Is renting out a holiday apartment in Spain a good investment? How much can and what rental income to expect — 9 important things to consider

A pоpular Spanish portal Idealista provides the following figure: 22% of the total housing stock in Spain is always rented out. Today, this market has noticeably expanded due to tourism, students, as well as the lack of desire among the younger European generation to purchase their own property.

Whereas in the past a young Spanish family would certainly save money to buy their own apartment as an essential element of well-being, today locals prefer to rent a flat, studio or villa. In major cities the demand for rental accommodation continues to grow, so should we look at this market as a decent business model? Today about 27% of Spaniards aged 22-29 years old prefer to live in rented flats.

On the other hand Spain is one of the most popular tourist destinations in the world and renting out holiday accommodation guarantees a return of 5% annually. During the summer months 90% of holiday rentals are booked in cities of Valencia, Barcelona, Castellón, Murcia and Palma de Mallorca.

In addition, students participating in international exchange programmes more often choose Spain as their study destination. This is due both to the comfortable Mediterranean climate and the increasing prestige of the country's universities. The most popular city for the Erasmus international student programme is Valencia.

The high demand for rental accommodation is also driving up prices. In major cities such as Barcelona and Madrid, a two-bedroom flat in a good area can easily be rented from €600 per month in the long-term and from €70 per day in the case of a short term. If you decide to buy a property with an idea to rent it out, it is important to choose wisely and take into account all the legal aspects.

With the start of the coronavirus epidemic, rental contracts in Spain are gaining popularity. In the spring of 2020, some purchases were cancelled due to uncertainty, resulting in buyers opting for short or long term rentals instead: in July, the profitability of renting in Spain rose to 8.2% per year.

The rental market has been affected by the same trends that described the housing market during Covid-19 in general. Well-ventilated rooms with balconies, terraces and other outdoor areas are now a priority for locals. Elevators remain an advantage and increase the value of the rentals. When it comes to villas and chalets, a swimming pool is important. With the onset of the epidemic, some Spaniards and foreign holidaymakers have switched to smaller towns and islands where there is the lowest incidence of coronavirus (all the main coastal areas). People with respiratory problems, who are in the high-risk area, are thought to feel better there.

In September rentals in Spain reached an all-time high of €11,4 per square meter per month. In October there were 63% more listings than the year before. Hotels, having missed out on tourists in 2020, are now also turning to renting out rooms, workspaces and meeting rooms to locals.

In November 2020 Idealista reported a 1.3% drop in rental prices in the last month. Experts estimate that this is how the market is "leveling off after the stress". At the same time, the price in November 2020 is 3.6% higher (€11.2/m²) than in November 2019. The preferences of tenants have also changed: instead of Madrid, Barcelona and the provincial capitals, towns of up to 50,000 citizens have now come to the fore.

Rental prices continue to stabilise at the start of 2021, with 26% Spaniards living in rented accommodation. The trend of moving from metropolitan areas to smaller cities continues (according to the Spanish National Institute of Statistics, 600,000 people left Madrid and Barcelona in 2020), which has helped the price of rentals in the big cities to fall.

As stated by Idealista, in the first half of 2021 the average rental yield for Spanish homes is 7.2% (-0.4% year-on-year). With the opening of borders for tourists and the start of the summer season, rental prices are estimated at an average of €9.70/m² per month.

If all of the above tips are followed, renting out a property in Spain will be a profitable business that generates a steady income.

• Type of rental
  

Decide on the type: short term (e.g. summer months only or permanent, but daily) or long term (contract for the academic year for students or a 3-5 years agreement).

• Location

For tourist apartments, close proximity to the sea or popular attractions is a must. For student accommodation, consider proximity to schools and amenities (libraries, bus stops).

• Type of accommodation
  

Studios and two-bedroom flats are in the highest demand in the cities. Apartments with more bedrooms are easier to rent per room, and detached villas with a swimming pool are more popular during the summer.

• Legal issues
  

When drafting a rental agreement it is advisable to consider the legal regulations. In the case of short-term rentals, some regions require a Tourist Licence (e.g. Barcelona). Be sure to specify all the conditions in the contract: the amount of the deposit (which is set by the owner of the property) the terms of termination of the contract, and the personal data of both parties.

