It was written on 15 June 2016. The law and practice in Spain change all the time. Our guides are updated as frequently as possible - typically every three years - but may be out of date.
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This guide is about buying property in Spain for investment purposes.
It describes, in particular, how to buy investment property in the area of Andalusia/Andalucía – which contains the Costa del Sol. See a map here. Please note that certain aspects of the law in Spain vary from one "autonomous community" (comunidad autónoma) to another.
It looks at different methods of buying property for investment, the risks involved and some factors to consider when deciding wheter and what to buy.
See also our guide to Buying a Property on the Costa del Sol.
Real estate has long been a popular option for those wishing to invest their money. It is tangible, you can use it yourself and many of us have heard stories about people making their fortune through property investment.
However, as many people found out during the global financial crisis of 2007/08, putting your money in property is a risk.
In this guide I will pose some questions for you to think about before investing in Spanish property. Always see a financial advisor and a lawyer before making a large purchase such as a house or apartment.
If you're buying property as a pure investment then you will want to buy a property that is going to generate new income or a capital gain (i.e. the amount by which the property increases in value): preferably both. You will want the results of your due diligence to indicate, pretty clearly, that this is going to happen.
If you're buying a property that you want to use as a holiday home but left for part of the time to cover all part of its running costs then your analysis of its potential as an investment may be a little less rigorous - but the analysis should still be done. In this case, you may attach more importance to how well the property suits your requirements as a holiday home and accept the limitations that flow from that. For example, because you wanted property located in the middle of the countryside; knowing full well that such properties will not be as safe a betting proposition as a property located in the city or by the sea.
However, even if this is your plan, it might be as well to think about the extent to which you're prepared to make compromises in your holiday preferences, if those compromises are going to improve the financial performance of the investment. Would you be prepared to buy a property located a little nearer to where there is popular demand? Would you be prepared to buy a property that is a more attractive letting proposition? Would you be prepared to buy a property with less inherent running costs (for example, with smaller grounds or without a swimming pool)?
Every investment carries some risk. Some carry a great deal more risk than others.
One of the most common misapprehensions amongst the people that I see is that they misunderstand the nature of risk and reward. They assume, because it seems intuitive to do so, that the greater the risk, the greater the reward. This is simply not true. There are many property investments that carry truly astronomical amounts of risk and yet come nowhere close to providing the potential for reward appropriate to the level of risk that you are taking. Conversely, there are many property investments where the risk factor is relatively low and the likely rewards surprisingly high.
For most people, this second type of property will be the better bet.
I encourage potential buyers (and, if they are a couple, they should do this separately) to rate themselves on a scale of 1 to 10. A person with a score of 1 is truly risk averse: the sort of person who throws out a can of food on the very day it reaches its ‘sell by’ date. A person with a score of 10 is happy to go bungee jumping. Often, you will find that the two people in a couple have very different scores. In these cases, it is not simply a question of working out the average. It is a question of working out the level of risk with which both will be comfortable.
Some investors are content to have all their eggs in one basket. For some, the one property that they're buying will be the only investment of any size. Such concentration of your funds is probably not a good idea and it is certainly not something that would be recommended by most investment professionals.
Yet some investors have only limited funds and really like the idea of investing in real estate. In this case, limited or no diversification might be the price they have to pay - and one that they are prepared to pay. However, even these investors would be well advised to think about the possibility of a co-ownership scheme with a share in several provinces rather than the outright ownership of one property alone.
Other investors are absolutely insistent on diversification of their investment portfolio. Some have rigid percentages from which they will not deviate. Often, those percentages will change as the years go by to reflect their changed investment objectives and financial situation.
One of the percentages will be the percentage of their total assets that they wish to see invested in real estate. Another might be the percentage that they wish to see invested in overseas real estate. Another might be the maximum amount or the maximum percentage of the overseas real estate pot that they would wish to see placed in any one investment or in any one country or in any one type of property. This might sound a little complicated and, quite clearly, a certain amount of flexibility is probably a good idea but the basic principle is sensible.
For the investor in overseas real estate who is wanting to build and diversify their portfolio of international real estate there is a whole separate topic of how to choose real estate assets in different parts of the world that mesh together and form a sensible, balanced whole taking into account the investment prospects in different parts of the world, the currency prospects in those countries and the relative merits of the different categories of real estate (residential, commercial, land etc) that are available. This is beyond the scope of this guide.
If building a diversified property portfolio it can make a lot of sense to take some professional advice. This can help you filter the masses of information that are available and choose the most beneficial combinations of countries, areas and types of property. Doing the research necessary to make the best decision takes far more time than most people are prepared to invest and there are simply too many choices and too much information for most people to process. This need not be expensive.
An investment in real estate is, by its nature, an illiquid investment. In other words, it cannot be sold quickly if you need the cash.
Many people are not too worried by this. Provided they have other investments in cash (or which they can turn to cash quite quickly) they are prepared to accept the illiquidity as the price they have to pay for the other attributes of real estate investments that appeal to them.
Yet, even within the category of real estate investments, there are some that are much more illiquid than others. An apartment in the centre of Marbella might sell quite quickly even in bad times, whereas a rural property 10 miles from the nearest road might take years to sell if there is a lull in the property market. Right now, the property market in Spain is in recovery - but these things are cyclical.
If you can accept the basic fact of illiquidity but need to limit that illiquidity as far as possible then you must factor this into your choice of property.
If you are thinking of buying a property as an investment then you have, clearly, included real estate in your investment strategy; but that does not bring the matter to an end. There are many different strategies within the category of real estate investment.
Some people are investing for income. They might be retired and using the income as or to add to their pension. They might like the idea of the property increasing in value but that is not their primary aim. They want income. They want secure income and they want an income that is likely to be strong in the future.
