If you’ve been following me you know that I strongly believe in investing in Israeli real estate among other types of investments. Yet, I am always looking for unique opportunities to diversify investments and I always do my homework before making any decisions.
I spent several years living in the USA and am even married to an American, so I first looked at investing in real estate in the United States. I also considered investing in Eastern and Western Europe, Greece, and Morocco. Morocco is a very attractive location with a very high yield, but the risk there is relatively high. And thus my search continued.
Real estate in Portugal
From the title of this article, you can probably guess that my research led me to buy real estate in Portugal. I’ll give you all the reasons below, but the bottom line is that I chose Portugal because it has a major advantage when it comes to financing. The largest banks in Portugal give attractive mortgages that provide up to 90% financing with 1% interest for 30 years. Even better, in some cases (including mine) the banks offer a two-year grace period meaning for the first two years you only pay the interest and then you start paying down the principal with the interest.
Financing alone is not a good enough reason to invest in a new country. If the country already has a good market, financing makes the opportunity better and significantly improves the return on equity.
Should you purchase real estate in Portugal?
Aside from financing, what else is important to investors in Portugal? First, let’s take a look at the country itself. It has a great climate all year round, fantastic beaches with surfing and recreational sites, great food, high quality of life and low living costs, good infrastructure, many educational and cultural offerings, and the country is considered safe from political conflicts and threats from neighboring countries. These are basic reasons that make Portugal a relatively solid option for investing because real estate can yield profits from both locals and tourists.
Additionally, the Portuguese are highly educated and about half of the country’s citizens speak at least one foreign language, mainly English, which makes it easier for foreign investors to deal with the bureaucracy of investing.
Tourism in Portugal
The World Travel Awards called Portugal the best destination because of its beaches and golf. It also was the first European country to receive the “Safe Travels” seal awarded by the World Travel and Tourism Council, which notes that Portugal adheres to global health and hygiene standards and protocols.
Real estate prices in Portugal
Let’s get into the more interesting part of investing in Portuguese real estate. We know the country has great financing conditions, it’s considered safe, and there is high demand, but if we want to invest there, we need to understand the price. If we compare Portuguese real estate to Israeli, we see that Portuguese real estate is significantly cheaper per meter.
Real estate prices in Portugal are increasing significantly. Prices jumped 56.8% between 2010 and the third quarter of 2021. Prices started increasing significantly in 2014 and have been rising ever since.
National average price change | Year |
4.9%+ | 2015 |
5.7%+ | 2016 |
7%+ | 2017 |
9.7%+ | 2018 |
11.7%+ | 2019 |
6%+ | 2020 |
5.46%+ | 2021(partially reported) |
You can see there has been a clear increase in property value.
The annual rental yield in Portugal
Different cities have different demand and costs of living. Investors shouldn’t be asking “how much is the rent?” rather, they need to ask “what is the rent in relation to the total amount invested and the equity?”
As the value of property increases, generally the ratio to the rent increases and the annual yield decreases. For example, in Tel Aviv properties are very expensive and their value increases significantly over time. But the annual yield from renting is about 1% to 1.5%. In the suburbs of Tel Aviv properties are significantly cheaper, but rent yields are between 4% to 5%.
The situation in Portugal is similar. High-demand cities such as Lisbon have high real estate prices, but rental yields of about 1% to 3%. If you look at other cities, such as Porto, yields range from 4% to 7%.
Return on equity in Portuguese investments
So the question is whether it is worth buying real estate in Portugal in terms of rental yields. In truth, the market is not something special that yields higher annual returns. But you have to remember the important thing we mentioned earlier! The main advantage of investing in Portuguese real estate is the financing terms. If you look at your return on investment, it is good and stable. But if you consider the return based on how much equity you put in, Portugal has the highest return in the world.
For example, let’s say you bought an apartment for 90,000 euros in Porto that could generate 400 euros from the monthly rent. You invested 18,000 euros in equity (roughly 20%) and the rest was financed. Every month, after paying your mortgage, you’re left with 200 euros. This means the property yields more than 13%. Additionally, the property value is increasing and after five years you could sell it for 20% more than you bought it for (if prices keep increasing as they did over the previous five years). Not counting the rent, you just made 100% on the equity you invested.
