Return on investment for a holiday home in the Algarve: costs, taxes and calculations explained simply

Are you planning a property investment in the Algarve? The popularity of the region as a holiday destination and the strong demand for holiday properties make an investment particularly attractive. But how do you calculate the yield on a holiday home in the Algarve, and what costs and tax aspects must be taken into account? In this blog post, you will get a comprehensive overview of all relevant factors to start your investment well informed.

1. The income side: rental income through short-term rental

1.1 Seasonal fluctuations

Rental income in the Algarve is highly seasonal. In the high season, June to September, holiday apartments can often fetch significantly higher daily rents than in the low season.
For example, for an apartment with two bedrooms, depending on the location and equipment, about 180 – 300 € per night are possible in the high season and about 75 – 110 € per night in the low season. A realistic scenario should take into account the average occupancy rate per year, which in the Algarve is in the range of approximately 65% for holiday rentals. This means that an apartment can be rented out on 237 days within a year. However, in particularly popular areas or resorts, occupancy can also be significantly higher. For example, the average AirBnB occupancy rate in Lagos over the last three years has averaged 74%.

1.2 Long-term rental as an alternative or supplement

In addition to short-term rentals, long-term rentals can be an attractive alternative or supplement, especially in the off-season as a so-called "winter rental" over several months. Retirees or digital nomads in particular are often looking for such options. Monthly rents for long-term rentals for two-bedroom apartments average between €1,500 and €2,500 plus water and electricity costs, depending on the location and amenities. A combination of short-term and long-term rentals can help to optimally utilize the property throughout the year and generate regular income.

1.3 Target group and marketing

The choice of the target group has a direct influence on the potential revenue. Luxury properties attract mostly wealthy tourists, while smaller apartments are ideal for families or couples. Platforms such as Airbnb and Booking.com play a central role in marketing. These two portals are among the most popular in the world. Nevertheless, smaller platforms can also be an option.

The brokerage commissions of the booking portals vary and are usually between about 3% and 16% of the host earnings. Due to the high popularity and international orientation of Airbnb and Booking.com, it is often sufficient to be present on only one of these platforms.

2. The cost side: ongoing and one-off expenses

2.1 Acquisition costs

When buying a holiday home, the following one-off costs are incurred:

• Purchase price of the property: Varies greatly in the Algarve depending on the location (€2,000 to €7,000/m²).
• Real estate transfer tax (IMT): Progressively graded, between 1% and 7.5% of the purchase price.
• Notary costs and land register entry: Around €1,000 to €2,000.
• Stamp duty: 0.8% of the purchase price
• Lawyer's fees: approx. 1 – 1.5% of the purchase price

The real estate agents commission is waived for the buyer, as in Portugal the seller takes over the commission.
On the subject of ancillary purchase costs, please also read our detailed blog post "Incidental costs: Taxes and fees when buying property in Portugal in 2024" to get detailed and up-to-date information about the one-off and ongoing costs when buying a property.

2.2 Running costs

• Property Management: If you don´t want to manage your property yourself, these services usually include cleaning when changing beds, washing bed linen and towels, managing bookings, check-in and check-out, and communicating with guests. These services typically cost 25% to 35% of rental income.
• Maintenance: About 0.5 - 1% of the property value per year.
• Property Tax (IMI): 0.3% to 0.45% of the cadastral value of the property.
• Insurances: Building insurance and liability insurance (approx. 300-600 €/year).
• Community fees (for apartments in holiday resorts): Varies depending on the complex (€50-500/month).
• Electricity and water: The costs are around 50 – 200 € per month. However, in the case of long-term rentals, these costs are usually borne by the tenants.

3. Tax aspects in Portugal

Portugal has special tax regimes for property owners, especially for holiday rentals.

3.1 Income Tax (IRS)

Rental income is taxable. A flat-rate approach is usually used for short-term rentals. For non-tax residents in Portugal, this is 28% of 35% of the net turnover from the rental, the other 65% is not taxed. However, if you are a tax resident in Portugal, or if you opt for the regular taxation procedure, the income from the short-term rental (Alojamento Local) is considered commercial income and is therefore subject to progressive income tax rates depending on the total income.

3.2 Value added tax (IVA)

Short-term rentals are exempt from VAT under certain conditions. However, higher turnover (over €15,000 per year, valid from 2025) may result in a VAT liability. In this case, however, VAT is only 6%.

4. Gross and net yield: What's the difference?

An important aspect in the calculation of yields is the distinction between gross and net yields.

4.1 Gross yield

The gross yield is calculated as the annual rental income in relation to the purchase price of the property, without taking costs into account.
The formula is:

Example: Suppose a property costs €500,000 and generates annual income of €40,000:

Gross yield = (€40,000 / €500,000) x 100 = 8%

4.2 Net yield

The net yield, on the other hand, takes into account all running costs and tax burdens. It gives a more realistic picture of the actual profitability.
The formula is:

Example: With a total cost of €20,000 and taxes of €3,920, the net profit is as follows:

Net yield = ((€40,000 - €20,000 - €3,920) / €500,000) x 100 = 3.22%

Why is the distinction important?

