Buying Property Abroad: The Highs, The Lows, The Benefits, The Fun And The Profits
by Peter Jones
Portugal has been a second home to me from 1984, ever since my parents bought a dilapidated farm on top of a hill on the Algarve, and then spent two years lovingly restoring and extending it. This included blowing a big hole in the garden with dynamite, and drilling for three days and nights before finding water 200 meters down. The result: a luxury five- bedroom villa with swimming pool sitting in five acres of landscaped citrus groves. Why would I want to go anywhere else when I could have all this, and my Mum’s cooking as well?
History & Climate
Back in 1984 Portugal was still recovering from years of dictatorship under Salazar, and a brief period of military rule following the revolution of April 1974. Property prices were still cheap but the writing was on the wall and they were rising steadily.
Things have changed a lot since then; you rarely see the donkey carts which even only thirty years ago were still common. Now it ’s all Peugeots and Renaults. The next door neighbour has sold his mule and bought a tractor instead, and shopping means, more often than not, visiting the hypermarket rather than the local village shop, where the produce used to be home-grown
in the back garden. Even so, in my opinion, Portugal is still an utterly charming country and, relatively speaking, still overlooked by second home-buyers. I am told that amongst the permanent residents, there are only some 20,000 Brits, 10,000 Germans, and 4,000 Dutch. If you think that sounds like a lot, check out the figures for the Costa Blanca and the Costa del Sol, where the permanent residents probably total ten to twenty times those figures respectively.
Whenever one mentions Portugal, inevitably everyone thinks of the Algarve, and then golf. This is understandable, as most visitors to Portugal from the UK go to the Algarve, and a high proportion of them visit to play golf. However, there is much more to Portugal than just this one region. There are superb properties and opportunities around Lisbon, for example Cais Cais and Estoril, and in the north around Porto. Also, for the more adventurous, look inland away from the coast. And don’t forget the wonderful island of Madeira, not to mention the Azores.
Although golf is big business on the Algarve, this is just one of many attractions. Personally I’m much more drawn by the weather (in the summer), the easy lifestyle, the beaches and the food. I distinguish the weather in summer deliberately. Don’t forget that Portugal is on the Atlantic coast, and the weather in the winter can be miserable. The rainy season kicks in around November and can hang around until March. This can come as a shock if you are used to a more Mediterranean climate, although, interestingly, this doesn’t seem to deter full-time residents, such as those buying to retire out there, or the golfers. This is an important point if you are thinking of buying as a partial investment and consider that you might want to let your dream holiday home out to help pay the expenses, or just to make some extra income.
If you have read my previous articles on buying property in Europe, you won’t be surprised to hear me say that today, with changes in travel, technology and the financial system, there is more to buying a property in Portugal than just buying a holiday home, a retirement home, or home to relocate to.
Buying An Investment
You see, I strongly believe that buying a property in Portugal, whether you intend to live there full-time, or to use it as a holiday or retirement home, is an investment opportunity. If you buy the right property in the right place, your second home can be a positive asset in your investment portfolio. Of course, investment might not be your primary reason for buying in Portugal, and that ’s fine. Many people will rightly consider their property in Portugal to be their dream home. However, I think that ideally a dream home should also double as a dream investment; in fact I’d go so far as to say that if you do not buy your dream home with the same care and criteria with which you would buy an investment, it could easily turn into a nightmare.
Doesn’t it make sense to buy a property which, as far as possible, meets the main criteria for a good investment property as well as provide you with a home or an ideal holiday spot? Then not only will you have the best of both worlds, but, if you ever need to sell or let your property, you should be able to do so easily and profitably.
If you have never thought about buying a second home in this context before, the idea may be a surprise to you; that your holiday or retirement home can also be one of your best performing investments.
All of this means that you and I can now mix business with pleasure, and enjoy our dream holiday and retirement home whilst also enjoying an income from the rent, if we choose to take it, and capital appreciation if we buy in the right area.
This is not difficult to achieve, but unfortunately, many buyers end up with a second home which is far from being an asset, and which can often be a drain on their resources.
We’ll look more closely at how to find your dream home later.
The fact that we can consider buying in Portugal as an investment just shows what a change there has been in the mindset of the British public over the last decade or so. And, of course, how much easier it has become to finance and buy property. A lot of this is to do with the breaking down of international barriers within the EU, the relaxation of financing regulations in member countries across Europe, and, increasingly, the introduction of the Euro as a single currency (although no one’s sure how long that ’s going to last!).
Today, having a second home abroad is no longer just for the rich and famous.
So Why Have Things Changed So Much?