Sounds complicated? It’s important to understand this calculation because you need to thoroughly check your investments and any alternatives.
The price of investing in Portuguese real estate
As with any real estate investments in any country, there are expenses from investing that are not included in the price of the property. Some expenses are fixed and some are related to the property’s value. For example, real estate agents often charge based on property value.
NIF number
To purchase Portuguese real estate you need a local bank account and the ability to deal with the local tax authorities. This requires a lot of paperwork and opening an entity called a NIF number, which is a personal tax number. You cannot conduct financial or business activities in Portugal without one. To get a NIF number you need a tax advisor or a local lawyer. The price of this is about 500 euros. Most of the cost pays for the service and not the actual fee, which is relatively cheap.
Portuguese real estate lawyer
Legal support for purchasing Portuguese real estate
Buying an apartment in Portugal requires a lawyer to complete the legal registration, transfer documents, and other items required by the bank for acquiring a mortgage. The cost of a local lawyer is about 2,500 euros. The lawyer’s fee in Portugal is a fixed price rather than relating to the property’s value.
Notary for Portugal
There are several processes including opening a bank account, the property purchase, and acquiring a mortgage that require notarized signatures on documents if you are a foreign citizen. You may need to use a notary several times during the process. In my experience, the total cost of a notary is about 1,500 euros.
Commissions and fees in Portugal
There are several fees to consider including opening your mortgage application, appraisals, property evaluation, and more. These fees may be small but it is important to prepare for them. In my experience, these fees reached 720 euros.
Real estate taxes in Portugal
Like in Israel, the taxation authority in Portugal also wants a portion of the investors’ profits and requires the payment of sales tax, purchase tax, and more.
There is a tax treaty between Israel and Portugal, meaning that while you do need to report your profits in both countries, if you plan your taxes smartly you can try to coordinate your taxes with regard to the interest tax payments.
As an aside, Portugal is the EU’s best tax haven for retirees and high net worth individuals (10-year exemption from most non-Portuguese income). It is also one of the leading countries to buy and own real estate.
For our purposes, there are several tax related things you should be familiar with.
IMT transfer tax
Simply put, this is the Portuguese purchase tax. This is a progressive tax. Up to 120,000 euros, you don’t pay any IMT transfer tax. Above 120,000 euros and up to 180,000 euros you pay about 5%. Above that, the percentage increases.
If you sell your property within 24 months (two years) you can get a refund on this tax. This is very important if you want to profit from your equity and increase the value of a sale.
IS stamp tax
This is a type of value-added tax (VAT) that is 0.8%.
Portuguese rental profit tax
Tax on rental profits in Portugal is 28%. For local companies, the tax is only 21%, so if you intend on buying multiple properties and you have a high budget, it might be worthwhile to open a local company. The tax is calculated after expenses, and there are multiple expenses related to your property.
You also have to consider taxes in your home country. You need to report your profit in your home country where you may need to pay capital gains taxes. Unfortunately in our world, every income is taxed. Many investors who operate overseas do not report their income and risk getting caught for evading taxes.
I recommend acting according to the law and paying taxes as required .
Example table of income and expenses for buying an apartment in Portugal:
100,000 euros | Property price |
20,000 euros | Equity required (20%) |
80,000 euros | Mortgage (80%) |
250 euros | Monthly payment of 30-year mortgage with 1% annual interest |
420 euros | Monthly rent (5% annual return) |
5,000 euros | IMT transfer tax (5%) |
800 euros | IS stamp tax |
1,500 euros | Notary |
720 euros | Fees and commissions |
2,500 euros | Legal fees- Portuguese real estate lawyer |
Example yield for real estate in Portugal:
30,520 euros | Equity required- down payment and expenses |
4,620 euros | Rental income (11 months x rent) |
about 15% | Annual return on equity percentage from rent |
about 4.6% | Annual return based on property price |
108,160 euros | Property value after two years (4% average annual increase) |
26.7% | Return on equity from property value only |
73.3% | Return on equity from rent + value increase + IMT tax return |
Just to note, these are relatively conservative numbers.
Remotely managing property in Portugal – do you need a local management company?
