People typically buy a vacation property in the Algarve to use as a second home and also as an investment property that brings in rental income to offset some of the costs of ownership. The rental demand has never been stronger and with this increasing demand and lucrative income potential, more property owners are putting their properties on the rental market. Often renting for just 4 to 6 weeks can cover annual running costs. When buying a vacation rental property in the Algarve, it’s important to choose a vacation destination that fits to the rental client you wish to attract, so the property will be rented frequently.
Here are 6 steps how to buy the right vacation rental property:
1. Choose a Good Location For Your Vacation Rental Property
The best location is one that you can afford and which brings you a high yield. Ask yourself which kind of customer you are targeting: the young sporty kind, the family, the elder couple or the luxury „money-is-not-an issue” client?
You adapt the kind of property and surrounding area to the client you wish to attract. Usually the sporty young people are rather looking for a centrally located apartment surrounded by attractions such as beaches, golf courses, marinas, cycling and jogging paths. Location, amenities and attractions are important when considering where to buy a vacation rental property.
The price range in Quinta do Lago and Vale do Lobo for instance can vary from approximately € 2.500 per week for a 2 bedroom apartment to over € 20.000 per week for a high-end luxury villa.
2. How to Find Vacation Rental Properties
In the past few years, vacation rental properties have become a popular alternative to tourists looking for temporary lodging while on vacation. These types of properties can be found online, with a real estate company.
An online search using portals is the best place to start looking for vacation rental properties. Choose a few destinations you like and then get a feel of the area by looking at maps, local attractions, hotels and rental properties. This will help you find out what properties rent for, why and what kind of tourists go to this area, as well as available vacation rental units to buy. You can filter results based on price ranges and areas you want to purchase in and some listings have vacation property as a keyword you can search for. This will take some research ahead of time since you need to know what attractions are in the area that will encourage tourists to visit and rent from you.
After browsing online and setting up a shortlist of properties, you should also work with a local realtor to help you research the area and set up appointments to view potential vacation rental properties. A realtor will be able to give you a local’s perspective of the area, including where specifically vacationers want to stay. A realtor will also show you how much comparable properties are selling and renting for.
3. What makes Your Vacation Rental Property Attractive
The best places to buy a vacation property are based on the desirability of the location, their affordability, your expected ROI, the local occupancy rates and the short-term market rental rates. Choose a place in a tourist area with not only nearby attractions that are easy to get to but also has upside investment potential.
Some locations include Quinta do Lago and Vale do Lobo due to their luxurious surroundings, Vilamoura due to its marina and sports scene, Lagos due to its nightlife and little beaches. The area’s attractions are important, but the major cities Lisbon and Porto are ruled out due to being too expensive and not having a high enough ROI.
Local occupancy rates of 70% or higher are a good rule of thumb when deciding where to buy a vacation rental property. However, you do need to consider that many vacation destinations are seasonal, so these rates will fluctuate. Short-term market rent rates vary as well. Consider the rents in the area and then figure out if you can afford to pay your bills when the property isn’t rented or if the rents fluctuate based on the seasons.
4. Calculate Income & Cost Potential
You want to purchase a vacation rental property that you will enjoy but also makes sense financially. Once you identify a potential property, you should perform a cost-benefit analysis to make sure you can afford the property, even when it’s vacant. Look at vacancy rates for the area as well as short-term rents and then compare them to your monthly financing and operational costs.
Once you find out the operating costs and the rental income, you can figure out if the property is cash flow positive. For example, if a property’s monthly operational expenses are € 250, monthly mortgage payments are € 1.750, the nightly rental rate is € 100, and the occupancy rate is 80%, you can calculate your potential monthly profit in the following way:
Potential monthly income: [(€ 100) x (80%) x (30 days) – [(€ 250) + (€ 1.750)]] = € 400
In this example, the property is cash flow positive if it was available for rent a full 30 days. However, remember that you’ll drastically reduce your potential occupancy rates if you live in the unit part-time and that occupancy rates will also decline during off-peak seasons.
A vacation rental property can be a sound investment and an enjoyable place to relax, but keep in mind the costs associated with ownership. Besides the fees that online sites charge for booking your rentals, you will also be responsible for utilities, condominium fees, management fees, advertising, property taxes, taxes on rental income, AL license, mortgage payments and insurance.
5. How to Make Money on Vacation Rental Properties
Popular ways to make money on vacation rental properties include AirBnB and OwnersDirect as well as hotel programs. If you hire a property management company they list the property for you and take care of all services, but you need to add their fee to your costs. Alternatively, you can manage the property yourself and manage the listings.
6. Get Financing For Your Vacation Rental Property
After you choose the location of the property and calculate its income and costs, you’ll have to pay for the property. You can buy it with all cash or finance the property. Vacation rental properties are usually financed with a conforming loan, a portfolio loan, a short-term loan or a bridge loan.
7. Hire Operational Services
Once you buy your vacation rental property you can either manage it yourself or get someone else to do it for you, which will affect the services you need as well as your overall costs. For example, if you’re going to manage the property yourself then you need to hire operational services such as gardeners and cleaners. If you have a pool, you will need a separate company to take care of the pool.
Typical operational services include things like the following:
However, if you buy a vacation rental property with a condominium, they’ll take care of much of the external care for you. Further, if you hire a property management company they will typically take care of all operational services for you. Of course, they charge a fee which needs to be factored to your costs. Vacation rental property management fees vary but average 28% of the rental income.
8. Ensure You Have an AL License
In order to rent a property in Portugal you need an official permit called AL License (Licença de Alojamento Local - permit required for short-term holiday rentals). This license is supported by a rental contract between you, or the corporate structure which holds the property, and your property manager. Once your property manager has the license, they are responsible and liable for all rentals in your villa. There must be a good understanding between owner and property manager, as the property must be kept in a high state of maintenance and fit for purpose.
9. Manage the Property
You want to rent the property as soon as possible to start making rental income and offset your ownership costs.
The two ways to manage a vacation rental property are to either do it yourself or hire a company to do it for you. If you manage it yourself, you need to either live nearby or hire service staff like cleaners and a meet-and-greet team because you can’t turn over the unit yourself. You’ll also need a way to let service staff and guests into the property. Some owners have a keypad that renters use to get into the property and then reset it between each use.
Alternatively, you can hire a management company to manage the property for you. This is the less time consuming way since you don’t have to be involved in the day to day operations. However, it can be costly and you need to be able to afford the management fee. Typically management fees for vacation properties range from 25 – 50%, with 28% being the average.
You or your property management company will list the unit on websites to expose it to vacationers. You can list it on more than one site to increase your renter pool. When you list your unit for rent, block off the days you want to use it so no one else can rent it during that time. If the unit is part of a hotel management program, they will list the unit for you.
10. Pros and Cons of Buying a Vacation Rental Property
Buying a vacation rental property in the Algarve can provide a place to vacation while offsetting some of the expenses with rental income when you are not using it. Short term rents are usually higher than long rental terms, but maintenance expenses, utilities, and management fees can quickly add up.
Pros of buying vacation rental property:
Cons of buying vacation rental property: