Considering Purchasing and Renting a Property in Italy?

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In the book The 7 Habits of Highly Effective People, author Stephen Covey lists habit No. 2 as “Begin With the End in Mind,” suggesting that effective individuals must have a clear vision of their destination before embarking on any endeavor. Purchasing a property in Italy to rent is no exception.

Renting a property implies, on the financial side, greater attention on the return of our investment and, on the legal and logistical side, an understanding of the different rental contracts available in Italy, alongside the ability to effectively provide the support that tenants expect.

Let’s start with the financial side.

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In my professional experience, I have seen countless buyers thinking about the rental aspect as a “cherry on top” factor. In their mind, they will buy a property they like, and they will also have the option of renting it out to an unspecified tenant and for an unspecified amount. This thinking process rarely leads to optimal results, and it must be flipped on its head.

In the spirit of beginning with the end in mind, we must first think about the different rental options and their expected yield first, to identify a model property that would fit our financial criteria. Within this newly formed group, we can then proceed to pick a property we like.

Transaction costs

In a return-on-investment-driven purchase, transaction costs matter a lot. In Italy, taxes on property purchases are higher for second homes (9%) than for first homes (2%). While the taxable amount is calculated by the Italian tax agency on a lower-than-market value figure, it can easily reach the $10,000 to $20,000 range on most purchases.

On top of that, if the purchase goes through an agent, an up to 4% plus VAT (currently 22%) professional fee will be added to the final bill. Lastly, every purchase must be formalized by a public notary, whose costs are also entirely borne by the buyer and will set you back $2,000 to $3,000 plus VAT on average. In addition, optional expenses for a property inspection, renovations and furnishing may have to be taken into account.

On top of these one-off costs, ongoing property expenses must be considered. These include the annual property tax (IMU), the council or waste tax (TARI) and the condominium expenses (assuming an apartment is purchased). The latter can be very high for properties that have, for example, a centralized heating system, elevators or reception services and are shared by every owner proportionally to the size of their property.

It is therefore very important to look at expenses for at least the past two years and to access the minutes of the condominium meetings to check if any big renovation/maintenance of the common areas (roof, facades, staircases) have been discussed, as these costs will also be shared proportionately.

How rental property works in Italy

The second step of the process requires understanding the legal framework for rentals in Italy.

To start, I would personally suggest avoiding renting out a property long term (i.e. over 18 months). Italian rental laws are extremely asymmetric and tend to protect tenants even if they stop paying rent. This situation is exacerbated by the sluggishness of Italian courts in delivering and enforcing their judgments, leaving property owners without a way to evict tenants for years.

That leaves essentially two viable options: transitory rental contracts and tourist short-term rentals.

Transitory rental contracts are an option designed to offer temporary accommodation between one and 18 consecutive months. While they do not offer tenants the same protection as long-term rental contracts, they are subject to very strict and specific conditions: Rent is controlled; only tenants with specific transitory work, health or family reasons can enter such contracts, and only a government-approved contract template can be used.

Any violation of these conditions automatically converts a transitory contract into a long-term rental contract.

The tourist short-term rental option is, generally, the one foreign owners tend to pick, as it gives them the possibility to enjoy their property while generating income when it is not used. But this is not without potential pitfalls.

In recent years, the Italian government and local administrations have increased the administrative oversight on short-term rentals, requiring licensing and authorizations from the municipality, the police and the Ministry of Tourism. Safety prescriptions have been broadened to almost match those applicable to hotels. Taxes have been increased on the income generated from the second short-term rental property onward.

None of this applies to long-term or transitory rental contracts.

About short-term rentals

Short-term rentals also require a very hands-on approach and a range of trusted providers (cleaners, laundry, handymen) to ensure an appropriate level of service. For this reason, most foreign owners rely on local property managers to run their properties, but their fees (ranging from 25% to 30% plus VAT) can dent the overall profitability of the operation, as such expenses — for Italian tax purposes — cannot normally be deducted from the income generated by the property, nor can the electricity, gas and water bills or the condominium expenses.

Purchasing and renting a property in Italy can be extremely rewarding from both a personal and a financial side, but it is a task that requires careful planning and likely the assistance of a local professional to ensure your investment will truly work for you.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Davide is an Italian qualified lawyer with over 10 years of experience within the insurance, real estate and litigation industry both in Italy and the United Kingdom. During the last couple of years, Davide worked as a real estate broker specifically assisting foreign buyers in Italy, performing legal and technical due diligence on real estate transactions, drafting the relevant contractual documentation and, in general, acting as buyer’s agent throughout the pre- and post-sale processes.