Where is it most profitable to buy to rent in Spain? Secrets

The decision to buy a property with the purpose of renting it out is becoming increasingly popular. The search for profitability in the real estate market has led investors to explore different regions of the country in search of opportunities that maximize long-term returns. In this context, the question arises: Where is it more profitable to buy to rent in Spain? Analyzing this dilemma involves exploring not only prices and demand, but also economic trends and the particularities of each region. We tell you everything you need to know below.

What does buy-to-rent mean?

Buy-to-let is an investment strategy that consists of acquiring a property with the intention of renting it out to earn profitable passive income. This strategy looks very profitable, but it also involves certain risks, such as the possibility that the tenants may not pay the rent or that the property may be damaged. To carry it out successfully, one must consider factors such as: 

• The location, since it is one of the most important factors to take into account when buying a home.
• The price must be adequate for the profitability to be attractive. It is crucial to carry out a market study to know the rental prices of similar properties in the area.
• The property must be attractive to tenants, in addition to being well located, of good size and in good condition.

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Benefits

This type of investment is very popular and widely chosen because it provides benefits such as:

Obtaining passive income

The main advantage of buy-to-let is passive income. This means that, once the property is rented, you as the owner receive monthly income without having to actively work.

Potential home appreciation potential

Housing is an asset that tends to appreciate in value over time. In addition to rental income, gains can be generated at the time of sale. 

Tax credit

In some cases, rental income benefits from tax deductions, lowering the total cost and increasing profitability.

Current panorama of the real estate market in Spain 

The real estate market in Spain has experienced almost constant growth in recent years, driven by growing demand and limited supply. According to data from the National Statistics Institute (INE), the price of housing in Spain increased by 8.2% in 2022, the highest annual increase since 2007. The average price stood at €1,507 per m².

This growth has been especially notable in large cities such as Madrid and Barcelona, where prices have exceeded €3,000 per square meter. In Madrid, the average price of housing stood at €3,022 per sq m, an increase of 8.6% over the previous year. In Barcelona, the average price of housing stood at €3,252 per sq m, an increase of 8.1% over the previous year.

However, this increase has contributed to reducing housing affordability for young people and low-income families. In Spain, the average price of housing is 11.3 times the average salary, which represents a high level of overvaluation. Currently, the factors that are having the greatest impact on demand are:

• The Spanish population is increasing. In 2023, the Spanish population stood at 47.4 million, an increase of 0.4% over the previous year.
• Immigration is also contributing to the increase in housing demand. In 2023, an estimated 600,000 immigrants arrived.

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Spain's most profitable cities for investment in 2024

According to data from several real estate portals, the most profitable cities in Spain to invest in 2024 are:

• Ourense, with an estimated gross yield of 8.88%, is the most profitable city in Spain to invest in housing. This Galician city is an important university city, which gives it a young and growing population. In addition, it has a good job offer.
• San Cristóbal de la Laguna, in Tenerife, ranks second in the ranking, with an estimated profitability of 8.15%. It is a tourist city thanks to its cultural and natural wealth. 
• Sanlúcar de Barrameda, in Cádiz, is the third most profitable city, with an estimated profitability of 7.72%. This coastal town is known for its wine production, which also makes it a popular tourist destination, offering many jobs in the hospitality and gastronomy industry.
• Badalona, in Barcelona, ranks fourth in the ranking, with an estimated yield of 7.68%. This Catalan city is an important industrial and commercial area, which provides it with a good supply of jobs. In addition, Badalona is well connected to Barcelona, which also attracts both residents and tourists.
• Alcalá de Henares, in Madrid, completes the top 5, with an estimated yield of 7.66%. It is a historic city, has an important cultural and educational center and is very well connected.

Real Estate Trend 2024 by region 

Real estate trends for the year 2024, both in Spain and abroad. Real estate investment in Spain and in Europe, are being strongly marked by factors such as:

• Geopolitical uncertainty and tight financing conditions.
• Investors are showing interest in segments that offer stable income and resilience to recessionary situations. This includes niche segments and asset classes reinforced by megatrends such as decarbonization, energy transition, new technologies, demographic changes and urbanization.
• Despite the economic challenges associated with decarbonization, such as rising construction costs, industry professionals recognize the added value of sustainability.
• The trend of converting commercial space into housing will continue to grow. This phenomenon not only responds to residential demand, but also contributes to urban revitalization and the creation of more diverse communities.

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In the specific Spanish panorama we can say that:

• Madrid is and will continue to be the most attractive city for real estate investors, with a solid demand for housing for both rental and purchase.
• Barcelona will also present a dynamic real estate market, driven by its relevance as a tourist and cultural center. In addition, an increase in investments in co-living buildings is expected.
• Valencia has a position as a tourist and commercial center, which will contribute to a high demand for commercial and office space.
• The Basque Country is characterized by a stable real estate market, with a solid demand for housing and a significant need for industrial and logistics space, driven by its importance as an industrial and technological center. By 2024 this will consolidate and continue to grow. 
• Finally, in Andalusia, it is believed that there will be an increase in investments in houses, especially villas, where privacy, comfort and proximity to green spaces and beaches are sought. 

Recommendations for real estate investment in Spain 2024 

As with any investment, you should always be cautious. No matter how much a market is growing and looks promising, it is important to be informed first and not rest on your laurels. Remember that real estate investments have a considerable cost. Our fundamental recommendations are:

Conduct market research

Market research is the most vital step when investing in real estate. It is essential to know the rental demand in the area where you are going to invest. To do this, you can consult data from the National Statistics Institute (INE), real estate portals or companies specializing in market research. You should also know very well the rental prices of similar properties in the area, either by consulting real estate portals or real estate agencies. 

