Investing in Spanish Property
Spanish property is a popular among international investors looking to build or expand a property portfolio. In recent years it has offered both capital gains and rental income opportunities.
Building a profitable property portfolio in Spain
If you’re looking to build a profitable property portfolio, there are a few things you can do to better your likelihood of success. They include:
- Research: Know the market. Look into property types in popular areas and compare rental yields to discover the most profitable type of home to rent out.
- Budget: Set your budget and speak to an independent financial advisor to create a plan for your investment. They can help you account for all costs, too, like taxes, legal fees, maintenance taxes, and property management fees if you’re considering renting.
- Legal advice: An independent lawyer can guide you through the process and ensure all legalities are handled correctly.
- Property selection: Choose properties that align with your investment goals. Are you seeking long-term capital growth or rental income?
- Diversity: Consider diversifying your portfolio to help spread risk.
- Regular review: It is wise to regularly review your investment portfolio and assess the performance of each property to align with your long-term goals.
The Spanish property market
House prices in Spain have continued to increase at a moderate rate for the last few years. According to Spain’s statistics agency the INE, prices in 2023 were 47% higher than in 2015.
New houses have increased by most, 67% in that period, and resales by 44%.
In terms of regions, the more popular international regions have grown most, with the Balearics and Madrid leading the pack with 63% growth, then Catalonia at 57% and the canaries and Andalusia at 44%.
The smallest growth has been in the central areas such as Castilla-la-Mancha and Extremadura, especially with resales which have only grown around 17% in the eight years since 2015. However, nowhere have prices fallen for either new or older properties.
Property in the tourist areas of Spain are in high demand and subsequently attract high prices. These regions can offer good returns for rentals, but there is seasonality to contend with. The prices growth across these regions has been steady, offering capital gains opportunities.
Spanish rental yields: What to expect
In recent years, the average gross rental yield (rent as a percentage of the property value, also known as return on investment or ROI) has been around 6% before tax[1]. So, on average for a €200,000 property you could expect to get €12,000 per year in rental income.
There will be large variations in rental income between long- and short-term rentals, as well as geographic variations. Investors need to analyse specific neighbourhoods and property types to make informed decisions.
Rental yields are typically higher in popular tourist cities such as Madrid and Valencia. Madrid has been one of the best scoring leading cities for overall rental prospects in the European real estate market in recent years, coming in third behind Paris and London.
Legal obligations and regulations
As an international investor in Spanish real estate, it’s important to register your property with the local registry (Registro de la Propiedad) which is essential for protecting your legal rights as owner.
One thing to consider as an investor in Spanish property is that all legal documents will be drawn up in Spanish and understanding them requires a good command of the language. Alternatively, most Spanish law firms have multilingual representatives and can offer translation services, if necessary.
If you are investing in a Spanish property to let out, you can opt for short-term or long-term rentals. Short-term rental properties tend to offer you more immediate returns compared to long-term rentals, but with considerably higher costs and work involved in promotion and turnaround.
If you wish to rent out your property in Spain, there are several rules that you must follow. You will also need a tourism license to be able to let your property out in almost all the Spanish autonomous communities. This must be displayed on all rental offers. If using a property management company, they can obtain a license for you and offer advice on meeting the requirements.
All Spanish rental properties with this license must have:
- Air conditioning in the living area and every bedroom
- A specified amount of clean linen
- A contact number for emergencies – 24 hours
- Natural ventilation or forced ventilators in bathrooms
- Operating manuals for every piece of equipment
- First aid equipment
You must also confirm guests’ identity documents and register them with the national police hotel service before handing over the keys.
Tax considerations for foreign property investors
Foreign property investors in Spain need to consider several taxes.
Non-residents owning property must pay Non-Resident Income Tax (IRNR), applicable whether the property is rented or not.
Second-hand property purchases incur Property Transfer Tax (ITP), with rates varying between 6% and 10%. For new-builds, Value Added Tax (VAT) replaces ITP, generally 10% for residential properties, and up to 21% for non-residential properties.
Some regions charge a Wealth tax based on asset value, with rates from 0.2% to 2.5%.
Local Property Tax (IBI) is levied based on property value and local council rates.
Profit from property sales incur Capital Gains Tax of 19% for non-residents. Inheritance or Gift Tax applies if you inherit or are given a property, with rates varying based on property value, beneficiary’s relationship to the deceased/donor, and the beneficiary’s pre-existing wealth.
Property rental tax payment deadlines are in May for permanent residents or those staying over 180 days a year, and in December for non-residents.
The role of a property management firm
Running your own “fly to let” might just be possible from overseas for long term rentals, if you have reliable local contacts for emergencies such as plumbers and electricians.
Alternatively you can employ a property management company. They will screen potential tenants and liaise with local maintenance service providers when required. In this scenario, tenants are typically responsible for maintaining amenities like swimming pools and gardens, cleaning, and so forth, while communal fees handle the upkeep of shared spaces.
Short-term and vacation rentals demand significantly more effort. The role includes weekly turnovers, cleaning, key management, handling of issues caused by any troublesome tenants, and maintaining high standards of cleanliness and upkeep. This is crucial as guest reviews can greatly impact your investment’s success.
Although the cost of these services can be substantial, generally ranging from 15% to 30% of the income, they should be considered a strategic investment for generating revenue rather than a mere expense that reduces profit.
Currency services
If managing a property from overseas, you will need to spend out on maintenance and other bills, while receiving income in euros.
If you can arrange to both receive and pay out the money from a Spanish bank account in euros this will be a saving.
However, if there are regular currency exchanges it will be essential to the project’s viability to work with a professional currency transfer firm and not a local bank, who can offer better products and services to help you navigate currency volatility.