Buy to let in Spain highlights aspects to focus on when buying property as an investment: read about profitability and real estate services.
When someone buys to let, not only in Spain, but anywhere in the world, they must take into account several factors:
Firstly, the profitability that can be expected in Spain for renting a property is between 1% and 10% of EBITDA (earnings before interest, tax, depreciation and amortization).
Of course, these are extremes that are difficult to achieve, and it is normal that the yield is between 3% and 7%.
If you are buying property in Spain, for example in the Paseo de Gracia in central Barcelona it is possible that the profitability is very low, perhaps only 2%, but nevertheless depending on your point of view this may be a more interesting investment than buying a flat in a suburb of a large city that gives a return of 8%.
If you are planning to continue living permanently in your country of origin and only rent out the property in Spain, you will be subject to non-resident property tax.
Other factors to take into account
A flat in Paseo de Gracia will have high value tenants, which means longer rental contracts, more solvency, that is, with less probabilities of non-payment, the property will be spend less time lying empty between one tenant and the next, and you can raise the rent more easily.
The investment itself is also more interesting because in case of economic recession the properties in the city centre are the last to go down in price but they are the first to go up in price when there is an economic recovery, and to sell it you will always have interested buyers.
On the contrary, for a property on the periphery of a city, the cost of acquisition will be cheaper, but the tenants will not always be solvent, which implies a greater risk need for eviction. An eviction in Spain at best takes 6 months from the time of the first non-payment to the time of eviction. Having a bad tenant is bad not only because you stop receiving rent, but there is also a question mark over how the tenant will take care of the property, it will cost more to raise the rent… etc. Does that mean that it is a bad idea to purchase a buy to let property in Spain outside the central areas of big cities? Not at all.
The risk of non-payment can be solved simply by taking out a rental insurance policy whereby in the event of non-payment you will continue collecting the rent until the tenant is evicted, and not only that, but it also takes care of the legal costs of processing the eviction and covers up to 3,000 euros for any damage. This insurance is barely 4% of the rental price, which hardly reduces the profitability of the property and protects against the risk of non-payment.
In addition, renting in the periphery of a big city has a very interesting factor, and that is that you are not going to worry too much about demand. Cities on the outskirts of large cities like Madrid, but above all Barcelona, have the highest population density in the world. And yes, we are not exaggerating, the most densely populated city in the world is Macao with just over 18,000 inhabitants per km2, while in Hospitalet de Llobregat, a city literally next to Barcelona, the population density of some neighbourhoods can exceed 50,000 inhabitants per km2. So you will always have people interested in renting your house.
On the contrary, a property outside a big city or its periphery, can have serious problems not only to rent, but also if one day you want to sell it, it can be difficult to find people interested in paying a fair price in a reasonable time period.
Price of the properties
You can buy a decent flat in Barcelona or surroundings from 80,000 plus the costs of the purchase that are around 12%.
You can finance part of it, depending on the country you come from and your income you may be able to get a leverage up to 70% of the amount of the property. Nowadays it is an especially good time to invest in Spain because the banks have credit and the interest rates are at a minimum, so you could get a mortgage with a fixed interest of 2.5%, in other words, if you have 24,000 euros you could buy a flat and get a return of 8% while paying a 2.5% mortgage.
Types of real estate agencies
When renting a property in Spain you will need the services of a real estate agency, and depending on your objectives, you will need one type of agency or another.
In fact there are several types of real estate agencies but we will speak about the 4 most common:
- Single service agency: This type of agency finds you a long term tenant, (5 years or more), does all the paperwork (places ads in webs, shows it to interested parties, makes the contract, registers it…) and that’s it. They charge a commission to the tenant of about 1.5 months. This would be an interesting option for someone who lives close to the property and will manage the day-to-day of the rental themselves, such as rent collection, possible repairs to the property, communication with the tenant… etc.
- Long-term rental agency: Another type of agency would be one that not only finds the tenant and draws up the contract but also manages the day-to-day running in exchange for a percentage of the rent of around 4%+VAT. This is the preferred option for those who buy a property without the intention of living in it in the short term.
- Temporary rental agency: This is the perfect agency for those who want to alternate the personal use of the property with renting it, that is, who want to enjoy the property one season and not another. This modality is very common in cities of the Mediterranean coast like Barcelona, Valencia, Alicante, Málaga… etc. With this option you can enjoy the house for example during 3-6 months and the rest of the year it is rented. Normally the rental periods are not less than 3 months.
- Tourist rental agency: The tourist rental, less than one month, is highly regulated in big cities like Barcelona or Madrid, where a tourist license granted by the city council is required, and for several years the city councils have not issued new licenses, so if you want this modality, it is possible that you will have a higher profitability than usual, but when you buy you will have to pay an extra price for the licence. They cannot be bought separately, that is, if you want to carry-out tourist lettings, you must buy a property that already has a tourist license already granted.
An agency that manages the tourist rent, will charge you between 15% and 25% of the turnover, from which you must discount other expenses like the utilities of the tenants, tourist rates, cleaning, etc.
However, there are also some agencies that offer a type of fixed income per month, ie, they pay you a fixed amount each month and are dedicated to renting the property and its benefit will be the excess obtained from the amount you pay.
Reliability of the agencies in Spain.
If you are wondering if the agencies in Spain are reliable, we can say yes. Of course there are always some incompetent people, swindlers and other undesirable characters, but in general in Spain agencies are reliable and they do their job quite well. In any case, in order to minimise risks, we recommend that you work with agencies of recognised prestige or that they are recommended by people you trust.
If you want more information on buying a property to let in Spain do not hesitate to contact us and speak directly to an English speaking lawyer experienced in this type of investment.