alojamento local project

For anyone that is not familiar with the term *Alojamentos Local* within the Portuguese Hotel Industry, it is the New Law classification for the operation of various types of Accommodations Establishments for personal and business travellers to Portugal. One of these classification types is Apartments For Rent in Portugal.

A Little History

A few years back when Mr. Francisco Gouveia fell ill with a Brain Stroke and was not able to continue with his Alcochete Project, we made it our responsibility to further study and try to fulfill his idea of renting and building apartments in the center of Alcochete. Because his illness prevented him from explaining to us all the necessary details about his idea and project, we had to retrieve all written records and notes and start from there.

The Language Obstacle

The first thing we realized was that we would need a translator because all records were written in Portuguese. So we hired Google Translate (Just Kidding on the Hire Part), by using the Free Online Google Translate Gadget, this made it possible for us to start understanding most of the text content written in Documents.

Starting Point

By now we had a general idea of what Mr. Gouveia's plans were for the ready to rent apartments and for the to be new apartment building. We also confirmed some of the information we had gathered from his past dealings with the Building Contractors, Architects, Real Estate Agents, Lawyers and Others. This gave us a good overview of the matter, from which we could begin.

Plan of Action

After debating the various alternatives of what to do next and what direction we should take to use this Property Asset to generate revenue, we decide the best option was to:

1. First test the Apartments Rental Market via *Apartment Rentals Rent-ability Research*,

2. Study the current local *Rental Laws* that would fall under our rental category,

3. Look at *Property Purchase* banking regulations and mortgage options in order to determine the Economical balance difference between *Renting vs. Buying Apartments*,

4. Examine the local Finance Department regulations and gather the numbers relating to the Operating Expenses and Income Projections for the Property.

Research Begins

 

  1. Research: Apartment Rentals Rent-ability

    About the Apartments: These Apartments were built in 2005. New construction, each includes 2 Bed rooms, Kitchen, full bathroom, Living room, Front Veranda and Back Terrace. About 70 sq. meters in size. Located in Alcochete City Center, a 20 minute bus ride to Portugal's Capital City *Lisbon*.

    In order to research the rent-ability of these New Apartments, we placed "For Rent Advertisements" in 2 National News Papers for 1 month, Correio da Manhã and Diário de Notícias.

    We also signed non-exclusive rental agreements with various Rental Real Estate firms to list the Apartments for Rent, ERA Alcochete, Multiuniversos Alcochete, VertiKal Alcochete and a few others.

    After 2 months of doing this rent-ability research, we conclude that the "Apartment Rental" for this Alcochete Location the Market was very Small. In other words, the majority of potential rentals were mainly people between the ages of 18 and 35, they were either in School and would need a Government Subsidy to afford the minimum rent amount, separated or recently divorced individuals looking to rent as a temporary accommodation until they could move on in life.

    Yes there were a lot of interested people, but they simply could not effort the monthly rental of 350 - 450 euros per month. Considering the minimum wage for full time employment was about 400 euros per month.

    In other cases people interested in renting the Apartments would have no references, no guarantors, bad credit and such.

    Conclusion: Our Apartment Rental Market for Portuguese Residents was Small.

  2. Research: Apartment Rental Laws

    After spending numerous hours reading through Law Books and talking to various Real Estate Firms. Our research results in this area was confirm by Maria João a Lawyer. She basically said that in the Portuguese Apartment Rental Laws there were only 2 Types of Rentals available in our case:

    1. 5 Year Rental
    2. 1 Year or less Short Term Rental


    She also further explained that it was permitted within the Law to set-out and execute a Rental Contract for various *Rental Periods*, but in any of these cases if a rental matter ended up in court, the judge will look at the Tenant as the weaker side and the Landlord as the Stronger side and Judge the case from there. You could NOT evict a tenant without a strong reason and even then that may take years to get Judgement in the Courts.

    This would be a problem for us because we did not want to be tied down to any 1 year, 5 year or any other rental term agreement with such regulations. Because we did not know what the future would hold for Mr. Gouveia's health and also the longer term plans for the Apartments and the entire property. By renting the Apartments under the then present Law, it would mean that the Tenant could not be given notice to vacate in the event we decide to Build on the Property for example.

    Another important factor we found was the *RENTAL RISK* based on the quality of interested tenant within our Market Share. As we talked to various Landlords, everyone had a horror story to tell about one or more of their tenants and how complicated it was to Evict Them even within their rights. These Tenants would continue to occupy the Apartments and Pay NO rent, according to some Landlords. This was something we learned about during the research that we had not though about. The potential *High Bad Debt Rental Risk Factor*.

    This *High Risk Factor* element was added to our To Do List. We looked back at the Apartments Past Rental History and there it was. One of the Rentals was a *Bad Debt*. As it turned out, the said Apartment was Rented by VertiKal Alcochete to a Tenant that was there for about 1 year and Defaulted On Rent Payments for 5 Months, a total of 2,000 euros of Apartment Rental Revenue that was never recovered and lost. Why? the Tenant lost their Job. Ok, it happens, let's move on....!

