Investing in real estate in Spain. What is worth knowing?

Investing in real estate is always a tempting proposal. Although COVID-19 has frozen the market for a while, now more and more experts believe that after a period of stagnation it will be a good time to buy. If you are also thinking about your first investment in real estate abroad, I have a handful of practical information for you.

Holiday apartment rental, long-term house rental and quick sale with high profit... - investment in real estate in Spain is a dream for many foreigners. In 2019, foreign buyers of real estate here accounted for as much as 18.7 percent. By the way, most often they were British.

When it comes to real estate investments, Spain is one of the most attractive places in the world. According to the calculations of the AFIRE association (Association of Foreign Investors in Real Estate), which deals with international investment in real estate, the country ranks 4th among the countries providing the highest capital growth. Only the United States, Brazil and China ranked higher.

Investments in real estate in Spain - the market situation

Recent years have been good or very good in terms of investments, but COVID-19 has changed a lot. The lockdown had to affect the market.

According to the land and property registers (Registradores.org), in the second quarter of this year there was a nearly 50% decline in property sales involving foreign buyers (compared to the same period in 2019). Foreigners carried out 8.100 transactions, and the last time a similar result was recorded in 2013. Many people suspended planned real estate investments because it was simply not known how the market would react.

House and apartment prices began to fall and many investors waited for the best time to buy. According to some experts, that time has just come. According to Miguel Laborde, partner at Laborde Marcet, investors should buy real estate now. "This is because the recovery will be U-shaped, and prices will not continue to fall," Idealista.com quotes him.

Purpose of investing in real estate

Not everyone buys a flat or house in Spain just for themselves. Many people want to make money from it, but it's important to remember that overseas real estate investment can have many faces. Basically, there are three main types of investments:

• Rent: holiday, long-term or commercial. The advantage of this solution is of course that you have a fixed weekly / monthly income. And if it is a typical tourist rental, you can have the property for yourself in the off-season (more on renting later in the text);
• House flipping - buying real estate at an attractive price, renovating it and selling it quickly. If you are lucky and very alert, the profit can be high;
• Capital investment - well, interest rates on bank deposits drop drastically and investing in real estate can be a much better way to increase savings.

Of course, the type of real estate you will be looking for and the locations you will be considering depends on the investment objective. If you are focusing on holiday rentals in Spain, you should look around in tourist destinations such as Costa Blanca, Costa Cálida or Costa del Sol . On the other hand, if you want to sell an apartment at a profit quickly, an investment in Madrid, Barcelona, Valencia or Seville, where the market is usually more dynamic, might be a better option for you.

Banks in Spain like foreigners 

Investing in real estate abroad often involves taking out a mortgage. What is the current situation in this matter?

Only by the end of May, Spanish banks received 300,000 applications for delayed mortgage payments due to the pandemic crisis. Despite this, the banking sector continues to provide investment financing. This is good news, although, of course, some banks tightened the criteria for granting loans.

On the Internet, the question often appears whether a foreigner may have a problem with obtaining a mortgage in Spain. Let me reassure you: in recent years, the local banks have been more and more open to foreigners, so getting a loan is usually not a problem. Provided, of course, certain conditions are met.

Most banks do not have credit restrictions based on nationality, although it is worth knowing that a bank may require a higher down payment from a non-resident. Residents in Spain can borrow up to 80 percent of the estimated value of the property, while non-residents an average of 60 - 70 percent. Although, as usual in such cases, everything depends on the financial situation of the client, the type of mortgage and the offer of a specific bank.

Holiday rental is a good investment in real estate

Let's go back for a moment to renting a property because many investors buy houses or apartments for this purpose. Generally, there are three types of rental: holiday - short-term (days, weeks), temporary (several months) and traditional - long-term (usually from one year upwards).

It is not difficult to guess that the most profitable is holiday rental. If you own a property, for example, on a prestigious coast, in a few weeks you can get income that will cover several months of maintenance costs and might even add few bugs to your account. One condition - it must be a location popular among tourists. The best region in this respect is Andalusia. According to Fotocasa.es, the largest number of holiday properties is located there - 26 percent of all Spanish holiday properties.

This form of rental - as I have mentioned many times on the blog - requires a special tourist license approved by the autonomous community. Only investors who rent the property to the same person for more than two months are not required to have a license.

if you are interested in investing in real estate in Spain, it is also worth checking the rental prices. According to data from September 10, the country's average monthly rental rate was 1,311 EUR.

Of course, this is just an average and in some attractive cities the prices are much higher. Still, it's worth taking a look at the average rates, as they show which locations are theoretically the cheapest and which are the most expensive:

 per month (all data according to SpainHouses analyzes)

• Murcia - 791 EUR
• Valencia - 1096 EUR
• Andalusia - 1,366 EUR

As I mentioned before, these are average rates that need to be approached with a certain distance.

An investment in real estate must be profitable

Even the most attractive price of an apartment does not mean a good deal. When choosing a property for investment, it is crucial to estimate its profitability.

Profitability includes the costs associated with the three stages of investment. The first is, of course, the price of the apartment and all costs related to the transaction (including notary public, appraiser, costs of taking a loan, ITP or IVA taxes, real estate register). The second is possible renovation and equipment. Third - all fees related to the maintenance of the premises you rent, e.g. rent, cleaning, utilities, real estate tax, insurance. It all needs to be counted.

The subsequent income tax should also be considered. An example would be a capital gains tax if you bought a property with an idea to sell it quickly. In Spain, it ranges from 19 to 23 percent. So if, for example, you buy an apartment for 150,000 EUR, and sell it for 250,000 EUR, the tax will be charged on the amount of 100,000 EUR minus costs.

Don’t forget about the IRNR income tax - it must be paid once a year by investors who are non-residents in Spain. Of course, a different rate will be paid by the owner who rents an apartment or house and earns on it, and another rate for someone who keeps the property only for his own use.

On the plus side, in addition to money from sales or rental, you can use various tax breaks. It is worth seeking legal advice here, because the room for maneuver is quite wide. A person who is a non-resident in Spain, but is a citizen of the European Union, can deduct from tax, for example, items such as invoices for utilities (electricity, water, gas, internet), cleaning or advertising expenses.

Source: Dream Property.