Funds VS Real Estate for the Portuguese Golden Visa

The Portuguese golden visa is one of the most popular residency by investment programs globally, having approved over 10,000 applicants and their family members in the past eight years. Investors can obtain Portuguese residence - eventually qualifying them for citizenship - in exchange for a simple investment in the country's economy.

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While the golden visa's simplified procedure, endless benefits, and family-inclusive nature all play a major role in making it such a prominent venture, but there is another significant factor to consider, the variety of investment routes on offer under the umbrella of the golden visa make it more attractive for prospective applicants.

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• Purchase property for 500,000 euros. 
• Purchase renovated and rehabilitated property for 350,000 euros, this option may be eligible for a 20% discount if property is in a low-density area, making the minimum threshold 280,000 euros
• Capital investment transfer in the amount of 1.5 million euros 
• Investing 500,000 euros in investment funds 
• Creation of 10 jobs through 500,000 euros investment 
• Invest 500,000 Euros in research & development activities 
• Capital transfer of 250,000 euros in supporting artistic output or developing national heritage

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Historically, investing 500,000 euros in real estate has been the most common option, while the rehabilitated property option then gained ground. However, as the pandemic hit and made travel more difficult, coupled with the recent changes that restricted the purchase of residential property to the interior of Portugal, making prominent investment areas such as Porto and Lisbon uneligible under residential property investment, the demand for these options decreased.

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This dwindling of applications under real estate coincided with the meteoric rise of applications done through investing in mutual investment funds. 

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The fund option began gaining massive popularity in 2019, and has since achieved a compound annual growth rate of 86.1% in the past four years. This growth is due to a number of factors, but the most vital of them is the massive benefits the fund option offers.

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However, some investors may still want to explore the differences between both the 280,000 euro real estate option, and the 500,000 euro fund option. While there is a clear variation in the initial outlay, there are multiple distinctions between the options when it comes to the finer details that every investor should be aware of, and this piece will take a closer look at those divergences. 

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Due diligence

The most immediate difference between the options comes prior to the investment stage, as conducting proper due diligence on any given venture is vital for financial security and risk mitigation.

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Conducting sufficient research on any given property requires actual presence in the country, on-site visits, and, to be adequately sure, the advice of a real estate expert. While the overall housing index in Portugal points to positive growth, the statistics on the interior are still lacking, and while it is safe to assume they are moving in the same positive direction as the real estate market in Lisbon and Porto, the speed of that growth would understandably be not as impressive. 

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The need to make a trip to see the real estate in person, although not a requirement of the program rather than a sensible one, hindered the property investment option during the heights of the pandemic. This trip was crucial, especially for those looking to invest in rehabilitated projects that consisted of older units that may require a keen eye to spot any underlying issues. 

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The fund option, on the other hand, makes due diligence quite simpler, as it can be completely done remotely. Funds are overseen by the government-run CMVM, where an investor can find and request information on any given fund. Applicants can also hire a lawyer or investment specialist to conduct third-party due diligence, which can be customized to highlight areas of interest. 

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Safety

In terms of secure investments, both options have similar levels of assurance. Real estate, of course, is a popular option amongst investors due to it being a reliable, safe, and tangible asset.

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Funds are also eminently safe, as they are overseen by the government, respond to a robust set of financial and operational regulations, and often have contingencies in place for their investments in the form of collateral and backing by financial institutes. 

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The level of safety of any given investment correlates directly to the due diligence conducted on them, and if sufficient effort is put into the research, both golden visa options boast high levels of reliability.

Taxes

Other major issues to consider are taxation and profitablity. Both options can yield a return on investment (ROI), but in differing ways.

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Real estate can be rented out to obtain profit. However, this method would require investors to handle renting out their properties themselves or shifting that responsibility to a property management firm. The first option requires them to put in effort, while the second will eat away at their profit margin.

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Fund management firms take care of all operational and financial activities of investment funds, and then distribute ROI to the shareholders at the end of each cycle. Investors have no active role or obligations, and they play absolute passive parts in the process. 

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Taxation is another issue, as properties come with three different types of tax:

• Acquisition taxes - paid when purchasing a property in Portugal, and cover both real estate acquisition tax and stamp duty, which are borne by the buyer. Tax rates differ from one area to the next and depend on the property's value but range between 5-6.5%, and maybe exempted in some urban areas. Stamp duty is set at 0.8% of the property value. 
• Annual property tax - Real estate owners in Portugal have to pay 0.3 - 0.45% of the property value, depending on the location, as annual property tax. 
• Rent income tax - Income derived from rent is taxed at a flat rate of 28%

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When it comes to funds, investors don't need to worry about taxation, as their income is not taxed unless they are planning on residing as tax residents within Portugal and collecting their profits within the country. Those living in one of the fifty-two countries Portugal has a tax treaty with do not need to care about the government leveraging taxes on their ROI derived from a fund. 

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Exit strategy

Another critical factor to consider is the liquidation of the investment. The golden visa allows investors to resell or recoup their investment after five years once they obtain permanent residence or citizenship. 

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Real estate, of course, has to be sold. That requires finding a buyer or delegating the matter to a real estate agent. This could take time and require a commission, but as real estate prices continue to grow it remains a solid option.

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Funds have an easier exit strategy, as the investment amount is directly transferred to the investor at the end of the holding period. No sales, no commissions, no third parties; it is done in an instant. 

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Finding the best option

Both the real estate and fund options are great routes to obtaining a golden visa. They have various distinctions between them, however, that could make an investor lean one way or the other.

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To find out which investment option suits you best, contact us today to book a free, comprehensive consultation with one of our experts. 

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