Property Update
THE LONG AND SHORT OF IT Stefan Humpenöder, director of Yellow Homes - Land & Houses Algarve, discusses Long term vs Short term Letting in Portugal
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s 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 home owners 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 benefitting 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 making 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
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regimes will almost equalize 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 lots of flexibility as a landlord. You can use the property for your own holidays while renting it out
March 2020
