Intro
Before and after moving to Portugal you have probably come across articles, posts and videos telling you the reasons to buy real estate in Portugal. Many of those, of course, are authored by real estate agents who would like to sell you a house. They might include facts and good reasons for buying or just state the obvious triad of sun, beaches and food and try to derive a rationale for buying from that.
A lot will surely be relevant for you in regard to moving to Portugal, but let us have a look at the factors that determine whether Portugal is also a good place for your money.
We will start with general reasons which give buy-to-let investment an advantage over other investment opportunities and then see if there are any additional advantages that apply to Portugal more than to other countries.
Focus in this post will be on reasons and, hence, advantages. Follow the respective link if you would like to learn more about the 5 biggest threats to the real estate market in Portugal in 2023 or the troubles that the Governments housing law package ‘mais habitação’ might bring.
The terms investment and buy-to-let will be used interchangeably.
What are the main reasons to do buy-to-let investment in general?
Investing in buy-to-let has some advantages over other types of investment. These are not universally true but apply to most developed markets and buildings most of the time.
Cash flow and passive income
On the top of the wish list of many digital nomads and part-time investors is passive income and cash flow respectively. Despite the obvious required tasks that are still needed, like search, selection and financing process as well as various property management tasks, real estate is very suitable to generate a constant, long-term and low maintenance income stream.
Further, many tasks can be outsourced to advisors, which can make it even easier to implement.
Capital appreciation and leverage effect
On top of the above-mentioned cash flow returns there is a fair likelihood that the value of your asset (meaning house, apartment etc.) increases in the long-term. Although this is usually hard to cash in on without selling it builds and stores wealth.
This is even more the case when debt financing is applied, since the value increase applies to the market value of the total investment which is higher and often a multiple of the invested equity. This is also known as the leverage effect and we will shed light on that in a future post.
You might argue that a big share of the mortgage rate go into interest payments which you will never see again. However, you still have the returns:
- Firstly, the difference between the income of the property and the costs of the mortgage.
- Secondly, the part of the monthly rate that is the repayment.
Taxation
Depending on your personal tax rate this may or may not apply to you. In many countries taxation of real estate investments is more favourable compared to other asset classes because it is often considered a retirement provision. Regulations vary and it may be worthwhile to stay on top of the topic to align your decision with it.
Often tax advantages come in the form of:
- reduced capital gains tax at sale after a certain minimum holding period or when the reinvestment meets certain criteria
- reduced tax for buildings under monument protection or in dedicated development areas
- increased write-off options to reduce the taxable profits
- deductibility of costs to reduce the taxable profits
- special deductibility or direct subsidies for improvements of energy consumption
- reduced tax for rent coming from affordable housing
- tax reductions to transform short-rentals to long-term rentals
In Portugal some of these are about to change with the implementation of the housing law package ‘mais habitação’.
Volatility
Since the underlying factors which determine the performance of real estate are rather slow and the market is very large, volatility is lower than in many other asset classes. This is also supported by the fact that property is not very liquid (or tradeable) and often held long-term.
Inflation
Often called an inflation hedge, one reason for buy-to-let investment is that it offers relatively good protection against inflation. This will depend on the type of real estate, rental law as well as the tenancy situation. However, the following contributes greatly to safeguarding your money:
- Firstly, market rents (the rent that a unit could be let at) move freely, so at time of high consumer inflation and-or rising incomes, new lease contracts are entered into at respective higher rents. Each time a lease ends and a re-letting takes place this can be repeated.
- Secondly, most lease contracts have an indexation clause which links them to consumer inflation. Variations of it also exist, e.g. step rents (fixed increase) or rent updates according to market rents. Even when these often cannot reflect the entire inflation, the adjustment is much better than in many other investments.
Limitations often occur when governments apply rent caps trying to maintain affordability. In Portugal, an example of this would be parts of the housing law package ‘main habitação’.
What are the reasons to do buy-to-let investment in Portugal specifically?
There are some reasons for doing buy-to-let investment that currently apply more to Portugal than top many other European markets.
Supply and demand
In Portugal, more than in many other European real estate markets, limited supply meets rising demand. A lengthy licensing process, one of Europe’s highest GDP increases, rising average incomes and a strong immigration have led to annual double digit increases in rents and sales prices in Lisbon and some other locations.
Whereas most countries in the EU face stagnating decreasing property values, Portugal has only seen a slower increase and current forecasts expect a moderate decrease of 3% that is yet to be seen.
Further, the governments housing law package ‘mais habitação’ has the potential to put further pressure on housing supply.
Market development
The Portuguese real estate market has become significantly more professional, international, transparent and investible over the past 10 to 15 years. This was also supported by politics that incentivise investment and create stability for market participants.
Affordability
Often foreign investors plan to divest in their home market and invest in Portugal after they have moved. What becomes obvious during that step is that, despite being exceptionally expensive for locals, real estate purchase in Portugal is still rather affordable for foreigners. This shows in absolute terms (price of a unit), in square meter terms (price per sqm) and in rental returns (yield):
- Instead of one apartment you can often buy a building and maintain more control over your investment.
- Instead of buying a unit in a secondary location you can often buy in a prime location.
International attention
This is a relatively soft factor, but should not be underestimated.
Despite being rather small country the international attention of media, tourists, digital nomads and immigrants is significant and poses a relevant support to the economy and, therewith, the real estate market. It benefits the important hotel & hospitality sector, allows Portugal to attract foreign investment and direct funds to areas of the economy that need improvement. This strengthens employment and support incomes and eventually the real estate market.
Is buy-to-let investment in Portugal for me?
As you will probably already have learned from other posts on Real Estate Bricks, this will always depend on your personal risk-return-profile.
Compared to some markets, where foreigners typically come from, Portugal is a bit less transparent and professionalised. Although this is constantly improving, real estate investments in Portugal have higher risks and higher returns.
Always consider the risk exposure that suits your lifestyle, the mix with other investments as well as diversification of investment types or even real estate types.
Also, what should be kept in mind is that the investment process as well as potential refurbishments and the property management may be more difficult than in your home country.
Be honest to yourself and define the amount of risk and hassle you are able and wiling to deal with.
Conclusion
If you have made all of the above outlined considerations and still find yourself optimistic about making buy-to-let investments in Portugal you can benefit from some untapped potential and achieve higher than usual returns from a very dynamic rental market and strong capital appreciation.
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If you are looking for advice that helps you to understand the Portuguese market, limits your risks, supports your buying process or you want to get connected to other services along the investment process, drop us a line.
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