How to Turn Your Algarve Property into a Profitable Rental Property
With the Algarve's popularity growing year-round, many homeowners are turning their properties into short- or long-term rentals to generate extra income. While it has challenges, the potential returns make it a venture worth considering. To succeed it’s essential to understand the rental business basics in Portugal especially in Lagos, located in the Western Algarve and choose a profitable property. There's real potential to create a reliable revenue stream. But success doesn’t happen by chance, it takes planning and legal know-how.
Why Renting in Portugal Can Be Worth It
One of the main benefits of turning your property into a rental is the extra income, of course. But beyond that, there are tax incentives, long-term property appreciation and even lifestyle flexibility. You can rent the home when you’re not using it and enjoy it yourself during the quieter months.
According to Forbes, rental prices in Portugal are significantly lower than in many other Western countries. For instance, rent in Portugal is 24% lower than the average in the U.K. and about 40–50% cheaper than rental averages across America. This affordability attracts a steady stream of renters, from retirees and remote workers to families and digital nomads.
Additionally, Forbes highlights that in some of Portugal's best areas, rent can be as low as €700 (about $756) per month, while Lagos is slightly more than this, starting in the region of €1,200 per month. This competitive pricing, combined with the country's warm climate, makes it an attractive destination for renters year-round.
In popular tourist hubs like Lagos, rental yields are among the best in the country. According to Numbeo and Idealista data, gross rental yields in Portugal for apartments can range from 5% to 7%, with the Algarve consistently ranking high for demand. Short-term holiday lets in Lagos, for instance, are especially lucrative during the summer, while long-term lets cater to expats, students and seasonal workers.
Tourism in the Algarve has been rising steadily post-COVID and Portugal saw over 30 million overnight stays in 2023 up to present, returning to pre-pandemic levels. That steady demand fuels the rental market and it’s one of the reasons why so many property owners are jumping in.
What You Need to Know Before Getting Started
Renting out property in Portugal, especially as a foreigner or part-time resident, comes with a few obligations. The first step is registering the property with the local authorities if you're doing short-term lets. This means applying for an Alojamento Local (AL) license. Without it, you’re not allowed to advertise or host short-stay guests legally.
For long-term rentals, a formal contract is required and landlords must follow Portugal’s tenancy laws, which include notice periods, rent caps in some urban zones and tenant protection measures. The good news is, Portugal offers a relatively landlord-friendly system, particularly when compared to other European countries.
You’ll also need to pay tax on rental income. Non-residents typically pay 28% flat on rental earnings, though costs like maintenance, insurance and utilities can be deducted. Residents are taxed at progressive rates. To avoid any pitfalls, it’s wise to work with a local accountant or property manager who understands the current tax laws.
Top Rental Business Types to Consider
If you’re planning to turn your Algarve home into a profitable rental, it helps to think beyond the basics. There are several types of rental businesses that work particularly well in this region:
- Holiday Rentals (Short-Term Letting)
The Algarve is a major tourist hotspot and holiday rentals are a top choice for owners looking to maximise income during peak seasons. Ideal if you don’t use the property year-round and can offer it furnished and ready to go.
- Long-Term Residential Rentals
If you're after consistent income without the hassle of frequent guest turnover, a 12-month rental can be a smart move. In Lagos, there’s steady demand from retirees, teachers and remote workers. It’s less seasonal, which means more stability, especially outside the summer months.
- Medium-Term Rentals (1–3 Months)
This growing niche caters to digital nomads, remote workers, or those relocating temporarily. It works well if you want flexibility while still keeping your property occupied most of the year. Tenants often stay longer than tourists, but without the long-term legal commitments of a standard lease.
- Themed or Niche Rentals
These stand out in a crowded market. Some ideas include:
- Pet-friendly homes for travelling families
- Wellness escapes with yoga space or spa features
- Eco-friendly stays with solar panels and sustainable touches
- Remote work retreats with desks, ergonomic chairs and fibre internet
Turning Your Home into a Profitable Asset
To make your rental stand out, you’ll need to focus on both presentation and practicality. Start by making sure the property is well maintained, clean and well-equipped. Tenants today expect fast Wi-Fi, comfortable furniture and practical kitchens and bathrooms. For holiday rentals, add small details like a welcome guide, good lighting and a local touch, it all adds to the experience and can boost your reviews.
Location is another major factor. Properties within walking distance to beaches, cafes and services tend to perform better, especially in towns like Lagos, Portimão, or Carvoeiro. If your home is a little more rural, consider highlighting features like peace, space and views.
Professional photography and strong listing descriptions also go a long way. Management companies are great when it comes to staging, not just the management of the property itself during rental periods. On platforms like Airbnb and Booking.com, your listing needs to catch attention quickly, high-quality photos, good copy and clear policies can help you stand out.
Buying Property in Portugal as a Foreigner?
Yes, you can buy property in Portugal as a foreigner, there are no restrictions on ownership, and the buying process is fairly straightforward. Non-EU residents can also explore visa options like the D7 or Digital Nomad Visa, which allows for long-term stays based on passive or remote income.
Keep in mind that property purchases come with upfront costs, including IMT (property transfer tax), stamp duty and notary/legal fees. Working with a local estate agent and a local solicitor will help ensure everything runs smoothly. If your goal is to rent the property out, be upfront about that with your agent, so they can help you choose a home that meets your investment goals.
Final Thoughts
The Algarve offers one of the best opportunities in Europe for turning a second home into a profitable rental property. With rising tourism, strong tenant demand and relatively landlord-friendly laws, it’s a market that rewards planning and effort.
If you're thinking about stepping into the rental market in Lagos or the Western Algarve, get in touch with our team at B&P Real Estate. We’re here to guide you through the process, from choosing the right property to getting it rental-ready helping you unlock its full potential.
