The Smart Way to Buy an Overseas Rental Property That Really Pays Off

Editor’s Note: This story appeared on Live and Invest Overseas.

In 2015, Lief and I went to buy a rental house on the Algarve coast in Portugal.

After eight years of economic crisis, the country was at the bottom, but we believed it would turn around.

We explored the coastal towns and villages from Tavira to Ferragudo, all beautiful.

It was Lagos that caught our attention. Its cobblestone square is marked by brightly tiled buildings that we have grown close to over the centuries. We love places with a long history, and Lagos is 2,000 years old. The seaside city was originally a Phoenician-Carthaginian trading post.

Finding an investment property

We visited six places and liked one in particular.

It was at the top of a small winding pedestrian path leading from the main square. Just a three minute walk to the city center but removed enough to be quiet and private.

This can be an investment purchase. However, we always choose to buy something we like. That way, in the worst case scenario—if the market, yields, prices, and currency all work against us—we’re left with an asset that we can personally enjoy.

Yes, we told ourselves as we stood on the roof of the house soaking up the view of the sea, the result of the investment aside, we will look forward to every opportunity to return to this place.

The location and layout ticked our boxes, but what tipped the scale was the unshakable price and enthusiastic salesperson.

We intended to make the accommodation available for short-term rental. The market in Lagos operates in three seasons. Tourists are less in the winter, although we may find tenants at Christmas and New Year willing to pay a premium.

Assumed returns

Our calculations, based on data from both our real estate agent and our market research, yielded an annual return of 8%. Our general expectation of net rental yield is anywhere from 5% to 8%. Another box is checked.

We made an offer and continued shopping.

During the four years we owned the place, we visited four times.

Between those stays, we would wander the beach, explore the old castle, take day trips north and south, and, as often as possible, stay at Praca Gil Eanes at the end of our route. Indeed, this is where you could find me most afternoons enjoying a glass of prosecco al fresco as the sun sets and restaurants display boards advertising the day’s specials.

When we arrived for each visit, we would withdraw some of the euros collected from the rent paid to our bank account in Portugal. Then we use that money to cover our expenses. It was like a series of free holidays in a 15th century city.

In addition to the crazy amount of vacation money, the rent covered all the costs associated with the apartment and left us with a nice-sized and steadily growing euro nest egg.

Rental returns met our 8% projection in the first year and reached the 5% to 8% mark each of our four years, based on the actual purchase price. The problem, if you want to call it that, is that the markets all over Portugal, including Lagos, were informed immediately after the country turned its corner of the crisis.

It’s time to sell

When we visited Lagos four years after our purchase, our agent friend – the one who had helped us find the apartment in the first place – suggested we consider selling.

“I’m sure you can get more than double what you paid for,” he told us.

We didn’t believe him at first, but two other local agents agreed with him. At the highest rate, our net rental return was less than 3%. At that yield, we are sellers rather than buyers.

All properties for sale in the Algarve appreciated significantly during the four years of owning our Lagos apartment, but our house more than doubled in value. Part of the reason was the location and the type of environment. It served as a rental property, but was also comfortable enough for full-time living.

In addition, the place had a unique charm that set it apart. It wasn’t the cookie-cutter beach-resort condo you find along this coast. That I don’t say anything part was part of the reason we bought it in the first place.

This is not a data point to enter into your spreadsheet when shopping, but an important point to remember when comparing potential purchases.

Building a portfolio of income-generating properties offshore is an opportunity to make money and build wealth, yes, but it’s also an opportunity to improve your lifestyle. Remember that – sometimes even prioritize that – when making investment choices.

The exchange rate between the euro and the US dollar hasn’t moved much in the four years we’ve been in charge of the property in Portugal, but it can be and sure has been since then.

This is another reason it is better to shop in places where you don’t just want to make money but also waste time. We were happy to use the euros we were earning locally, which meant we were protected against possible currency devaluations. It didn’t matter to us if the euro lost its strength against the dollar, because we didn’t convert our euros into dollars. We were spending and hoarding them in euroland.

Likewise, when we sold that flat, we kept the money we got in euros, ready for our next EU investment.