Risks

Identify, classify and always keep in mind the kind of risks you might face when investing, for example: 

• Risk that the tenant will not pay the rent.
• The price of the home may go down, resulting in a loss of value of the investment.
• Changes in regulations and rental laws, these always affect the profitability of the investment.

Patience

Be patient, real estate investment is for the long term. It is important to be patient in order to generate profits.

Focus on cities with high demand

Cities with a high demand for housing tend to offer better returns.

Consider demographic trends: Cities with a young and growing population tend to generate better investment options.

Invest in well-located properties

Well-located properties are easier to rent and sell. 

Invest in quality properties

Quality properties have a higher market value, in addition to the fact that they do not entail subsequent construction costs to make them habitable.

Projection of the real estate market in Spain 2024. What is expected?

The projection of the real estate market in Spain is not clear, some foresee growth, others stagnation, others a slight depreciation. 

But most portals specialized in the subject speak of a slight cooling, with a possible fall in prices of between 1% and 2%. The increase in interest rates makes it difficult to obtain financing for the purchase of housing. In addition, the inflation experienced in recent times reduces the purchasing power of households. On the other hand, there is also the economic uncertainty generated by the war in Ukraine and the energy crisis. However, in any case, the market is expected to remain solid, with a constant demand, especially in large cities such as Madrid and Barcelona.

According to a report by the consultancy firm Knight Frank, housing prices in Spain could fall by 1.5% in 2024, while the consultancy firm Tinsa forecasts a fall in prices of 2%. 

What is a good net return on a rental?

Determining what constitutes a good net return on a rental depends on several factors, including the local real estate market, the location of the property, the type of property, and general economic conditions. However, below are some general guidelines that can help you evaluate the net profitability of a rental:

Gross Return vs. Net Return

• Rentabilidad Bruta: Es el porcentaje que se obtiene al dividir los ingresos anuales por alquiler entre el costo de adquisición de la propiedad.Rentabilidad Bruta=(Ingresos Anuales por AlquilerCosto de Adquisicioˊn)×100\text{Rentabilidad Bruta} = \left( \frac{\text{Ingresos Anuales por Alquiler}}{\text{Costo de Adquisición}} \right) \times 100Rentabilidad Bruta=(Costo de AdquisicioˊnIngresos Anuales por Alquiler​)×100
• Rentabilidad Neta: Es el porcentaje que se obtiene al considerar los ingresos anuales por alquiler menos todos los gastos anuales operativos (mantenimiento, impuestos, seguros, etc.), dividido entre el costo de adquisición de la propiedad.Rentabilidad Neta=(Ingresos Anuales por Alquiler−Gastos Anuales OperativosCosto de Adquisicioˊn)×100\text{Rentabilidad Neta} = \left( \frac{\text{Ingresos Anuales por Alquiler} - \text{Gastos Anuales Operativos}}{\text{Costo de Adquisición}} \right) \times 100Rentabilidad Neta=(Costo de AdquisicioˊnIngresos Anuales por Alquiler−Gastos Anuales Operativos​)×100

Factors Influencing Good Net Profitability

1. Property Location:
   • Urban and well-connected areas tend to be in higher demand and can offer higher net returns.
   • Developing areas may offer opportunities for greater future profitability.
2. Property Type:
   • Residential properties such as apartments tend to have different yields than commercial properties.
   • Smaller properties such as studios or one-bedroom apartments can have a proportionally higher return due to lower acquisition costs.
3. Real Estate Market Conditions:
   • A booming rental market can increase rental income and improve profitability.
   • Rent control policies and vacancy rates also affect profitability.
4. Operating Expenses:
   • Regular maintenance and repairs can reduce net profitability.
   • Local property taxes and insurance also affect operating costs.

Ideal Net Return

• Generally Accepted: In many markets, a net return of 4% to 6% is considered good. This means that after deducting all operating expenses, the property should generate 4% to 6% of the annual acquisition cost.
• High Return: Net returns above 6% are considered excellent, but may also imply higher risk or more intensive management.
• Low Return: Net returns of less than 4% may be acceptable in very stable and safe markets, where property value appreciation is high and risks are low.

Example of Net Profitability Calculation

Suppose you bought a property for 200,000 euros and the annual rental income is 12,000 euros. Annual operating expenses (taxes, maintenance, insurance, management) add up to 4,000 euros.

1. Annual Rental Income: 12,000 euros
2. Annual Operating Expenses: 4,000 euros
3. Net Income: 12,000 - 4,000 = 8,000 euros
4. Acquisition Cost: 200,000 euros

Net Profitability=(8,000200,000)×100=4%{Net Profitability} = \left( \frac{8,000}{200,000} \right) \times 100 = 4% Net Profitability=(200,0008,000)×100=4%.

In this case, a net return of 4% would be considered reasonable in many markets.

Final Considerations

• Comparative Analysis: Compare the net return with other possible investments (stocks, bonds, etc.) to make sure you are getting a good return.
• Risk and Management: Consider the level of risk and the amount of management you are willing to take on. Properties that require more management may offer higher returns but also more work.
• Professional Advice: Consult with a financial advisor or real estate investment expert for a more accurate assessment tailored to your circumstances.

With these guidelines, you will be able to better evaluate the net return on a rental investment and make informed decisions about your real estate investment.

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Conclusion 

In conclusion, the return on rental real estate investment in Spain is certainly attractive. While certain areas may offer more desirable rental yields, it is crucial to consider economic stability, long-term projections and sustained demand over time. The key lies in finding a balance between profitability and investment security, but always being willing to adapt strategies to the specific characteristics of each region. 

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