The real estate investment route to a Portugal Golden Visa may involve high hidden costs, in terms of both taxes and property overpricing. In this article we reveal what such costs may amount to and compare this route to the securities investment route in terms of all associated costs.
The real estate investment route – caveat emptor!
The real estate investment route to a Portugal Golden Visa is the most popular, because the minimum investment amount required per family is only €500,000.
However, be careful. Many investors choose to use the services of emigration agents, emigration consultants or real estate agents in or from their country or region of origin. What they don’t know is that many such agents have commission agreements with Portuguese real estate agents, under which they get paid commission which often reaches 20% of the property purchase price and such commission is in addition to that of the Portuguese real estate agent. Now, to be clear, normal estate agents’ commission rates in Portugal only very rarely exceed a maximum of 6%, most commonly varying between 3% and 5%.
Such commissions (i.e. the foreign agent’s plus the Portuguese real estate agent’s), often totalling 30% of the property purchase price, are added by the property seller to the intended sale price, because, being billed by the estate agent, they are tax deductible by the seller.
In addition to this rather scandalous situation, many sellers of properties in the sub-€500,000 price range are putting their asking price up, so that it reaches the €500,000 mark, in the hope of selling them to a Golden Visa applicant. This will typically be the case of someone wanting to sell a property that is worth, say, €450,000. Try and find properties in Portugal that are likely to be appealing to Golden Visa applicants and are priced between €450,000 and €499,000. They are very difficult to find, of course.
So the sad truth is that many Golden Visa applicants are buying properties that may be overpriced by 30 or 40%, and will consequently have a bad surprise when they decide to resell their property or swap it for a better one.
In addition to this overpricing situation, the investor must take into account the taxes payable on the property purchase (and on property income, if the property is for rental). The following one-off property transfer taxes are payable by the buyer on the purchase price or on the tax office valuation of the property, whichever the greater:
In sum, if you are making a €500,000 or so investment in Portuguese real estate you may well be paying some 40% over the market price, and then adding 8.8% in taxes to this ridiculously high purchase price.
The securities investment route
If you opt for investing in Portuguese securities as your route to a Golden Visa, you must invest a minimum of €1 million. This is not a bad route, since there are several good opportunities of making a reasonably good and relatively safe investment under current market conditions.
Portuguese bonds bought in the secondary market at a discount are a good example. Take a Portugal Telecom (PT) 5, 6 or 7-year bond maturing in 5 years, for instance. PT is a very solid company and one of Portugal’s biggest. You can buy such bonds in the secondary market at 94% of their face value and they yield an interest of 4.6% per year, which you may receive net (free of tax) if your bank books the transaction offshore. If you bought at 94%, the effective yield is 4.89%. Then at maturity you receive the face value of your investment, making an additional 6%. And there are no taxes on the purchase, on the income or on the sale – it’s all net.
So under this conservative approach you stand to make 30.45% net over a 5 year period with a risk tending to zero. And this can, naturally, be considerably higher if you are prepared to take higher risks.
To match this performance with a real estate investment you have to buy at a good price and expect market prices to increase over the next 5 years (which seems probable). It is feasible, of course, but the risks are very high if your purchase is overpriced.
Conclusion – your options
The first decision you have to make is on your choice of route. As things stand, investing in securities is probably a safer investment, but the investment amount must be considerably higher. If you choose the real estate route, we would advise as follows:
In any case, you are welcome to use Belion Partners’ Preliminary Property Search service totally free of charge. This will allow you to determine the type, size and location of properties, if any, that meet your requirements and your budget.