In the past, some second homebuyers were discouraged from buying abroad because they required variety when holidaying and didn’t want to feel compelled to visit the same property, and the same area, whenever a vacation came around. It was also a worry that the property would be left empty more often than it was occupied, and buyers had concerns about security and management problems in their absence. With the widespread acceptance of buy-to-let in the UK, there is a growing realisation that when you buy a holiday home, there is no reason why it should be left empty. As there is an established and growing rental market in Portugal, buyers understand that the property can be an asset, generating cash flow when they are not in residence.
Loans against Portuguese property are obtainable both in the UK and direct from Portuguese lenders. This has opened the market up to virtually everyone. And if you do take out a loan, most lenders will now allow short-term holiday lets, so ou can make extra income if you aren’t at the property. Before the recession hit, demand for second homes in Portugal increased significantly for a decade. And there is still interest out there, but prices have come down a lot, so there are plenty of bargains to be had. People are now wondering if the market has bottomed out, and thus it ’s time to step in. In particular there has been an increase in demand for property generally on the Algarve. This is partly the result of people witnessing bargain prices, and also by low interest rates set by the Bank of England and the European Central Bank, which makes financing any property much more affordable these days.
We’ve also seen the introduction of, and the increase in, flights to Faro by low cost carriers such as Easyjet from Stansted, and Bmibaby from East Midlands. Cut-price flights have made holiday homes all across Europe more accessible, not just for holidays but also long weekend breaks, and this is just as true of second homes on the Algarve.
And I’m not just talking about interest from potential buyers from the UK. Portugal is also popular with the Germans (whose economy is doing okay), the Dutch and Scandinavians.
So, If You Are Interested In Buying In Portugal, What Should You Be Aware Of?
First, I suggest that you carefully consider the type of property that best suits you and your own needs and requirements, but also have one eye on the investment implications. Let ’s have a look at some of the investment issues now.
There is no such thing as a perfect or risk-free investment, so here are some things you will need to be aware of before you commit to your purchase.
Even well located property is a relatively illiquid asset and takes time to sell. A poorly located property may never sell. That is why, if you think you may need to get your money out in the future, or if anything were to happen to you or your spouse and relatives need to sell, I think it is important to buy a property with this in mind. You should only buy a property which you know you can sell if you ever have to.
As we’ll see later, you will need to budget for purchase costs and taxes of around 15%. If you need to sell, after allowing for estate agent ’s fees and lawyer’s fees, you are looking at a similar amount again. This means that after allowing for Capital Gains Tax and other costs, you will need to hold the property for a minimum period of say three years, assuming historic average rates of capital growth, in order to maintain your capital. This makes investing in Portugal a medium to long-term activity, and not a ‘get-rich-quick scheme’.
When you own your dream property in Portugal you could have additional tax consequences, which should be planned for so you can minimise their effect. Before you buy I strongly recommend that you talk to an accountant who is familiar with the Portuguese tax system.
Even the best built and best maintained property requires ongoing management and maintenance. Unless you live close by, for example if you let properties as a business, it will almost certainly be impractical for you to manage the property. You will probably consider appointing a local agent to let and look after your property. Managing agents’ fees will range between 10% and 25% depending upon the level of service you require.
When buying a property for investment, it is important to have a clear plan about how you are going to make your return. In addition, you need to be clear on whether the financial return is the only thing that you are interested in, or whether you are looking to take advantage of the other benefits, such as using it as a holiday home.
Whether you plan to make a return from selling or letting your property, you need to look at who would rent or buy it. There are many groups of people active in the Portuguese market. They may be looking to retire or relocate, acquire a holiday home or buy for investment themselves. As we’ve seen, they might be from Germany, Holland or Scandinavia, not just from the UK.
If you bear all of this in mind when looking you can own a property which:
- is a valuable amenity for you, your family and your friends, if you choose to let them use it;
- can create a positive cash flow when you are not there;
- will increase your equity and net worth from capital growth.
To reduce the “risk” of your investment, before buying a property you should consider how easily or otherwise it will be to sell, if you ever need to get your money back out. This means you need to think about your market and where the demand for properties in your chosen location is likely to come from.
So, If You Are Tempted To Buy A Property In Portugal, What Is The Best Way To Go About It?
We’ll work through our three-stage process, which is:
- Research thoroughly the area in which you want to buy
- Work out how much you can afford to spend
- Look for properties in your preferred price range
Let ’s have a look at these in more detail.
First, Research Thoroughly The Area In Which You Want To Buy
Ultimately the location you choose will depend on individual taste and budget, but after reading this article I hope that you will also think about the investment implications of where you buy.
In the old days, with certain exceptions, the bulk of the second home market on the Algarve centred around Albufiera, which is roughly mid-way along the coast measured from the Spanish border at Vila Real in the east and Cape St Vincent in the west. This is where the first large developments of 2-bed villas and apartments were to be seen.
