The Biggest Advantage of Investing in Fund for Your Golden Visa

Unlike previous years, in 2021, over 75% of our clients have chosen to go with the fund route.  We are not only seeing Americans, but also clients from Asia like Hong Kong, Taiwan, China and India are choosing fund over property.  

This shifting of trend is likely caused by the following reasons:

• With the pandemic, many clients couldn’t come over to view the property in person and are not confident in buying a property without seeing it, or knowing the area
• Not too certain where property market in major cities will head from next year on when residential properties will no longer be qualified for Golden Visa in major cities like Lisbon and Porto and other coastal area
• Residential properties in Lisbon, Oporto and most of the costal areas will no longer be qualified for Golden Visa in 2022, which could make it riskier (if you are not able to catch the online submission deadline of December 31, 2021) for a Golden Visa process that starts in the later part of 2021 
• A wider selections of funds in terms of quantity, investment scope and strategy 

We have written an article about fund and property options where you can take a closer look of these two alternatives – 7 Advantages of Fund Investments for Portugal Golden Visa.

In this post, we will focus on the two most notable advantages of funds over properties and drill into details.

Portuguese Citizenship / Permanent Residence by Investment (The Complete Guide on the Aftermath of Portuguese Golden Visa)

Fund is More Cost Effective

Lower entry/ subscription fee

• Subscription fee of average 1%-2.5% on funds vs. IMT + stamp duty of 5%-7% on property

• Sometimes, the fund subscription fee (depending on fund) are deducted from the 350k of fund invested, whereas the IMT + stamp duty are paid on top of the investment 

Lower exit cost

• 0% on the exit of fund vs. 5% on real estate agent commission

Lower tax

• 0% tax on income and profit from fund vs. 28% tax on income and capital gain from property

Lower ongoing cost

• While the management fee can range from 1%-2% on average for funds (most are paid by the fund, no need for investors to pay on top),
• A typical property management company charges 1 month rent for long term rental and 20% – 30% of revenue for short-term rental. 
• On top, real estate agent normally charges 1 to 1.5 month rent for commission of getting long term rental. 
• Additionally, maintenance fee for a property when things break down can be expensive and a big hassle.  In fund, there is no maintenance needed. 
• Lastly, properties pay property tax of around 0.5% – 1% per year.
  

Simulation of profit/ loss comparison

For the sake of comparison, we have done a simulation below on income and expense of going through fund and property with 350k investment.  Please note that starting from January 1st, 2022, the minimum investment amount is 500k.

The below calculation didn’t take into consideration of the following

• properties may be a new built and won’t be completed until 1-2 years later, meaning the rental income won’t come in until then
• any vacancy period for rental
• any maintenance fee 

Assuming no gain / loss on the captial invested.  For property route, you get a loss of 16,183€, while for fund route, you achieve a gain of 45,500€. 

The difference of the profit/ loss for a typical property and fund investment comes to 61,000€!

Fund is More Diversify

Having said enough about the big differences on profit/ loss.  We now introduce the single one biggest advantage of fund investment over property/ hotel project investments – the diversification of asset investment.  And it is also one of the utmost concern of Golden Visa investors –  to diversify, and in turn, lower the risk.

By regulation, Golden Visa qualified fund can’t invest more than one third of its capital in any single company/ asset.  Most funds invest in 3 – 20 different assets/ companies. Whereas in property, most people just buy one property, or one project.

Further diversification

Clients can easily further diversify their risk by investing into more than one fund. For example, they can combine a low risk fund with a higher risk fund to gain some upside while having a conservative fund as a foundation.  Or they can choose two to three low risk fund but invest in different areas to further diversify the risks.  

This is not easy to do with property or hotel projects, with the limitation of the followings

• budget – 280k, 350k or 500k can only get you as far as 2 to 3 properties
• location – you can buy in different cities, but management would be a headache
• types of property – the budget of 350k or 500k limits the choices you can have on the type of real estate assets (most clients just focus on residential, the budget won’t allow you to buy a commercial space for supermarket or agricultural land for corporate farmers).  The budget also limits the size of your properties, meaning you may end up buying only studio apartments.  

Clients may end up buying 2 residential properties in the same city.  But the diversification is just on the number of properties, but not on the size, the location, or the asset type of the properties.

With funds, you can invest in areas where you as an individual won’t have the budget or the expertise to invest in.  Just under the umbrella of real estate, you can choose from rehabilitation residential to luxury residential, from commercial to agricultural and logistics assets, from development projects to rental premises.  You can also easily diversify into other business scope such as environmental, IT and so on.

More and more of our clients is choosing to invest in more than one fund.  We anticipate that this trend will be very prominent next year, when the minimum threshold goes up to 500k.
 

What should I consider when choosing a fund?

Choosing what to invest in for a one-off 350k investment is no easy task.  Here are a few points to think about as a starting point.  

• To start with, you should know your own risk profile, what is your objectives in the investment, how much return are you looking for and how much risk can you take?
• Then, you should look at the return potential of the asset class where the fund invests
• You should also look at the leverage of the fund.  The more leverage they use the more pressure they will have to generate income or sell the asset to pay off loans.  

Below are some of the funds that are qualified for Golden Visa.  They differ in investment scopes, strategies, industries and so on.  Please note that funds have subscription opening period, so the list is not static.  We have funds closing and opening constantly.  Please contact us if you would like more information.  

We would be happy to arrange consultation call to discuss about Golden Visa process and timeline, give you a background on the Portugal fund industry, and to discuss in details the different options you have and things to consider when choosing an investment.

Check out the latest Portugal Golden Visa eligible funds.

Our strength is finding the appropriate projects according to your need and providing detailed analysis on the different investment options for you to make an informed decision.

7 Advantages of Fund Investments for Portugal Golden Visa

Learn more about the Portuguese Golden Visa and how our products and services can help you can get your Portugal residency and citizenship!

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