What to consider before buying an investment property
Sean Woolley, Founder and Director of leading real estate agency Cloud Nine Spain.
Can you afford it and does it offer value for money?
When you’re starting out with your investment property journey, my advice is to choose a realistic budget and don’t overstretch yourselves. Better to buy a lower cost property in the first instance to get a foothold in the market, rent it out for a few years to make sure the area is right and the rental yields stack up with costs. Then you can trade up to something more grandiose and expensive when you are absolutely sure where you want to be and what attracts rental clients all year round.
When you’re calculating what you can afford, make sure you understand the full costs of buying a property, as well as your overheads and running costs. In Spain, as a rule of thumb, the total buying costs for a resale property will be somewhere between 10% – 11%, while the costs for purchasing a new-build property will fall into the range of 13.5% – 14.5%. In addition to the costs of purchase, you will also need to consider the property’s running costs and community fees and make sure that rental yields will be able to exceed these costs.
But, don’t get taken in with great-looking ‘cheap’ deals. CHEAP does not necessarily mean VALUE. Get advice to identify the best value property which will be the most sensible investment over the long-term.
How will you use the property?
Before you embark on your search, decide why you are buying the property and who for. If it is only an investment, then it’s strictly a business decision and you don’t need to like it. In this case, you simply need to follow expert advice and choose something which ticks boxes as an investment and will make you the most money. However, if you will be using the property even some of the time, and renting it out at other times of the year, then you need something which renters will like but you will also enjoy spending time in.
We recommend that a client should purchase an investment property with their HEAD, and a second home with their HEART. Problems can arise if buyers are looking to purchase a holiday home which they intend to use for part of the year themselves but with which they also want to earn a decent rental income. In this highly common scenario, there is often a conflict between head and heart as the criteria for investment and personal enjoyment both need to be met.
As in all property purchases, a degree of compromise needs to be factored in. After all, buying a property which will appeal to the mass rental market may not necessarily accord with your own personal wish list. For instance, buyers may like the idea of owning a home in the hills, surrounded by nature, but is this the sort of place that would appeal to holidaymakers? A balance that satisfies both financial and emotional needs is often hard to find, but an experienced agent with plenty of local knowledge should be able to guide and assist.
Finding the right property for rentals
When searching for a property, make sure your agent knows you’re planning to generate rental income from your property and that you discuss the most popular property types and the most popular locations for rental, to ensure you make the right decision.
I have always believed the most important fundamental is LOCATION, LOCATION, LOCATION. I always prefer to purchase whatever my budget allows in what is considered to be the best location. It may mean that I don’t always end up with the flashiest or the glitziest place in town, but I always try to end up in a really good area. This is a wise investment decision in general, but also very important when it comes to renting your property out.
Holiday rental clients love to be as close as possible to the beach, shops, bars and restaurants, so they don’t need to drive. Easy access to the airport, and to public transport, will also give you an advantage over more isolated properties. Once you’ve chosen the right location you need the right space and facilities on the development to give you more selling points to set you apart. Imagine writing your property description on a rentals website and try to find a property that has as many selling points as possible.
How to maximize rental yields
To maximize rental yields, make sure to take advice and conduct research about the correct pricing levels. You need to offer competitive pricing, but if you’ve got yourselves some top-quality photos, have written a compelling description, and also have some great 5* reviews, you shouldn’t need to undercut the prices of your competitors. Alongside this, you need to assess the occupancy levels that you need and/or want to achieve. You may only want or need a certain amount of income (say to cover the mortgage payments), or you may want to achieve the maximum occupancy (and income!) possible.
Average gross yields on the Costa del Sol range between 5% – 7% (dependent of course upon personal usage), and once fees and management costs have been deducted, the net yield is normally between 3% – 5%, depending upon occupancy levels and personal usage.
Jesse Pitts has been with the Global Banking & Finance Review since 2016, serving in various capacities, including Graphic Designer, Content Publisher, and Editorial Assistant. As the sole graphic designer for the company, Jesse plays a crucial role in shaping the visual identity of Global Banking & Finance Review. Additionally, Jesse manages the publishing of content across multiple platforms, including Global Banking & Finance Review, Asset Digest, Biz Dispatch, Blockchain Tribune, Business Express, Brands Journal, Companies Digest, Economy Standard, Entrepreneur Tribune, Finance Digest, Fintech Herald, Global Islamic Finance Magazine, International Releases, Online World News, Luxury Adviser, Palmbay Herald, Startup Observer, Technology Dispatch, Trading Herald, and Wealth Tribune.