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.

913_MW_P23_Inv-Prop

Your own place in the sun what could go wrong?

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.

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.

Recommended

Stamp duty holiday extension will keep the house-price party going – for now
Property

Stamp duty holiday extension will keep the house-price party going – for now

The government is to extend to the stamp duty holiday by three months. Good for today’s buyers, says Nicole Garcia Merida, but what happens in June?
26 Feb 2021
Properties for sale with detached home offices
Houses for sale

Properties for sale with detached home offices

From a contemporary duplex apartment in a period property in Fulham, London, to a brick-and-flint house close to Marlow high street, Buckinghamshire, …
26 Feb 2021
Pandemic no barrier as house prices rise faster than at any time since 2014
House prices

Pandemic no barrier as house prices rise faster than at any time since 2014

December saw the biggest annual rise in house prices for over seven years, as buyers rushed into the market to be sure of completion before the end of…
19 Feb 2021
Can the government's proposals fix the residential cladding crisis?
Property

Can the government's proposals fix the residential cladding crisis?

In the wake of the Grenfell fire disaster, many homeowners have been left stuck with huge bills to make their properties safe. The government is stepp…
13 Feb 2021

Most Popular

A beginner’s guide to bitcoin: what is bitcoin?
Bitcoin

A beginner’s guide to bitcoin: what is bitcoin?

As a completely novel concept for many people, bitcoin can take a little effort to get to grips with. In the first of a short series on the cryptocurr…
1 Mar 2021
A beginner’s guide to bitcoin: how to buy bitcoin
Bitcoin

A beginner’s guide to bitcoin: how to buy bitcoin

For the novice, buying bitcoin can be a daunting prospect. Here, Dominic Frisby outlines the process from start to finish.
2 Mar 2021
What is “yield curve control” and why is it coming to a central bank near you?
Government bonds

What is “yield curve control” and why is it coming to a central bank near you?

Central banks around the world are determined not to let interest rates go up too quickly or by too much – a practice known as “yield curve control”. …
1 Mar 2021