An investment case study on buying and letting an office. And, whilst we’re at it, about exemption from a hefty IMT tax. We’ll explain how we bought an office with an original value of half a million for just 320 thousand and let it out at 8.25% – all within a month.
We have a client who is prepared to invest several million euros in commercial property with a yield of 5%. Over the summer and autumn, we viewed numerous liquid office properties for sale from Lisbon to Cascais. A week after one of these viewings, we received a call from the owner of an office in Expo, who had initially wanted to sell it for 500K but, due to a lack of interest, had listed it on Idealista for 425 thousand. The owner was ready for an urgent sale at a discount of 100K and knew that we had the funds available and were ready to proceed. We gathered the necessary documents as quickly as possible and arranged an appointment with a notary.
As well as a substantial discount on the deal, a second pleasant surprise awaited us – we were exempted from the IMT rule, meaning an additional saving of 20,000. We hadn’t been expecting this, as the seller’s agent had been misinformed.
And then came our third stroke of luck – we found an equally quick tenant from the north of the country. Our client wanted to let the office at a rate of €1,800. We got a bit greedy and set the rent at €2,200. In less than a week, an IT company got in touch with us and took the premises without haggling. They’ll even be doing the refurbishment themselves. Here, the return on investment is calculated as gross profit, before tax, and without taking into account the increase in the property’s value. Thus, the rental return is 8.25%, and we slipped a 5% annual rent increase into the contract; furthermore, we can expect the property’s value to appreciate naturally by up to 5 per cent per annum.
And a separate point regarding exemption from IMT. This is a tax on the transfer of ownership rights, which, in the case of commercial property, always amounts to an exorbitant 6.5%. How can you avoid paying it? For 5–6 thousand euros, you can buy a company that is exempt from IMT. Until recently, it was possible to set up a new company whose main activity was the buying and selling of property and to carry out a minimal transaction involving a plot of land worth next to nothing. That’s it – the new company is now exempt from the property transfer tax for the following year. However, in November 2022, a new law was passed stipulating that, to qualify for the exemption, the company must have carried out resale transactions over the previous two years, rather than just one. Another change is that the tax must now be paid in any case, but the state subsequently refunds it. It is also important to note that a property held for resale must be retained for no more than three years; otherwise, the tax is withheld.