The gross yield is suitable for a quick comparison of properties, while the net yield is crucial for long-term planning and evaluation of profitability. Investors should keep both values in mind in order to make informed decisions.

5. Average yields in the Algarve and Portugal

Recent market reports and experts estimate that gross yields in the Algarve average between 5% and 8%. These values vary depending on the location, equipment and target group of the property. For example, high-quality properties in prime locations, such as Lagos, Albufeira and Vilamoura, achieve up to 8% and average properties in less touristy areas around 5% to 6%.

For Portugal as a whole, gross yields in major cities such as Lisbon and Porto are often similar or slightly higher, often between 5% and 9%, as demand for rental properties here is consistently high. Less touristy or rural areas, on the other hand, achieve lower yields of around 3% to 5%.

6. At what yield is the investment worthwhile?

Whether an investment is worthwhile depends on the individual goals and circumstances of the investor. Nevertheless, there are guideline values.

6.1 Minimum yield as a guide

Many experts recommend that the gross yield should be at least 4% to 6% to consider a property a profitable investment. This usually covers ongoing costs and minor market fluctuations. With a gross yield below 4%, the investment is often risky, unless you speculate on a strong increase in the value of the property.

A net yield of 3% or more is often considered a good goal because it already takes into account ongoing costs and taxes.

6.2 What does "rewarding" mean?

The yield alone is not the only criteria for whether an investment makes sense. Other factors that should be included in the considerations are the following:

• Value Appreciation & Inflation Protection: Real estate in the Algarve has increased in value by an average of 8% per year over the last 10 years. If your property is located in a prime location in a top tourist region, the increase in value can make the yield even more attractive. In addition, a property offers protection against inflation.
• Long-term potential: For example, through planned infrastructure measures in the area.
• Long-term goals: Are you planning to use the property yourself later or pass it on to your children? Such factors can also affect profitability.

7. The location: A decisive criterion

As already mentioned, the location is crucial for holiday properties to generate higher income. But what makes a good location?

• The view: An apartment or room with a sea view guarantees higher income.
• Orientation: A balcony or garden facing south or southwest for plenty of daylight and good sunlight is ideal.
• Infrastructure plays a central role in the attractiveness of a holiday property. Good accessibility of shops, restaurants and leisure activities is essential. Especially in the Algarve, the proximity to beaches, sights and sporting activities such as golf courses, water sports centres or tennis facilities are a significant plus. Amusement parks or zoos in the area can also increase the value of a property. A high-quality infrastructure not only ensures an increased quality of life for guests, but also contributes to better occupancy.

8. Popular sizes and property types for vacation properties

The choice of the right object size depends on the target group. Apartments with ideally one to two bedrooms, which are suitable for couples as well as (smaller) families, are particularly popular. Furthermore, houses with their own pool and garden are just as popular for families or groups. Townhouses or semi-detached villas are a more affordable alternative to detached villas that still offer comfort and space. If the apartment is located in a tourist complex with pool and playground and other amenities, this of course also increases the attractiveness.

9. Yield calculation: An example

Let's say you buy a holiday home for €500,000 in a popular location near the sea.

Revenues:

Average occupancy: 237 days/year
Average daily rental: €170/night

Annual income: 40.290 €

Ongoing annual costs:

Booking platform commission (e.g. AirBnB 3%): €1,208.70

Property Management (25%): €10,072.50

Maintenance (0,5%) : 2.500 €

Property tax (0.375%): €1,875

Insurance: 400 €

Community fees: 3,000 €

Electricity & water: €1,500

Total cost: €20,556.20

Net profit before tax: €40,290 - €20,556.20 = €19,733.80

Tax burden: 35% of income taxable: €40,290 x €0.35 = €14,101.50

Tax rate: 28 % (average) ⇒ €14,101.50 x 0.28 = €3,948.42

Net profit after tax: €19,733.80 - €3,948.42 = €15,785.38

Yield:

Gross yield = (€40,290 / €500,000) x 100 = 8%

Net yield = (€15,785.38 / €500,000) x 100 = 3.16%

10. Conclusion: Is a holiday apartment in the Algarve worth it?

Investing in a holiday home in the Algarve can offer an attractive return on investment, especially if you are strategic and purchase a property in a sought-after location. However, the exact calculation of income, costs and tax burdens is essential in order to realistically assess profitability.

If you have any questions about choosing the right property or need more information, we are always happy to help. Contact us for a non-binding consultation: To the contact form

Legal notice: The information presented here is not legally binding and no legal claim arises in the event of errors. If you have any legal questions, we recommend consulting a lawyer.