• Who to rent out to?
  

When renting out for a long term, you should consider whether the potential tenant has a work contract, sufficient funds on account, and whether he/she has references from the previous landlords. For short-term rentals, particularly tourist rentals, a copy of a passport and visa (as proof of legal stay in the country) will suffice. If you are planning to rent out a villa or other high-value property, it is also a good idea to ask for a reference from the tenant's employer or a bank statement.

1. By law, rental income must be declared on the annual tax return. The rate of tax is 24%.

2. IBI is a personal property tax, which must be paid once a year and is up to 2% of the cadastral value of the property.

3. Gastos de la comunidad – This is a community service charge that covers the infrastructure of the housing complex. The swimming pool, a well-kept garden and a guard increases this bill.

4. In some regions of Spain, you must pay the IEET – Tasa Turística or a tourist tax.

5. Property insurance. In this case you can choose the best rate for you.

For more information on property taxes in Spain please follow this link.

If you do not speak Spanish and would prefer to be aloof from the process of finding and selecting potential tenants, you may entrust your property to professional agents. In this case, you will have to pay an agent's fee (8%-15%) plus you will save time.

If you have the skills and knowledge of Spanish, and you live close to the one you would like to rent out, there are several real estate portals that list your property for free:

1. Idealista.com is a Spanish portal that specialises in homes for sale and rent and is available in English, German and French versions.

2. Milanuncios.com is a Spanish website with listings in various categories, which also has a real estate section.

3. Habitaclia.com is also a Spanish online portal for property sales and rentals.

4. Forums in English/your native language about Spain and communities in social networks. If you don't speak any foreign languages, there are numerous online communities where you can post your ads and which are accessed by a fairly large audience.

5. International rental property portals like airbnb and booking (they charge a commission for their services).

In general, with the right approach, you can make good money on renting out, and the declared 5% per annum (of the market price of the property) is a realistic figure. For example if you want to rent out a small flat in a coastal town and its market price is currently around €100,000, the net income will be about €5000 per year (or €600 per month).

If you are less diligent, you can earn around 3%, or €3,000 a year. The particularly enterprising can, on the contrary, "squeeze" out of the rental business up to 7% per annum. As a rule, these results are achieved only with a self-sufficient and competent management of property: it is desirable that the facilities for renting out were more than three, then you can save on services such as cleaning, insurance and other stuff.

In any case, buying a home in Spain is a valid investment option: almost all marketable property is rented out from April to October, and in the low season you have an opportunity to enjoy life in Spain yourself.

Let's look at a real-life example of a Spanish rental property in terms of income and expenses:

What's for rent:

A small studio (52m²) with 1 bedroom and 1 bathroom, for two people, renovated, with a communal pool. Located in the city of Alicante, the area of the Archaeological Museum of Alicante, near the beach (walking distance). The flat has all the furniture, Internet and TV. Previously it has been successfully rented on Airbnb and booking.com.

*The approximate market value of such a flat in 2020 is €120,000.

Next, for a better understanding of the mechanics of the calculations, we've made this table. It shows the potential earnings from renting the above studio by month.

*The prices are based on real examples and take into account the real occupancy rate.

So, a small flat in Alicante worth around €120,000 can earn you around €10095 before expenses. In low season property owners usually rent out accommodation for a month or several months, but in this case the monthly rates will still not be higher than this (for example, in January you can rent a flat for €30 per day with occupancy no more than 50%, or rent it for a whole month for €450, sometimes it is more profitable). But what will your real earnings be after expenses are taken into account?

• Annual property taxes and personal income taxes are about 0.8% (just under a percent) of the cadastral value of the property. With a market value of €120,000, you can expect a cadastral value of around €100,000. Taxes will therefore amount to about €800 per year.
  
  
• Property insurance is a voluntary payment. If the flat is bought without a mortgage, you do not need to buy insurance. But in the case of renting it out we strongly recommend doing it. The cost is about €300 per year.
  