Other areas that initially caught the developers’ eye for ‘mass development ’ included Vilamura, near Faro, and to a lesser extent Portimão and Lagos, both of which are further along the coast, to the west of Albufiera.
Meanwhile, middle England were heading for Almancil and the surrounding area, and Santa Barbara de Nexe, both of which are within easy striking distance of Faro, the beach and the world famous Loulé market.
For the extremely well healed, who wanted something a little special and were willing to pay for it, the high quality developments at Quinta do Lago and Vale de Lobo fitted the bill perfectly – luxury villas within easy driving distance of the airport and set amongst pine woods, close to the beach, and on the door step of some of the best golf courses available.
Thirty years on, Vilamura is now a mature community centred on one of the most popular marinas in Europe, and development at Quinta de Lago and Vale de Lobo continues. Here you’ll need a cool £2 million before you should bother even setting foot inside the estate agent ’s office (although prices are significantly down), if you are looking for a villa, but if you fancy something a little cheaper how about a small three-bedroom townhouse for just £500,000?
However, there are true bargains to be found these days. Compared to other parts of Europe, property prices in Portugal can still be considered relatively cheap and they’ve come down a lot since the peak, although the Algarve still has a slightly exclusive feel.
This has been helped by the Portuguese authorities who, from the outset, have controlled development to avoid a repeat of the over-development that occurred on the Spanish Costas in the 1970’s. Although not completely fool proof (I’m told it was surprising what just the gift of a bottle of whisky could get you in the early days, if you gave it to right person), this policy has been largely successful.
Further, there have been huge recent improvements to the local infrastructure.
Portugal is an enthusiastic member of the EU and has benefited considerably from funding to improve its transport network. The first evidence of this is seen stepping off the plane; Faro airport no longer operates out of a tin hut; it is now a major international airport handling millions of passengers a year, and is still growing.
Drive out of the airport and you start to see the considerable improvements to the road network which has been developed partly to take the coaches away from the airport down to the coastal resorts with the minimum of hold ups. Actually, I quite like this for purely selfish reasons. In my opinion (and in the opinion of UNESCO, who have designated it in part “A World Heritage Site”) Faro is one of the nicest cities in Europe. Apart from the relatively recent appearance of MacDonald’s (albeit tastefully done), Faro shows little evidence of being of interest to tourists, mainly because they are directed around the ring road before they can discover its delights. I’m sure a lot of travellers to the Algarve think of it as being the place with the airport and no more (similarly Palma is overlooked by the masses visiting Majorca).
For anyone who has endured the relative horrors of travelling on the EN125 to the western resorts, the relatively new motorway, the Via Infante as it is known locally, is a dream come true. It doesn’t quite go as far as Sagres, it reaches as far as Lagos, and will considerably cut travelling time from Faro all along the coast west of Albufiera.
You can see by the amount of development around Portimão and Praia de Rocha, along to Lagos, that it has helped bring a fresh interest to this part of the Algarve, which has otherwise been a bit like the poor relation to the original golf resorts. This has brought a new lease of life to the area.
Second, Work Out How Much You Can Afford To Spend
Arranging property finance in Portugal is different from the UK, so I recommend that you know exactly how much you can afford before you start your search. It will speed up the process and help avoid unnecessary disappointments. You may decide that the easiest option is to refinance an existing property in the UK and take out an equity release loan to finance your Portuguese purchase. Alternatively, if you are approaching retirement, you might consider selling up your UK home and buying something smaller as a bolt hole, and using the balance to pay for your dream second home.
Mortgages are still available from Portuguese lenders, although the terms are invariably not as flexible as with a UK lender, and they aren’t as easy to get as they used to be, since Portugal ran out of money; but it ’s still possible. For example, loans are usually full status only and you will have to provide proof of earnings and outgoings.
When you buy a property in Portugal you will need to budget for various costs as well as the purchase price. Firstly, there is purchase tax, or SISA. This is a bit like stamp duty and is charged on an increasing scale up to 10%, depending on the amount of the purchase price.
Then there are notary (lawyer) fees and registration fees, which typically will total around 2% of the purchase price.
And there will be the fees of your solicitor.
Depending on the price of the property, as a rough rule of thumb, you should be budgeting around 15% of the purchase price for fees and property tax.
Don’t forget that if you find a property you like, you’ll need to pay a deposit. The standard rate is 10%. If you want to avoid disappointment, make sure you have quick and easy access to the deposit. If you have to go back home to arrange for funds to be transferred to a Portuguese bank, you could find the whole process takes a couple of weeks. If you are serious about buying, you could consider opening a euro bank account and putting it in funds when you start looking, or identifying a lawyer you will use to convey the property once you find it, and placing funds in their clients’ account (if they are agreeable).