It’s very common when investing in real estate abroad to use a local management company. You pay a monthly retainer and the company takes care of everything relating to maintenance. These companies generally cost about 6%-10% of the total incoming rent. It’s very convenient if you don’t want to deal with management, however, I personally believe you don’t need a local management company. From my experience, aside from finding a tenant, there is very little that is required on an ongoing basis. If there is a problem with the apartment, you simply find a professional to fix it or ask the tenant to do so and you can sort out the finances through their rent. I have hardly set foot in the properties I invest in, even in my home country. I use a local brokerage company to find tenants and I have a network of good professionals in the location of my investments (Porto, Portugal). I can message or call them if I need their services. It’s relatively simple.
Do you need a visa for Portugal? How long can you stay in the country?
As of 2022, visitors can stay up to 90 days without any special permits. If you want to stay longer, there are three types of visas: short stay visas, called Schengen Visas, for a stay of more than 90 days; national temporary residence visas for up to one year; and long-term national residence visas, for stays longer than a year.
Are there any advantages to being a Portuguese citizen when purchasing property?
In my experience, there is no advantage for citizens whatsoever in purchasing an investment property in Portugal. It is advantageous for Portugal to bring in foreign money, which is why the country has such great conditions to attract foreign investors.
The takeaway
It’s always great to invest in your home country. However, investing abroad, specifically in Portugal is a smart strategy to diversify investments if you’ve done your research. I’ve done mine and decided to invest in Porto, Portugal for the reasons detailed above.
If you’re interested in investing in Portugal, I am happy to help! I only want to emphasize that I accompany and advise you, but as the investor, you must maintain control and understand the entire process.
Summary
There are many advantages to investing abroad. If you want to invest abroad, you need to take into account many variables other than just the return on your investment. You should consider the local real estate market, tourism, any threats to the country, financing options, demand, the country’s relation with your own, taxation, and management options, among others. My research led me to believe it is smart to diversify investments by investing abroad.
Portugal is a favorable destination for real estate investments because the country has great conditions to encourage foreign investors. Local banks provide up to 90% financing with 1% interest. Additionally, the country has a great climate all year round, fantastic beaches with surfing and recreation sites, good food, high quality of life and low cost of living, good infrastructure, and many educational and cultural offerings. The country is also safe and has relatively no conflicts or political threats from neighboring countries. The annual return on investments is between 5%-7%, and if you consider the high financing, the return on equity is dramatically higher than in any other country.
The World Travel Awards called Portugal the best destination because of its beaches and golf. It also was the first European country to receive the “Safe Travels” seal awarded by the World Travel and Tourism Council, which notes that Portugal adheres to global health and hygiene standards and protocols.
Prices per meter in Portugal are cheaper than they are in Israel. However, prices in Portugal are rising. Between 2010 and the third quarter of 2021 prices increased by 56.8%.
This really depends on where in Portugal. For example, in Lisbon, the capital, real estate prices are high and rental returns are only about 1%-3%. If you look at other cities, such as Porto, yields range from 4% to 7%.
As the capital, Lisbon is great for tourism and short-term rentals. But if you are looking for long-term rentals, you want cities with more demand and stability such as Porto.
As with property in any modern country, this greatly depends on the location and size of the property. Prices can range from 80,000 euros to even millions.
There are several types of taxes including the IMT transfer tax, which is about 5%, and the IS stamp tax, which is 0.8%. You also need to consider lawyer fees, notary fees, and other commissions.
In Portugal, generally only the seller pays a broker in real estate transactions. However, the property owner generally pays a broker one month’s rent for finding a tenant.
Portuguese rental income tax is about 28% of the income after expenses. There are a few tax benefits for specific situations. You also need to report your income in your home country and depending on your country’s policies you may need to consider other taxes.
If you live in Portugal, it may be easier to obtain a mortgage, because the bank can assess your financial situation more easily. However, the country encourages foreign investors so the process is very convenient even for non-citizens.
It’s not mandatory, but it is very common to use a local management company. I personally think you don’t need to. Apart from finding a tenant, there is very little ongoing management that is required. If a problem arises, you can find a professional to fix it or ask the tenant to do so and settle up the finances with them.