  
• Maintenance (communidad) includes monthly costs for housing maintenance, rubbish collection and pool maintenance, which is around €360 per year.
  
  
• Utilities and communication services. Electricity, gas, water (per sq m), taking into account above mentioned occupancy will be about €700. Internet + television – around €300.
  

That adds up to €2460. We have not included cleaning costs as it is usually the responsibility of the tenant. It is, however, worth adding a couple of hundred euros for incidental expenses such as electricians or plumbers. Total maintenance costs with taxes are €2660 per year. Subtract this amount from the gross income (€10095) and you obtain a net profit of €7435 (6,2% of the taken flat).

Possible extra costs:

But that's not all. If you do not have the desire or ability to be in Spain all year round and do the rental business yourself, you can hand over the keys to an intermediary (such as a real estate agency or online booking service). You may also need the services of a concierge (someone to check in and check out tenants, keep the property in order). So, remote management is worth a minimum of 15% of revenue. In our case, that's €1514.

You should also keep in mind the rental income tax. It is 24% and, in our case, would be €1,784. In practice, if you decide to rent out your apartment on your own, you may find that this amount can be reduced or even avoided. It is true that in recent years in Spain the government is more demanding on the landlords. In some areas it is not possible to rent officially without a tourist license (e.g. in some cities in Catalonia, partly in Valencia and Alicante).

In total, if you entrust the rental business to intermediaries and declare all the income and pay taxes, the net profit can fall from €7,435 to €4,137.

Let's say that the method of simple calculation will be relevant absolutely for any type of property, which is rented out on a short-term basis. As we have noted, it's about 5% of the market value of the property (as of 2020). For example, if you rent out a villa worth €300,000 you can expect to earn €15,000 a year.

As you saw in the example of calculating the yield on a flat, all costs (and income) are directly related to the type of property and its value, so the 5% rule will always work. It applies to flats, villas and townhouses.

As an example, let's consider the same flat in Alicante. The annual cost of renting would be €6000 (or €500 per month).

The community costs and bills will be covered by the tenant. So we exclude this cost. There are also no permanent payments for renting the property via an agency. If you rent out your property with an agency, you will pay a monthly fee one time, i.e. €500. You still have to pay €800 in taxes and €300 in insurance.

That makes: €6000 (proceeds) - €500 - €800 - €300 = €4400. It is a little less than 5% of what you can earn from daily renting. But this option is more stable and you can always save some money in case you rent the apartment without an intermediary.

This is one of the most popular questions among our clients. When potential buyers hear about the profitability of the 5% per annum, many become hesitant and think that it might be easier to buy a house in their home town and rent it out there.

Here are some arguments in favour of buying a Spanish property to rent out:

• This is a stable passive income in euros, requiring minimal effort.

• Even in the case of a mortgage on the purchase of housing in Spain, you can earn income from renting, around 1-2%.

• The cost of housing in Spain is rising annually by 4%-8% per year. This trend will continue for at least a few more years. That is, if you buy a flat for €120 000, you can safely add to your assets extra €6000 per year.

• The opportunity to vacation in Spain for several months of the year free of charge. If you come to Spain in the middle or low season (for the winter), the loss on the amount of rent will be minimal. In this case, all maintenance costs will be borne by tenants.

• The possibility of obtaining a residence permit on the basis of proven income or the Golden Investor Visa (when buying a property of €500,000 or more).
  

If we're talking about short-term rentals or holiday rentals, then it is best to choose a property with the following characteristics:

• Close to the sea (within walking distance, i.e. no more than 1 km from the beach). Many tourists prefer to save money and not to rent a car but walk to the beach.
  

• The resort infrastructure – supermarkets, bars, and restaurants nearby.
  

• Size and number of bedrooms (the most demanded accommodation with one or two bedrooms and an area of 50-80 sq m). Finding tenants for 3-4 bedrooms and over 100 sq m of area is more difficult – tourists hardly ever want to overpay for extra space. And if a large company moves in, the property will age faster.

• Located in areas where there are not many hotels (on the Costa Blanca, in Valencia), or with major tourist attractions, such as PortAventura in Salou.