Lawyer Raymundo Larraín spills the beans on how to become a successful Buy-To-Let landlord in Spain.
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The following finance article has been summarised to avoid unnecessary tax technicalities. Before committing and making any type of investment, you should first seek professional tax & legal advice on your matter – see disclaimer below.
Article copyrighted © 2019. Plagiarism will be criminally prosecuted.
By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Lawyers
8th of November 2019
We have closed in October the accounts for Q3 2019, and it has been – yet again – a record-breaking tax quarter. The cracking numbers we’ve seen from BTL landlords have prompted us to write a short finance article on the matter.
Several factors have contributed towards this ongoing Buy-To-Let boom, to name but a few:
- Spain became in 2017 the world’s second tourist destination. Let those words sink in. This has created a huge demand for tourist accommodation to house the over 83 million tourists Spain receives every year (and growing). The hospitality market simply struggles to keep up with the strong demand.
- Irruption in the market of new big players. AirBnb, HomeAway etc all these huge holiday platforms have created for the first time ever the opportunity to harness the huge tourist demand and widen the offer range at competitive prices. Effectively they have single-handedly moved the goals posts, allowing small-time investors to offer their Spanish properties to an unprecedented worldwide audience. For the first time ever, small investors may now give their properties great marketing exposure, in equal footing to large hotel groups.
- A sluggish sales market has helped to steer investments towards the ever-growing, and far more profitable, buy-to-lets.
- New gargantuan changes in tax laws. Several European Court of Justice key rulings have paved the way to huge tax savings for expat landlords. So much so, that non-resident landlords have seen their tax bills drop by an average of 70%, or more, which directly impacts the bottom line making their real estate investment far more rewarding. This is unprecedented, as before non-residents were barred from deducting any expenses, taxes and fees.
- New changes in long term rental laws. Spain clumsily approved in April 2019 new rental laws which have given huge entitlements to long term tenants, among many other changes detrimental to landlords. As a result of these sloppy measures, landlords have pulled out en masse from long term lets, offering instead their properties as short-term holiday accommodation which are decidedly more lucrative and have far less associated legal restrictions.
- Political instability in competing tourist destinations. This translates into tourists looking for safe havens, like Spain, to spend their holidays in.
- Rental yields have soared by two digits year-on-year over the last three years. As a result of the imbalance in supply, landlords find themselves in a privileged position being able to command higher rental yields year on year to meet an ever-growing demand.
- Climate change. The global warming has caused the tourist rental season to draw out to months which were previously unsuitable for short term accommodation, allowing overall more rental days with good weather.
When you factor in all the above, you come to realize why the tourist rental industry is booming in Spain. This short article goes on to explain how you too can profit and ride the tourist rental wave.
8 tips to rent like a pro
- Location, location, location. Any article on real estate worth its salt usually starts with this timeless saying. A worn out trope no doubt, but that doesn’t make it any less true and it is hands down the first tip that is often forgotten or neglected by most. Property prices can increase or decrease, but nothing impacts more on them than location. A great location helps you to cap off the storm greatly cutting down on your losses in a cycle downturn. Conversely, in a property boom, well-located real estate greatly capitalizes from it, soaring at a much higher rate than the average. When you invest in BTL, you need to choose a location which has a great touristic affluence. You simply can’t go wrong with international household names such as Madrid, Marbella, Mallorca, and Barcelona.
- Inland vs coastal. Both are on high demand but for very different reasons. The discerning city crowd, with refined tastes, are after the glitz and bling of a cosmopolitan lifestyle and are drawn to museums, restaurants, cultural events and all the flashy spoils a big city has to offer. On the other hand, the beach crowd is after raw fun, sun & beach, mojitos and disconnecting for a while. You must decide which group you want to appeal to and hone your marketing towards it. Both are proving to be great business options. Inland property (large cities aside) tend to fall more on the rural wayside. Whereas coastal resorts (and large cities) are clearly aligned with urban properties. To sum it up, in general, flat out you should choose urban over rural for buy-to-lets in my humble opinion. That said, if you have a strong predisposition towards nature and wildlife preservation and want to offer this healthy experience to your guests, then by all means go rural (inland). Spain has thousands of unspoilt scenery waiting for you, and your guests, to discover and get lost in their beauty.
- Affordability vs maintenance. Budgeting carefully is a key element of any successful conveyance procedure. Yes, you may afford to buy a swanky property in a great location, but can you afford its steep maintenance? Only buy a property you are absolutely confident you can afford to maintain over the mid to long run. Buy-to-let properties intrinsically should not be very expensive. I advise the property you acquire should be centric, small, with good communications, within walking distance of all amenities and the sea (on coastal resorts). If you do your research properly, you can even use at times the rental income generated to repay the mortgage and any additional expenses.
