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Buy to rent?

Buy to rent?

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Monday, 2 september 2019 | Redacción CEU

The 2008 crisis was a blow to the Spanish economy. The real estate market was hit hard from which it is still recovering today. Despite this fact, the "brick culture" is today fundamental for the growth of this country, as evidenced by the progressive growth of the sector during the last years. Nonetheless, the rules of the game have changed. The approach is still conservative, but the market is slowly opening up to new options. On the other hand, principles such as "renting is wasting money" have started to lose their original strength in the Spanish society. All this has led many investors to wonder whether it is a good time to invest in a property in order to rent it out or not. Today, at the CEU IAM Blog, we analyze the keys to buying and renting a home as an investment.

2019 has been characterized by its moderate growth in the real estate sector. This progress has been marred by a drop of 16.2% in mortgage signings and 9% in the housing sales at the end of the first semester –according to the figures provided by the Spanish Statistical Office and the General Council of Notaries–. However, as the ABC newspaper points out, the IMF's growth forecasts (2.3%) may serve as an incentive for investors and individuals to acquire a property in 2019.

This is a detail that Casaktua.com experts have taken into account when presenting the trends that, in their opinion, will have an impact on the end of this year. Among them, we find some predictions which are related to the Spanish rental model:

The rent "boom" will also affect peripheral neighborhoods
Housing will continue attracting investors, profitability will remain positive
Second-home owners will choose their own enjoyment to the detriment of the tourist rental

Likewise, the real estate website also notes the difficult access to housing for the younger generations, in particular, since their incomes do not grow.

Other studies such as that of BBVA Foundation and Ivie come to the conclusion that the percentage of people living in rental housing has grown in all autonomous communities in Spain, without exception. Specifically, an increase of four percentage points since 2007. This report also highlights the differences that exist between regions. For example, in the Canary Islands (27.8%), the percentage of rental homes almost triples that of Extremadura (10.9%). Paradoxically, this boom in renting (due to economic, sociodemographic, fiscal and cultural factors), coincides with a drop of 21% in the price of housing. Even so, the study indicates that the effort per inhabitant to acquire a home is still greater in Spain, which is why it is necessary to encourage rental housing.

Buy to rent?

Before buying...

The purchasing power, a context of flexible and temporary work, as well as the change of mentality are some of the reasons that explain why many citizens choose renting over tying themselves to a mortgage. Thus, the bet on renting becomes a formula that may seem profitable in the eyes of both experienced and new investors, as it is also a faster alternative than selling and provides regular benefits. On the other hand, the recovery of the invested money is slow. This is more than enough reason to reflect well on this decision before buying. These are our tips:

Knowing all the associated expenses well: The purchase of a property requires a significant initial outlay, taking out a mortgage and paying some tax expenses. In turn, the maintenance costs must also be taken into account. It might even be necessary to undertake some reforms. If the figures do not add up, investors could consider other investment alternatives like real estate crowdfunding, specialized investment funds or the purchase of shares from some companies in the sector.
Finding out what the future tenants need: One of the biggest risks in this type of investment is low-occupation. To find the ideal place, investors must take into account who their target clients are and find the right location for them (connection and means of transport, car parks, leisure areas, nearby schools,...). Of course, it is advisable to draw a profile that can be met by a wide public, so that the risk is lower –especially in the case of inexperienced investors–.
Checking the correct condition of the property: In the long term, the hidden damage of a house may backfire on the investor. When purchasing a property, especially if it is a second-hand house, it is necessary to assess the quality of the installation and the current state of the home.
Taking into consideration the size of the house: As a general rule, the larger the property is, the more difficult it is to rent. However, it is also necessary to consider its future profitability.
Studying the price of the property: The location of the house has a direct impact on its return. Before investing, it is essential to know which is the rental price for similar properties in the area. It is also important to consider whether any project or event might influence the value of the property. For example, the construction of a shopping center or the closure of a factory.

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