Watch out for the devilish details when buying a holiday home abroad

Costs and ongoing fees could severely dent your income when you buy a holiday home to let abroad.


Your own place in the sun what could go wrong?
(Image credit: Credit: Jose Pedro Fernandes / Alamy Stock Photo)

You might find it hard to muster much sympathy for television presenters Ant McPartlin and Declan Donnelly. The presenters are reportedly at risk of having their million-pound villas repossessed as the bank that financed the now-insolvent developer behind the resort seeks to recover its losses. The Portuguese state-owned bank Caixa Geral de Depsitos is owed nearly £250m, and is first in the queue to reclaim its debt. But the news provides a useful warning about investing in property in overseas holiday resorts.

Of course it is possible to buy a place in a financially stable resort, have a lovely time of it, and make some money at the same time by renting it out while you're not there. Just make sure you're aware of all the costs and risks thatcome with buying and running such ventures.

Do your sums

Firstly, you need to factor in the costs of buying property abroad. Taking Portugal as an example, the main purchase tax to account for is the Imposto Municipal sobre Transamissoes (IMT), which is based on a sliding scale. For a €350,000 property, IMT would be approximately €16,965, plus another €2,800 in stamp duty, estimated A Place in the Sun's website last November. Council tax, or Imposto Municipal sobre Imveis, varies from 0.3% to 0.8%, according to the local council and property type. For a€350,000 villa or townhouse in a tourist area in the Algarve, expect to pay between €400 and €800 per year.

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Then there are ongoing fees. The website of Portuguese property managers Quinta Property, which operates in association with Savills, talks enthusiastically about the fact that rental demand in Quinta do Lago (the same area where McPartlin and Donnelly own villas) has never been stronger. You can expect to get roughly €2,500 per week for a two-bedroom apartment and more than €25,000 per week for a high-end luxury villa, it reckons. Nonetheless, it then lists all the expenses you need to take into account when renting out your villa. The whole thing starts to look less appealing.

Of your monthly income, subtract roughly 20% agency commission (and 6% VAT). Then a stamp-duty tax must be paid 10% of your monthly income. For non-residents, there is a flat-rate 28% tax on rental income, with allowances for certain expenses. You also need to get hold of a local licence to carry out short-term holiday rentals.If you're letting out your apartment via the resort operator rather than directly through an agent, the owner will almost definitely take a cut of your rental income, with perhaps another regular sum destined for its capital improvements fund (potentially in addition to one-off unexpected costs). If you are buying in a golf complex in the Algarve, for example, you would be looking at about €3,000 a year for communal fees, says estate agent Cerro Novo. Remember also that there's no guarantee that rental demand for the property will be consistent.

Finally, you might also have to give up on your dream of nipping off to the Algarve at a day's notice. With some resorts of this type, you're required to give several months' notice of exactly when you want to stay. So next time you're ambling along the waterfront on the Algarve, by all means start planning your next holiday there. Just steer clear of the adverts that promise fantastic rental returns on a flash villa. If it sounds too good to be true, itprobably is.

Sarah is MoneyWeek's investment editor. She graduated from the University of Southampton with a BA in English and History, before going on to complete a graduate diploma in law at the College of Law in Guildford. She joined MoneyWeek in 2014 and writes on funds, personal finance, pensions and property.