And whilst working on your budget figures, don’t forget the costs of ownership once the property is yours. As well as finance costs, if you take out a mortgage, there is Contribucão Antarquica, which is the closest equivalent of our council tax, the cost of repairs and maintenance, which can be reasonably hefty if you have a swimming pool, fees to managing agents if you appoint someone to look after the place while you’re not there, and of course the usual standing charges for utilities. If you buy on a development, there will also be the equivalent of service charges for the upkeep and maintenance of communal areas including the grounds and swimming pool, but this is fine because it takes the responsibility off your shoulders.
Look For Properties In Your Preferred Price Range
I also recommend you take your time and carefully consider all the options available. Choices range from apartments to villas, new properties and resales, bare plots for development, old farms for refurbishment, and of course at the moment distress sales and bank repossessions.
To say there is a wide choice of property in Portugal to consider is an understatement. However, these will largely fall within four general types as follows:
- Newly-built developments, often within their own complex, and some themed, such as centred around a golf development or marina.
- Individual villas, houses and apartments being sold as resales.
- Plots of land or ‘quintas’ for development or efurbishment.
- Distress sales and bank repossessions.
Nowadays it ’s easy to start your search using the internet. Just type ‘Portugal property’ or ‘Portuguese property’ into Google; you’ll be surprised just how many good-quality websites are devoted to Portuguese property.
I also suggest that you attend some of the foreign property exhibitions which are held around the UK. These are advertised in the national newspapers in the foreign property sections (see The Sunday Times etc). It is rare to find an exhibition dealing purely with Portuguese property but there are general foreign property exhibitions covering properties from Cyprus to Florida and at these you’ll more than likely find a good number of firms specialising in Portugal. If you follow these two steps first it should help you clarify what to look for, and where to look and this will help when you travel to Portugal to look at properties first hand. If you can, it is a good idea to view your preferred location at different times during the year, to get a feel for what they are like during each of the seasons. This is worthwhile if you have time; you can be surprised at how different somewhere can be in the winter if you’ve only viewed in the summer. As mentioned earlier, but it ’s worth repeating, you’ll also be surprised at how different the weather is if you haven’t experienced a Portuguese winter.
My insider sources advise that when buying in Portugal you should always buy through a government licensed estate agent. This guarantees that the estate agent must comply with certain codes of practice, and use approved documentation. This reduces considerably the risk of mistakes, or even worse, malpractice. In the event of a dispute, a government licensed agent is covered by a bonded insurance policy which can be claimed against in the case of a proven dispute.
When you have found a property you will want to know the legal and financial issues associated with buying in Portugal. The Portuguese system of conveying properties is very different from the UK system.
This is one reason why I recommend that you always use a lawyer. This might sound a strange statement to anyone used to buying in the UK, but because the Portuguese use the ‘notarial’ system for conveying properties, some purchasers in the past have been tempted to try to cut costs and not use a lawyer.
For example, as well as checking the contract and the title deeds, your lawyer will check with the local town hall, the Camara, that the property has a proper habitation licence, is correctly shown in the land registry, and will advise on the amount of the ‘Caderneta Predial’ lodged with the Tax Office, the Financas. This is the notional valuation upon which property taxes are assessed.
The Notorial System
As I said earlier, Portugal, like a lot of Europe, uses the notorial method of conveying property. Here are the basic steps to acquiring the ownership of your dream home. First, you will sign a ‘promissory contract ’, usually a Contrato de Promessa de Compra e Venda, and pay your 10% deposit. However, before you sign, you should instruct your lawyer, the avogado , to undertake initial inquiries. This is when he will establish that the property has a habitation certificate etc. If the initial searches are ok, then you can proceed with the purchase.
Unless you have to, it isn’t advisable to sign the contract before the searches are completed. Obviously, whether you do so or not has to be your decision. The only circumstances where it might be unavoidable is if you know for sure that you might miss out on the property if you don’t sign there and then. However, if you don’t complete you will lose your deposit and the vendor may be able to sue you for specific performance.
Under no circumstances is it advisable to sign any document if you don’t know what it means. If it is in Portuguese, wait until your lawyer has had a chance to explain its meaning to you.
Before the ownership is transferred you will have to pay any SISA tax accruing. You will then sign the Escritura de Compra e Venda in the Notory’s office, and pay the balance of the purchase price. The Notary will check the documents and witness and record the transaction, and then arrange for registration.
Before you buy you should consider whether it would be preferable to buy:
- In your own name
- In joint names with your spouse or partner
- In the names of your children or an another beneficiary of your will
- In the name of a limited company – most likely an offshore company.