Hi,
Thanks Rui for your comments and the link.
We have just signed the promissory contract on a place in Peniche. I wanted to get that signed so I was talking about what we actually have done and not what I am planning on doing!
I will summarise my learnings to date and share a little about the process/rules I have developed here to hopefully be successful in REI in the Portuguese market. Always happy to have input from others!
Firstly my objectives
•To provide uncorrelated predictable income streams while allowing for the opportunity of capital appreciation
•To provide high % yields. Achieved by buying low value residential housing and turning into high value tourist accommodation for Short Term Let (STL). I won't proceed on a property if I don't believe I can hit a 10% gross yield.
•KISS – Keep it simple stupid
•Low risk as each unit is a small % of investable capital
•Downside protection if properties are purchased in areas where they can be sold as residential homes.
•Downside protection if properties are purchased requiring improvement to provide a fast increase in capital valuation – improvement means non structural renovations/work. Painting, plastering, refitting out fixtures and fittings, windows and doors.
•Low time requirement for operations – the rental operations can be automated to a large extent maintaining a high hourly return and helping ensure quality control.
Financing
We have found a mortgage broker who seems to be doing a good job so far. She seems to be able to facilitate mortgages of up to 75% LTV. Rates are <2% and fixing is an option for anything up to 30 years. Affordability is linked just to Salaries, income from the property is not counted.
Legals
Legals where the problems begin! It seems that most of the older houses we have looked at have some kind of legal issue. Some of these issues are resolvable, others seems to be impossible to solve completely requiring work arounds if you still decide to proceed with the property.
The example I can give is our property in Peniche. It has an annex that is unlicensed/not on the plans. To get it licenced will take from now until at least October at the earliest and no sale is completed until that time.
In addition even after the building is fully licenced the previously unlicenced annex will always be treated different from the house that was built with a correct licence from the start. Basically if you are selling/buying a house that has been retrospectively licenced then that part for private use is ok, however if officially and practically if you wish to rent the place out on LTR or STR you are not allowed to ever use this space as part of your rental. This may also be because parts of the annex are within 5 meters of the property behind. It must have a door sealing the area off and a sign marking it as private.
By making it licenced the new area can be included by the bank in its estimate of valuation. This leads you to really having to target buyers who are looking for the home as a private home and not selling onto another rental investor. Certainly worth considering in one's exit plans!
Also worth noting that when you see properties that are T2 + 2 for example, that +2 may well not be possible to use for Alojamiento Local / STL. It may well form part of the bank valuation in terms of square foot, and it may be covered in the habitation license (the habitation license would cover house + annex), but it will be treated differently and need to be closed off for rental. Still learning about how it works but this is my understanding today.
We have decided to continue with this deal, due to the location of the property, the fact by licencing the extension and renovating the building we should be able to get a price increase from a buyer as a private home. It is also excellent experience to better understand the market here! We can use the original part of the house for rental as well, which is valuable to help use understand the STR rental market better, ie what income we actually get as all we have current is the airbnb site itself and airdna (an airbnb analytics site).
In short I think the downside is limited, and this deal with give valuable experience while testing my beliefs that it will make me some money!
More generally I think the market here is very interesting. In the UK for example we have a simple LTR model, which works well and is very hands off. I am still trying to find a way to make LTR attractive here in Portugal, but haven't found it yet. Does anyone have any experience of making LTR working here? How have they dealt with problem tenants and what seems to be a challenging legal environment for a landlord? Is it as challenging as it is reported to be or is that just a perception issue?
Market wise it seems that in the central Lisbon and Porto areas yields are pretty low for LTR, if you go to the suburbs there seems to be options here, but I don't have never knowledge in this area yet.
In terms of STR it seems that in the really strong markets (Lisbon, Porto, old town Ericeira) it is difficult to get the AL licencing. In the outlying areas it does seem possible and that is what we are focusing on. Rural tourism also seems to have potential, but doesn't have LTR back ups if you decide that STR is not feasible for any reason.
Sorry if this has rambled on a bit, but hopefully it is helps people if they are just turning up. I know there are a lot of very experienced investors here in the country who have been successful for a generation or so. It is clearly possible to do well here, but as expats I believe you need to be extremely careful in entering the market. Things that I think are obviously common sense are in fact completely incorrect. I currently know enough to know how little I know!
Luckily I have the help of a good lawyer (@Diogo Capela) who has help guide us through these early days in Portugal. Also our Mortgage broker has been very helpful in understanding how the banks work here.
In terms of estate agents it seems they focus on a specific area so it is certainly worth building relationships in whatever areas you decide to target.
Thomas
