How to calculate the profitability of renting, here is the formula of the gross profitability of buying a house in Spain to rent
According to a study by the real estate portal idealista, the gross profitability of buying a property in Spain to rent out is 6.9%. Many clients want to buy a property in Spain to spend their holidays but also want to have the profitability to at least pay the costs. Here is how to calculate the profitability of renting in Spain.
Investing in a property in Spain for a rental can therefore be a very profitable activity, especially if you take into account the possible revaluation of the property in the future.
However, before buying a flat or house in Spain with the aim of renting it out, it is necessary to take the calculator and calculate whether it will really be profitable or not.
Profitability of renting in Spain
Among the Spanish capitals, Lleida is the most profitable, with 8.8%. It is followed by Murcia (8.1%), Huelva (7.9%), Santa Cruz de Tenerife (7.5%) and Almería (6.9%). However, the lowest returns in Spain are obtained by rental property owners in San Sebastian (3.7%), Palma (4.5%), A Coruña (4.6%), Ourense, Madrid and Barcelona (4.7% in all three cases).
Calculate all the costs to find out the profitability of renting a property in Spain.
Before buying a house or flat in Spain to rent out, you should carefully analyse all the costs that the operation will entail. This is the only way to calculate the profitability.
Investment in a new property: It includes the price of the property, taxes derived from the purchase, VAT (10% for purchases of a new property), notary and land registry fees, AJD, both of which depend on the autonomous communities (in Alicante the 1.5%), development costs, etc.
Maintenance: All houses need maintenance and repairs which must be taken into account when calculating an estimate. For example, if the washing machine breaks down, the costs of maintenance, cleaning, etc…
Fixed expenses: community fees, rubbish tax, land registry or IBI, home insurance, water, electricity, etc.
How do you calculate the profitability of a rent?
If we know the fixed costs of the house, the maintenance costs, the price for the investment and the rent that we are going to ask to the tenants, we can calculate the profitability that we will obtain from our house in Spain to rent.
To do this we will have to use the following mathematical formula with the calculator:
Rental return =
Annual rental income – fixed costs and maintenance ÷ investment x 100
Let’s take the following case as an example:
Annual rental income: €15,000 (the sum of all monthly rents).
Annual fixed costs: € 3,900 (the costs of electricity, water, landlord, cleaning).
Investment: 200,000 € (purchase, sale, taxes, notary, etc.).
We would have to make the following transaction:
15,000 – 3,900 ÷ 200,000 x 100 = 5.55% net annual return.
The calculation of this return can guide us in a future sale. Using the rental yield formula, we can find out whether it is more profitable to sell or rent at a given time.
How do you calculate the profitability of a rental if you pay a mortgage?
If you buy the property with a mortgage, the only difference from the previous data is the figure for the initial investment and the fixed costs. In concrete terms, you have to subtract the mortgaged amount from the investment and add to the fixed costs the monthly payments (with the interest rate that the bank has granted you).
But a serious setback can occur: not finding a tenant. If no one pays the rent, the total cost of the mortgage must be borne by the landlord. That is why it is advisable to analyse the costs and see how much you can and cannot afford to pay.
Risks of renting a house
All of the above is speculation, as variables can arise that can completely upset the plans and figures. These are the most common ones that can occur:
You don’t find enough tenants. Or the rental does not meet your estimates.
Expensive renovations and maintenance of the house. Tip: get a good maintenance agency and fix the prices beforehand.
Unexpected defects. Tip: take out guarantees.
Defaulting tenants. This is the least because in general in tourist rentals you take the money before you rent the flat.
Where is it more profitable to buy to rent?
For example, according to data provided by idealista, among the Spanish capitals, Lleida is the most profitable for renting, with 8.8%. It is followed by Murcia (8.1%), Huelva (7.9%), Santa Cruz de Tenerife (7.5%) and Almería (6.9%). On the other hand, the lowest yields in Spain are those of San Sebastian (3.7%), Palma (4.5%), A Coruña (4.6%), Ourense, Madrid and Barcelona (4.7% in all three cases).
In these data, we should look for the hottest areas of the localities. A difficult task, but one that can undoubtedly help us a lot.
What to do before buying to rent?
Before buying a property in Spain to rent out, it is necessary to carry out an in-depth analysis of the market, as well as to look for houses and flats that are of particular interest. In addition, we can assess whether the house can be revalued in the future. Letting a professional like Click for the Sun advise you on this point can be highly recommended to avoid false illusions.
Our tips for buying a house in Spain to rent
If you have decided to buy a property in Spain, these tips can help you choose one property or another:
- Look for a house that needs a minimum of renovation or a brand new house. This will save you extra costs.
- Choose a location with all amenities and leisure facilities nearby.
- Decoration and nice pictures can increase the value of the property.
- Communal areas such as gardens, gyms or swimming pools are an asset, both for renting and for future sale.
- Terraces have become a must since the beginning of the pandemic.
- A house with good communications will attract more interest than a more isolated one.