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.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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.
Related Content
-
Visa Is the Worst Dow Stock Wednesday. Here's WhyVisa stock is down sharply Wednesday after the credit card company came up short of revenue expectations for its fiscal Q3.
-
Another Analyst Moves to the Sidelines on Tesla Stock After EarningsTesla stock is spiraling Wednesday after the EV maker's big earnings miss and Wall Street has been quick to weigh in. Here's what you need to know.
-
Confused by Annuities? Making Sense of the Different TypesMany investors aren't sure if annuities are a good option for meeting financial goals. Let's look at the different categories, along with their pros and cons.
-
Talkin' 'Bout My Generational Wealth: Baby BoomersWith retirement, each generation has different priorities and challenges. For Baby Boomers, it's a matter of ready or not, here it comes.
-
How to Avoid a Big Hassle if Your Financed Car Gets WreckedHow an insurance check is made out for repairs can cause a world of problems if the lienholder is left out.
-
Estate Planning Strategies to Consider as Election NearsAre big changes in tax laws coming soon? Not likely, but you might want to take advantage of higher estate and gift tax exemptions well before the end of 2025.
-
How to Get Your Money's Worth From Your Financial AdviserA good financial adviser will focus on how your financial planning and investment strategy align with your lifestyle and aspirations.
-
Think of Prenups and Postnups as Financial Planning ToolsThese contracts provide a clear framework for asset management and protection and are especially useful if you get married later in life.
-
Congratulations on Your Raise: Three Things to Do With ItWe're not saying you shouldn't spend it on a new car, but there are some considerations to guard against lifestyle creep and to help ensure a comfy retirement.
-
Check Off These Four Financial Tasks to Finish 2024 StrongThe new year is a popular time to set financial goals, but now is the ideal time to check how you're doing. Four tweaks could make a big difference.
