Buying a home to rent or to sell: the keys and the profitability of each type of investment

Housing has always been the choice of in Spain. Although during the first part of 2020 this trend was paralyzed as a result of the health crisis, everything indicates that the attractiveness of obtaining profitability through residential real estate will recover the pre-pandemic path in 2021.

All this, thanks to the attractive prices presented by the market, the emergence of new housing needs and the recovery in demand. This is demonstrated by the latest official data released by the Bank of Spain: interannual growth during the third and fourth quarters of the year of 6.8% and 1.1%, respectively; adjustment of 1.1% in the appraised value of the home in 2020, increase of 1.1% in the CPI for rentals, etc.

But what is the best investment option right now: buy to sell or buy to rent? How to ensure profitability? How to find the right tenants or buyers? What do you need to know about the sector to get it right? In order to resolve all these questions, Solvia analyzes the advantages of betting on each of these two investment alternatives and the easiest way to calculate the return to be obtained.

Buy to let: regular monthly income

Acquiring a property to put it up for rent is one of the most common investments. According to data from the Bank of Spain, the total annual return on a home (rent plus price variation) stood at 5.2% in 2020, compared to 7.4% in 2019 and 10.6% in 2018. Specifically, the gross rental return was 3.7%, below the 3.8% of last year and the 4% of two years ago. Despite these declines, housing continues to be an asset for which you can continue to earn profits thanks to rent, especially in large cities or in areas with great economic dynamism.

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The reasons that justify that buying to rent is a good idea are the following:

-The current economic situation and the impossibility of accessing home ownership have made the rental option gain more prominence.

-Regular monthly income. If a tenant is found who rigorously pays the rent, a guaranteed monthly monetary amount will be available. The drawback is that the capital invested in the purchase will take years to recover.

-Renting a home is generally faster than selling. In demanded areas, and if the property is in good condition, it is possible to rent in days or even hours.

-Favorable taxation. When renting a home, you are entitled to a 60% deduction on the total income.

How is profitability calculated? It would be necessary to calculate the expected annual income and deduct the maintenance costs of the property (spills, community fee, IBI or garbage rate). The result of this operation is divided by the initial investment (purchase price of the property, taxes, operating expenses and disbursement for the development of the home…) and multiplied by 100.

Buy to sell: between 15% and 20% average return if reform is carried out

Although it can also be the case of acquiring a property to invest, the most common way is usually to buy the house, reform it and sell it. In this regard, industry estimates calculate between 15% and 20% average profitability with this operation, and can even reach 30% if it is very old properties. This has led to renovating flats in poor condition with the intention of reselling them as an alternative that attracts more and more interest. Even more so taking into account the excellent purchase opportunities currently presented by the sector and the forecast recovery in demand and the value of real estate.

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Among the advantages of this alternative are the following:

-It is not necessary to carry out major rehabilitations to obtain benefits. Fixing minor damage or painting the house will serve to increase the value of the property. However, there are some actions that could help to revalue the property to a greater extent and obtain greater profitability: adapt the distribution of the house to current needs, update the kitchen and bathrooms, improve its energy efficiency…

-More capacity to negotiate the purchase price. Acquiring a very old property or in poor condition will give greater bargaining power when purchasing it.

-Speed ​​and greater volume of demand when you want to sell. Despite the fact that the market for , the supply of refurbished second-hand homes in perfect condition to move into is scarce in the big cities. Therefore, it will be much easier to find a buyer.

-Possibility of increasing the sale price due to its central location. Since the demand for this renovated property will be greater, especially if it is located in central areas, there will be greater possibilities of adding additional value to its final price.

-The benefits are perceived in the short term. Unlike choosing to buy to rent, selling the renovated property will allow you to recover the investment in the short or medium term.

How is profitability calculated? In this case, you have to calculate the price for which the property could be sold and subtract the transaction costs and capital gains taxes. If this amount is divided between the initial investment (cost of the acquisition and the reform) and multiplied by 100, the percentage of profitability is obtained.

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