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Renting vs Buying in Portugal: What's the best option?

Are you considering a move to Portugal and wondering whether it's better to rent or buy? In this blog post, we'll delve into the insights shared by our very own CEO, Ana Caramujo. With over three years of experience in the real estate market, Savvy Cat Realty sheds light on the current state of the Portuguese real estate market and the pros and cons of renting vs buying.


Apartment and house


Understanding the Market


In the last decade, rental prices have experienced a steady and substantial increase. This upward trajectory is primarily attributed to a surge in demand that surpasses the available supply, creating a scenario of limited housing options. Consequently, this heightened demand has led to inflated rental prices, providing landlords with substantial influence over both the conditions and the pricing structure within the rental market.


house price index in portugal
Portugal's House price index (2013-2023) - according to the Bank of Portugal

Simultaneously, and mirroring the rise in rental costs, mortgage rates have also shown an upward trajectory. The interplay of these factors underscores the intricate balance within the real estate landscape, where both renters and prospective buyers are met with a market shaped by high demand and limited supply.



Financial Considerations


The key financial consideration when comparing renting and buying is the monthly cost. Generally, it may cost more monthly to rent than to buy in Portugal. However, the decision depends on individual financial situations, long-term commitment plans, and location preferences. 


man piling coins on table

For example, becoming the owner of a property requires a more thorough examination of your end goals and more detailed analysis on your current employment and financial status and family situation. For many, buying a home represents a step toward stabilization, requiring a thorough examination of their options, budgeting, and the adoption of various financial plans.



Rental or buying


There is not a correct answer as to whether buying or renting is best as this decision depends on your personal and economic situation, as well as your goals.


On the one hand, the awareness that with renting long term, you have the feeling of throwing money away because you will never own the property.

On the other hand, buying a home is a decision with a lot of financial commitment required that ultimately affects your life choices. 


Nonetheless, let’s get into more details about the pros and cons of each.



Pros and Cons of Buying


Pros:

  • Equity Building: When you buy a property, your mortgage payments contribute to building equity over time. This can serve as a long-term investment and a source of potential financial stability.

  • Stability and Predictability: As a homeowner, you have more stability and predictability in your housing costs. Unlike renting, where landlords can increase rent, your mortgage payments are generally more fixed.

  • Customization and Control: Homeownership allows you to customize and modify the property according to your preferences. You have control over design choices and can make structural changes without needing permission from a landlord.

  • Return on Investment: Real estate has the potential to appreciate over time, providing you with a return on investment if you decide to sell the property in the future.


Cons:

  • High Initial Costs: Buying a property typically involves significant upfront costs, including a down payment, closing costs, and other associated fees.

  • Responsibility for Maintenance: As a homeowner, you are responsible for property maintenance and repairs. This can be a financial and time-consuming commitment.

  • Market Risks: Property values can fluctuate due to economic conditions, and there is a risk of not getting a positive return on investment if the market experiences a downturn.

  • Limited Flexibility: Homeownership can limit your flexibility, making it more challenging to relocate quickly or make sudden lifestyle changes.

  • Property Taxes and Other Expenses: Besides mortgage payments, homeowners need to account for property taxes, homeowners association fees (if applicable), and other ongoing expenses that can contribute to the overall cost of homeownership.




Buying Process and Costs


keys and miniature house on a wooden table

When you choose a property, the first step of the buying process is to formalize the agreement by signing a promissory contract. Alongside this commitment, you'll be required to make an initial deposit, typically amounting to around 20% to 30% of the property's value and this amount is non-refundable. On the other hand, if the owner decides to withdraw the agreement, they are obligated to reimburse you twice the deposited amount.


The finalization of the agreement happens through the signing of the final Deed or “escritura”.


Besides the down payment of the property, you are also responsible for the payment of the respective fees and taxes. Typically, you can expect the following additional taxes:


  • ​​Municipal Property Transfer Tax (IMT): 0% to 8%, this tax depends on factors such as property type, value, location, and if it’s a temporary or permanent residence;

  • Municipal Property Tax (IMI): An annual tax, varying between 0.3% and 0.8% of the property's value;

  • Stamp Duty (IS): Calculated at 0.8% of the property price;

  • Registration Duty: Approximately €500, the cost depends on where you choose to register the property;



Pros and cons of Renting


Pros:

  • Flexibility: Renting provides flexibility in terms of living arrangements, allowing you to easily move to different locations or upgrade/downsize your living space as needed.

  • Lower Initial Costs: Renting generally requires less upfront costs compared to buying a property. You won't have to deal with a substantial down payment or other upfront expenses associated with homeownership.

  • Maintenance Responsibility: The responsibility for property maintenance often falls on the landlord, relieving you of the burden and cost of major repairs or upkeep.

  • No Property Value Risk: As a renter, you are not directly affected by fluctuations in property values. Market changes do not impact your investment.

  • Easier Relocation: Renting is advantageous if you plan to stay in Portugal temporarily or if you're unsure about your long-term plans. It provides an easier path to relocate when necessary.


Cons:

  • Monthly Expense: Rent is a recurring expense, and over time, it may add up to more than the cost of a mortgage, without building equity in a property.

  • Limited Control: Renting means you have limited control over the property. You may need permission to make significant changes, and you are subject to the landlord's decisions regarding the property.

  • No Equity Buildup: Unlike homeownership, where your mortgage payments contribute to building equity, renting does not offer this long-term financial benefit.

  • Rent Increases: Landlords may increase rent, potentially making it more challenging to budget for housing costs in the long run.

  • No Investment Return: Rent payments do not contribute to property ownership, and you won't benefit from potential property appreciation.



Conclusion


In conclusion, the decision to rent or buy in Portugal depends on various factors such as financial capacity, long-term commitment, and location preferences. While buying may offer stability and potential returns, renting provides flexibility with fewer financial commitments. It's essential to carefully weigh the pros and cons based on individual circumstances.


For more information and assistance with your move to Portugal, you can reach out to us at contact@savvycatrealty.com directly.  You can also check out our video about this topic here:




Don’t forget to download our free 'Move to Portugal' Workbook from our website





Making an informed decision is key to ensure a smooth transition and a successful experience in the vibrant Portuguese real estate market and we’re here to help!


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