PROPERTY Long vs Short Rentals

SHORT-TERM VERSUS LONG-TERM RENTALS

What works best for you? By Stefan Humpenöder

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TAVIRA VILAMOURA As with most investment decisions there is no straightforward answer. Both rental strategies have their own pros and cons. Short Term Rentals (STR) are those available to tenants for an overnight stay, a week, or another limited period of time, but not exceeding 28 days. These properties are completely furnished and ready to use. Popular platforms for short term rentals these days are Booking, HomeAway and Airbnb. The idea behind Long-Term Rentals (LTR) is to buy a property purely as an investment in order to rent to a permanent tenant for a much longer period of time, e.g. 1 year or longer. With the rise in tourism in Portugal, making income from Short Term Rental has become extremely popular from a financial point of view. Over the past few years investors and homeowners alike preferred the STR market as the weekly rate in summer often is equal or higher than the monthly rent while at the same time benefiting from a more favourable tax rate. The State’s regulated regime for STR called Alojamento Local (AL) started originally with a very low tax regime. A large number of buyers who made their property available for the STR market were initially taxed at 3.75 % of gross revenues. In the meantime the STR market has lost some of its advantages. Recent legislation has forced a couple of bureaucratic changes and effective tax on gross income increased to 8.75%. In addition - and not many people are aware of it - owners who have an AL licence and who later remove their property from the rental AL scheme are liable to pay capital gains tax, whether they are selling their property or not. Long-term rentals are taxed at a flat rate of 28%. A recent tax law foresees a reduction in the current IRS income tax rate for longer dated rental contracts, e.g. 14% for contracts between 10 and 20 years and 10% for contracts of 20 years and longer. To help owners make a decision which rental scheme works better for them, we have put together a list of pros and cons which can be helpful to make an informed decision as to what will meet their needs. We suppose that the tax burden of both regimes will almost equalise in the future, but there are other arguments that are decisive for one or the other regime. Long Term Rental - The pros One of the main advantages of Long-Term Rentals is to have a stable cash flow, since renters pay the same amount of money every month over an agreed period of time. Even if the income is less than you can achieve with STR for some homeowners this gives peace of mind. LTR involves less paperwork and less hassle and is less time consuming and the owner can focus on other activities. Depending on how much you charge as your security deposit at the start of the contract, most long-term tenants will take more care of your property in comparison to short term tenants. Security deposits will be returned at the end of the contract unless there is damage to the property. Management is less frequently needed (but more urgent, and often outside of office hours when needed) and the operational costs are relatively low. Utilities are not

included in the rent. The property can be rented fully furnished or empty in which case you have less wear and tear as tenants bring their own belongings. Long Term Rental – the cons Renting to a long-term tenant can be risky. You can get great tenants but sometimes you will be counting the days until they leave. If you rent your property long term, you have the risk of delayed payment. Some tenants can be demanding while others may refuse to pay the rent due to financial problems. In addition, if a tenant does not want to vacate the property you must go through an often painful legal procedure of eviction. If you decide during a LTR to sell the property it can become a long process for the owner in case the tenant does not want to move out before the contract expires. Short term Rentals: Pros Short-term rentals offer you loads of flexibility as a landlord. You can use the property for your own holidays while renting it out for the remainder of the year. Property management gives you the option of a hands-off experience as a landlord. You can leave all aspects of managing your rentals to the professionals while enjoying your rental income. Short-term rentals tend to produce in general a higher income especially in combination with long stays during the winter period. Long stays can be billed at the lower STR tax rate and most of the time the guest will pay the utilities during their stay. Depending on the location you can rent out your property on weekly or nightly rates. The average annual income can be much higher compared to long-term rentals, especially when your property is located in a prime location. Holiday rental portals make it easy for the owner to find renters and potential damage is usually covered by the insurance and/or security deposit of the portal. If you create your own website for your property you could market it yourself. Short Term Rental – cons The more clients you have at your rental property, the more potential there will be for wear and tear. If you do not want to appoint a property management company to look after the property, it can end up being a full-time job. Demand for short term rental is seasonal; there will be times that your property is vacant and no income is generated. Operational costs are higher than with a long let, since you are responsible for all the utility bills, the cleaning and laundry services. With STR owners have to provide a lot more in the way of amenities than with LTR. Wireless internet is in the meantime standard if you want to stay competitive and the property must be fully equipped and furnished. Under current legislation the bureaucracy for AL vacation rentals has increased and owners need to register with the local authorities and report to SEF (immigration and border control) as well as making rental receipts with AT (tax department) approved billing software and the reporting of the monthly SAFT file (digital file with consolidated rental income), quarterly VAT reporting if income is above Euro 12.500 in the preceding year and in some areas of the country the collection and payment of tourist tax. It is evident that both options offer different pros and cons. If you prefer stable income then the best is to go for long-term rental. If you want to maximise your return on investment and/or make use of the property yourself, then shortterm rental is the better option. In particular for vacation rentals we strongly recommend hiring a property management company, a real estate lawyer and an accountant to help you do your taxes properly. In order to achieve your goals you need to make sure to choose the right location for your investment property. If you have any questions or need further information, please feel free to contact us and speak with a member of our team. Covering the whole Algarve Land & Houses Algarve – Yellow Homes is well placed to advise you on all property related matters.

Stefan Humpenöder, Director

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