

The objective of letting is to reach the highest capacity rate (in case, you do not want to enjoy it yourself, of course) and if you have to lower your prices during low season you can still find it interesting to cover a part of your fixed costs. Remember that you still have some tax to pay which should be covered as well in the price you ask.

It is also advisable to ask for a security deposit against breakage (usually between 200 € - 500 € depending of the type of property) which is to be refundable at the end of the stay.

Advertising

If you choose to let your holiday home personally, you will need to advertise. There is a wide range of possibilities for advertising your property on the internet or in newspapers and specialized magazines. In order to maximise your rental potential when using a web site, you should advertise at least 6 month before summer starts.

Selling

The first decision to take is whether to sell it privately or to sell it through an estate agent. It also happens that a house can be marketed both by the owner and by an agent (in case of non exclusive agreement).

If you decide to use an agent you will have to consider putting his commission in the selling price, which would add 3% to 6% of the overall price. This added cost could place your property over the market price and make it more difficult to sell. Hence, investigate the real estate market in your region and ask a surveyor or an estate agent to determine the market value of your home.

While your goal is to sell your property quickly and achieve the best price possible, remember that it usually works the other way around: the quicker you want to sell, the more appealing the price should be!

Another important aspect of selling your home is to make your property look attractive for potential buyers. First impression is crucial and it could pay off to paint the interior and exterior of the property as well as replacing a few items such as kitchenware or bathroom equipment for example.

Think also how to market the “unique selling points” of your property. When you decide to sell your house, try to detach your emotions from the property and approach it as a product to sell and ask yourself; why would the customer want to buy this property, what are the best features?

If you really do not want to sell it yourself, then you will need to use the services of real estate agents who usually has a greater knowledge of the market. Be sure to select a professional agent motivated in selling your house because they really range from excellent to completely useless. Also, use agents that have different marketing strategies and territories. If your property is located in an area attractive to foreign buyers, it could be interesting to use a foreign agent who advertises in foreign newspapers and magazines.

Do not forget to verify the validity of their licence number (Nº AMI ) by checking them in the web site from the INCI.

Once you have selected the agents you want to work with, there are few aspects that you should be careful about when asked to sign a contract with an agency (contrato de mediação):

Capital gain tax

There is a capital gains tax (imposto sobre mais valia) on sale of homes and properties which is taxable as income.

For residents this is on a sliding scale from 12-42% where the taxable gain is reduced by 50%. Documented costs that have increased the value during the last five years can be deducted.

For non-residents, the capital gain is taxed at a uniform rate of 25%. If the property is your principal residence, then you can roll over your profit into the purchase of a new property located in Portugal or in any country from E. U. (see notice below) and you have a three year period to do so: up to one year before the sale and as much as 2 years after. If you re-invest less than the full amount, the exemption will be on a pro rata basis. In the event that you do not fulfil your declared intentions, an assessment will be made on the entire non-reinvested balance plus interest.

Important notice: The European Court of Justice examined Portuguese capital gains tax rules that granted an exemption from capital gains tax when the proceeds of the sale of a property constituting the principal private residence of an individual were reinvested in real estate situated in Portuguese territory (but not when reinvested in a property situated in other member states). The Court found that those rules were a deterrent to the exercise of an individual’s right of free movement and right of establishment in other member states and decided that since the Portuguese rules were contrary to the free movement of persons and freedom of establishment, there was no need for a separate examination of that legislation in light of article 56(1) EC and the free movement of capital. See Commission vs. Portugal (housing Policy) Process C-345/05 paragraph 45. The Portuguese Government has rectified this incompatibility through the “Decreto-Lei nº 361/2007 de 2 de Novembro”.

Comments

Capital Gains Tax2010-03-05 01:47:00, Anonymous, United Kingdom
Interesting point about reciprocity. BTW you need to tell HMRC in the UK about a home being your primary residence within two years of purchasing it. Not sure whether you have to reinvest your money in UK if you do make a gain. Or whether, since Portuguese tax rules where acting against EU mobility, whether that still applies?

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Selling or letting a property