Investing in Portugal real estate for “golden visa” second residency

Despite never having a real bubble, real estate in Portugal has dropped like a stone. Suburban homes near the two largest cities of Lisbon and Porto has fallen in value by double digits, while blight in some areas of Lisbon is as bad as that in Spain.

You may remember things to the east have gotten so bad that squatters taking up shelter in some Spanish homes, turning entire neighborhoods into modern refugee camps. Alas, it would seem that the bright side for Portugal is that they’re not quite Spain.

After all, Portuguese real estate hasn’t had any of the fanfare the rest of Europe or the world has. Even when I was first there in 1993, the place had missed the early 1990’s boom that pushed values up in Spain and Italy. There was only one year of ho-hum growth in the mid-2000s. Yet last year, commercial real estate investment was cut in half. And banks are now desperate to unload properties.

To do so, they’ve rolled out discounts as high as 12-13%, looking for European and foreign investors to snatch up as many as 10,000 homes this year. Banco Comercial

Portugues is leading the way with heavy discounts. Properties in rustic central Portugal and warm tourist spots like the Algarve are on sale.

Portugal is a member of the old PIIGS and is not exactly a safe haven, but real estate opportunities there do exist if you look closely enough despite a few years of steep price increases. All of this presents an opportunity to those seeking a second residence in Europe. Portugal’s Golden Residence Permit gives instant residence to anyone investing €500,000 in one or more properties.

You can actually spread the investment out over multiple properties so you can use some of the value for your own overseas residence, and the rest for investment. Other options for getting a Golden Residence Permit include investing one million Euros into just about any company in Portugal, or creating ten new jobs in a business, similar to the US EB-5 program.

But let’s focus on real estate. Like the US program, rich Chinese are flocking to Portugal. Real estate-hungry Asian investors are all too happy to plunk down a half-million Euros for the right to live and travel anywhere in the Schengen Zone. After five years of minimal residence requirements (seven days the first year, fourteen days thereafter) you can become a permanent resident of Portugal.

One year later – six in total – you’re eligible for naturalization and a second citizenship if you can speak some Portuguese. While I tend not to be hugely bullish on European investments for obvious reasons, Portugal has gotten the short end of the stick being lumped in with Spain and Italy. Whenever friends of mine return from vacationing in Italy, I asked them how many strikes they dealt with during their trip, and the answer is never zero.

In Spain, similar antics have played out in the form of the squatters I mentioned earlier. In some cities, they’re everywhere. It’s total chaos. However, Portugal has a bit more order going for it.

The strengths of the Portuguese real estate market

To start, the government actually constitutionalized property protection after the 1974 Revolution, and hasn’t supported any of the “occupations” of apartments that the Spanish government has made government policy by letting jobless homeowners squat for two years.

Additionally, while Americans were fawning over real estate shopping sprees, center-right Portuguese officials weren’t pushing mortgages to unqualified buyers. That’s why 2006 was the only quasi-boom year for local real estate; no NINJA loans meant no wild speculation. People bought houses to live in, not to become “no money down millionaires”, and austerity among other factors helped put the brakes on the whole thing.

In certain areas of the country, there were never sprawling developments of tacky tract homes that swallowed up huge areas of exurbia. Even driving through conservative Ireland, you’d see dozens ofcheap-o developments on top of old farmland heading through isolated areas far west of Dublin on the M4 freeway.

As a result of some this more reserved environment, some old-school tourist destinations which have retained their authentic charm are now available at much lower prices thanks to uniformly lower real estate values. The Portuguese people also seem more open to belt-tightening.

The country is riding the EU export train, recently ramping up exports by as much as 10% in just one month. Locals seem to get that the party of endless spending on imported goods, and the luxurious lifestyle that comes with it, is over. Rather than threaten revolution like the Spanish, they’re getting down to business and focusing on their strengths, including agriculture and even clothing and shoes that have remained competitive with Chinese products.

And if you like great food and wine, northern Portugal has some of the best boutique wineries you’ll find anywhere. Just spend a day or two inside the Duoro Valley – you’ll love it. If you’re looking for a European property investment with a warm weather climate, Portugal may be worth considering. The nonsense going on there pales in comparison with other southern European PIIGS states.

Where to invest to qualify for your Golden Visa

Depending on what kind of property you’re looking for, you can likely find a great deal. [UPDATE February 2015: The “great deals” are fewer and far between thanks to thousands of Golden Visa investors driving prices up, but Portugal is still cheap by European standards.]

Prefer a more rural setting? I’ve seen a few five-bedroom, nearly-2,000 square foot houses in central Portugal villages for barely $100,000. Apartments in Lisbon will run $200,000 and up for more cramped quarters in the city center, or 1,000-ish square feet as you head a few stops on the metro line. And for a little bit more, you can join former investors like The Beatles and own a home in the party-friendly beach areas of the Algarve down south. Values there have made properties quite attractive to rich Russians and Chinese looking to establish a second residence in Europe.

If you’re investing for a residence permit, you’ll need to hold your investment through the five-year investment window. Buying real estate in Portugal through a foreign corporation exposes you to hefty transaction taxes, so it’s best not to use your offshore corporation to buy.

The good news is that, at least for now, foreign real estate owned in your name is not a reportable financial asset in the United States. Owning overseas property is a great way to diversify your assets and invest in a place you’d like to live. While I would always support keeping your offshore bank account in a separate country from your second residence, Portugal is a nice place if you like a Mediterranean climate.

You can enjoy the local wine and port wines in Porto, while beautiful cliffs and fairy tale castles like those in Sintra add to the landscape. Just don’t eat the overpriced appetizers the restaurant sets out on the table.

With Portugal’s culture of negotiable real estate prices and openness to low-ball bidders, now may be the time to snatch up a property there if you’ve always dreamed of living in Lisbon or wine country or along a rocky beach.