    Conclusion: The Rental Laws were NOT in our favor. No Rental Termination allowed without a strong reason. To Build on the Property was Not a strong reason. High Bad Debt Rental Risk Factor.

    Resource: Sample Rental Contract : PDF Download

  3. Research: Renting vs. Buying Apartments

    Yes there were people that were "IDEAL TENANTS" and could afford the rent and pass the credit check, but such potential tenants that could afford the rental amount and were the perfect tenant with good credit rating, they would Not Rent the Apartment and go directly to the bank, take out a mortgage (80 year mortgage for example), pay very little mortgage payments every month and with some cases it cost more to rent than to buy. Also the initial buy deposits were very low, one could buy the Apartment with a small buy deposit and *Own It*.

    Conclusion: According to bank's lending and mortgage policies and rates at the time, buying and owning an apartment was the way to go. It made no economical sense to the vast majority to rent.

  4. Research: Finance Dept., Operating Exp. and Income Projections

    The Finance Department is very easy to work with for the most part. They are online and a large amount of information is available as long as you own a computer and have Internet access. The only thing we found it lacked was in the actual transactions end of things. Transactions had to be done at your local Finance Dept. and this could mean waiting in line to pay... for some time!!! (eeerrrhh).

    As for the Operating Expenses Information, this was easy to gather and they were:

    Realty Taxes, Misc. Expenses and the Pay Down on the Capital Asset Expense of Building the Apartments. Of course in the event of a Non-Paying Tenant a Bad Debt entry and collection expenses would be added to the Income Statement.

    As for Income Projections, that too was easy to calculate. Apartments Rental Income for the year, less vacancy months plus any other Agent Rental Fees. By the way, the normal base Agent Rental Fee is 1 Months rent equivalent to the Monthly Rental rate of the Apartment.

    Conclusion: Yes, it would be profitable if the vacancy rate were low.
 

Research Completed, now what?

Well, one thing was clear, there was no market for these New Apartments. Yes we could of rented them for $ 350 euros per month but the High Risks, Vacating Restrictions and the Low rent we could get for them all played a part in our decision Not to rent them out just yet. Why? look at it this way, these were Brand New Apartments built in 2005 in a great small town of Alcochete, Alcochete wears its culture front and center, its near Lisbon, footsteps from the Largest Shopping and Entertainment Complex (FreePort), its a cross roads location for all of Portugal's major highways and more....! talk about a hidden treasure under a Vail of blue sky for most of the year with warm weather.

Now we are at a stand still, with new apartments and operating bills to pay. What do we do? ...work to find a solution day and night for a few weeks. Then, it all came to us, we decided that we needed to find a Niche market and adapt the apartments to it. We basically crossed off most of the Niche Ideas and only 2 remained. One was something to do with Technology and the other with Tourism.

Why Technology or Tourism?

Technology

Looking around Portugal and Europe, we found it to be well advanced in Technology and the best part was that even in a small place with a relatively small economy such as Portugal, the latest tech products could be found and purchase in any of the major chains outlet stores. This was not the case in the USA or even Canada when shopping around for the same type products. Yes, technology and its products were easy to buy in Portugal and its greater European expanding market place.

Tourism

Tourism was another avenue we were interested in. The weather, food, culture and other factors makes Portugal a great holiday destination for vacation travel. Expo in 1998 gave it a strong boost too and it is located across the Vasco da Gama Bridge from Alcochete. Also, it was extremely affordable for tourists to rent Apartments at a good rate that would equal 4 or 5 time more the rental amount we would rent to the Portuguese residential market.

Conclusion: Due to what we had on hand and the fact we could use our own experience with the internet to market the apartments worldwide, we decide to further explore the Tourism Idea/Concept.

Research: Apartment Rentals to Tourists

  1. First on our list was the local City Hall C.M.A. ( Câmara Municipal de Alcochete ) to learn what they could offer in terms of support and guidance for local future Business Ventures, Urban Development, Preservation of Culture, and Tourism Marketing. We met with their New Business Ventures representitive and she was very helpful in providing us with information and the proper steps to start a business.

  2. With Internet Marketing we found it to be a little populated with 3rd. party re-sellers. This would give us an upper hand because we could setup our own in house website and internet marketing and rent these Apartments directly to Short Terms Guests. Notice we are begining to us the word Guests and NOT tenants? ....Right from the begining we could see this internet stuff be a great asset due to our group being internet nerds to start with (lol). This made us feel a little more comfortable.

  3. Next up was the Legal Scheamel Laws relating to Hotels and Apartment Rentals we had to learn about.

    1. The Old Law

      We spent at least 1 month reading through the Old Laws relating to this Rental Business, we had it all figured out, we were ready to submit the Permit Application, that same day a new Law came out. Serious.

    2. The New Law

      The New Law is a lot simpler we must say. For one there are only about 17 pages where the Old Law there were at least 50. If that's not proof of simplicity to a certain degree than a bear does not sh*t in the woods.

      Diário da República March 7-2008 New Law

      Diário da República June 25-2008 Portaria n.º 517/2008


    ....to be continued next week.




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