- Tourist Licence. Several regions in Spain have devolved competencies on this matter, passing their own regional laws (holiday rental licences in Spain, region-by-region). Some of these laws are very stringent i.e. Balearic Islands. Spain’s Supreme Court has recently ratified and defined the scope of regional competencies on holiday rentals. You would do well to acquaint yourself with the regional regulation where you plan to buy a property in. You must comply with all the requirements set out in the regional law and attain a Tourist Licence, where necessary. You really do not want to invest several hundred thousand euros in a property only to find out you are banned by your local town hall from offering it as holiday accommodation!
- Licence of First Occupation. A staple requirement to apply for a Tourist Licence throughout every region in Spain is to have attained what is known as a Licence of First Occupation. This is an unconditional requirement which marks the difference between being able to let your property legally, or not. Humongous fines are levied on landlords who fail to prove their property has attained a LFO from their town hall.
- Community of owner’s bylaws. If you buy into a gated community or building, chances are high you will become part of what is known as a community of owners. New laws passed on March 2019 have empowered communities of owners across Spain to outright ban, or restrict, holiday rentals. You really do not want to invest several hundred thousand euros in a property only to find out later on you are banned by your community to offer it as holiday accommodation!
- Rental management companies. This is a make or break. Some shoddy companies and individuals, that fly under the tax radar, refuse to hand over VAT invoices for any of their services (for which they charge thousands!). This translates into their clients unbeknownly picking up huge tax bills. Other more professionally-run rental management companies have no qualms to supply clients with proper VAT invoices, so that the landlord’s lawyers may deduct them, dramatically reducing a landlord’s tax bill (on average by 70%, or more). Make no mistake, landlords end up picking the tax bill of those suppliers who refuse point blank to declare and pay VAT. Bottom line, go legal and demand VAT invoices from suppliers; you will be able to offset huge amounts of expenses from your landlord tax bill. Don’t subsidize tax dodgers out of your own pocket!
- Taxation - Lawyers. A competent company, like Larrain Nesbitt Lawyers with over 16 years’ experience, will be able to legally knock off 70%, or more, from your landlord tax bill. Our company does this routinely for all our tax clients. Did you know there is a huge list of property-related expenses, taxes, fees etc which are all tax-deductible and can vastly mitigate your landlord tax bill? Not to mention that lawyer’s fees can also be offset from any tax you need to pay on renting out... Ask us for our holiday rental accounting service (HRAS).
In Spain, the average annual rental yield equates to 5% of a property’s value. Given how rental yields have soared year-on-year by two digits across the board over the past 3 years, this is quite substantial. The afore does not even factor in capital appreciation, which has increased in general by one digit and by two digits in large cities. When you combine both the power of soaring rental yields and capital appreciation, you conclude that real estate is a safe investment that is yielding a two-digit return per annum YOY, with little to no risk. BTL is ideal as a safe retirement plan, as opposed to investing your hard-earned pension with legions of mainstream overrated ‘professional’ hedge fund managers, who rake in millions a year, and return between 36p and 83p for every £1 invested by their customers.
At a time of historic ultra-low interest rates (which, incidentally, is a wondrous opportunity to request a buy-to-let mortgage) this is simply smashing; it doesn’t take a MBA to profit from it, only a level-headed investor that puts some work and time into lettings.
Buy-To-Let is akin to running your own business. If you want to succeed, you must learn to delegate. When you examine some of the world’s most successful CEO’s, it dawns on you that the key to success is finding the right people for the right roles and delegating on them. You cannot hope to do everything yourself or you will be driven insane.
Instruct a seasoned lawyer (conveyancing & taxation), hire a competent rental management agency, and market your property using a renowned property portal. All three working in tandem with you will drive your rental business to success. And profit from it all as millions of landlords already do!
"If you pick the right people and give them the opportunity to spread their wings and put compensation as a carrier behind it you almost don't have to manage them.” – Jack Welch
John Francis "Jack" Welch Jr. (1935). From a humble background of deeply religious Irish immigrants, he made money as a youth working as a newspaper delivery boy and shoe salesman. He captained his high school hockey team and would go on to study chemical engineering. He would rise to become a legendary US business executive, author of several best-selling books on management, and ex-CEO of General Electric (at the time, the world's largest and most powerful company). Through a series of clever acquisitions in emerging markets, and by (polemically) streamlining the company, Mr Welch multiplied GE’s market cap by a stunning 38. Over the course of two decades, under his competent stewardship, he steadily grew the company from $12bn to a whopping 450 billion dollars of capitalization. Upon retirement, he received the largest severance payment in recorded history ($417mn). He is now retired with an estimated personal fortune of $1bn and never misses mass on Sunday's. He married a lawyer; nobody's perfect.
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Article also published at Spanish Property Insight: 8 Tips for Buy-To-Let Success in Spain
Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal or finance advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.
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