Others are not concerned about income. They perhaps have plenty. They want a place where their surplus income can grow in value to the greatest extent possible. In other words, they're looking for capital growth.
As is always the case, some will be looking for a bit of both.
Some will be lurking to invest for the long term. For example, the pensioner or the pension fund. They want to buy a property that will perform now and that is likely to perform equally well in 10 or 20 years’ time. They do not want to go to the expense and trouble of having to sell their property and buy another (or even another category of investment) in a few years time. They have often done their maths and worked out that the costs of acquisition and sale are substantial and can dramatically reduce the net performance of their investment.
Others are happy to buy and then sell at a profit. Some will wish to do so very quickly. In other words, they will be looking for a real bargain which they can sell on without delay: possibly not even getting to the stage where they take legal title to it. Of this group, some will wish to rent out the property for the period between the time when they buy it at the time when they sell it; whereas others will wish to keep the property in its pristine new condition until sale.
Others will want to buy and then improve the property before selling it on.
What about buying 'off-plan'? This means buying property before it has been fully built and, in many cases, before construction has even started. In thriving markets such purchases can produce large rewards. It is not uncommon for the launch price to be 40 or 50% less than the price at the time when the properties have been fully built. This is for a number of reasons. Developers need the money to launch the project and, very often, they cannot raise the bank finance needed to do this. They therefore sell their first few properties at very heavily discounted prices in order to generate the necessary funds. Developers (and their banks) also like to see confirmed sales as this makes other sales easier and raising finance less challenging.
The obvious, but often underestimated, danger is that the project never raises the finance necessary and never gets built. In Spain, there are protective mechanisms to secure the money you have paid in in these cases. As a result of bitter experience, many people have decided to steer well clear of off-plan developments.
If you are looking to invest in an off-plan development you should be looking (with your lawyer and financial advisor), very carefully, at the precise terms of the protection being given to you. If the development is not completed and title delivered to you is it absolutely guarantee that you will get your money back? Who is giving the guarantee? Do you trust them? Do they have the financial capacity to repay you if the shit hits the fan?
See our Guide to Buying an Off-Plan Property on the Costa del Sol for more information.
Some investors are put off by the idea of owning bricks and mortar. They dislike the potential cost of buying and selling yet they liked the concept or investment in real estate. As a result, they look at investment funds. There are lots of these and of many types. The same two great risks attach to all of them. How good was the choice of the property upon which the fund was based? How expensive is the fund's management? In many cases, the choice of property leaves a lot to be desired and in just as many cases the administrative charges associated with the fund seem very high.
There is money to be made in property development and so investors try to cut out the middleman by becoming developers themselves. In my experience, few succeed - at least in their first development. They find that it is a lot more complicated than they thought and that there are a lot more hidden costs than they expected. Most lose money. Property development, certainly internationally, is not a game for amateurs.
See our Guide to Property Development on the Costa del Sol for more information.
Some properties are marketed as being 'below market value'. Sometimes this is true and sometimes they can present spectacular bargains. On other occasions such claims are nothing more than an unethical marketing ploy. Do not take them at face value.
Why would somebody be selling at less than market value? There are many reasons.
It may be that they have bought a number of units in a development and secured a substantial discount doing so. If they can sell quickly they can afford to pass them on as individual units at much less than the price of such an individual unit in the marketplace.
On other occasions the sale might be by somebody who is in serious financial difficulty or whose personal circumstances mean that he wants to get rid of the property quickly. For example, his employment might have come to an end and he is now leaving the country; or he is in the process of getting a divorce and he and his wife need to turn their house into cash and buy two smaller properties before one of them kills the other.
If you want to buy in the BMV market make sure that you are dealing with a good and reputable seller or agent and crosscheck value claimed for the property.
In the last few years there has been a lot of talk about 'distressed property'.
Distressed property is property that is being sold because the seller is in difficulty. The seller could be a private individual who has bought a property that he can no longer afford - either a holiday home or his primary residence - or it could be a developer who is unable to clear the units in his development and was in trouble with his bank.
I have touched on the issue of distressed property in the section on properties that are below market value, but it's important to understand that, whilst distressed property is often being sold at below market value, this is not always the case. It is certainly not always the case that below market value property is distressed property. They are first cousins, not identical twins.
There is a whole range of distress. At the lower level, you find the person who is merely anxious to sell and there is, therefore, prepared to lower the price a little in order to do so. At the top of the range you find the person whose house will be repossessed in a few weeks' time if he does not sell it and who knows that any equity he has built up will simply disappear into the pocket of the banks. He will be a far more motivated seller and prepared to take a much bigger hit on the price of the property. Sadly, somebody's misfortune is always somebody else's opportunity.
Developers often find themselves in a slightly different position. Sometimes, just like private individuals, they know that if they do not sell the units very quickly the bank will repossess them or put the company into administration.
However, many other occasions the position is not quite that dire. The developer may have sold 90% of the project and covered his costs but he is not capable of selling the last few units which generated a profit. Without the profit, he cannot go on to his next development and so the inability to sell may be losing him not just the profit on those units but the potential profit on the whole new development. This will usually be much higher. Add to this the fact that he may have sales staff on site who are costing money every single day and you can see that he will be motivated to dispose of these last troublesome units at significant discounts.
In some cases the developer may not want to give cash discounts because he feels that that would be breaking faith with his earlier buyers, whose properties could be seen as being thereby devalued, but in these cases he may well be prepared to give you a substantial alternative incentives. A complete furniture pack, a new car, a two-week cruise etc. During recession, more developers are prepared simply to cut the price of the last units in their development.
Distressed sales offer a major opportunity to buyers though, as the Costa del Sol's property market recovers, they are become more scarce. But the mere fact that the property has fallen substantially in price does not, of itself, make it a good buy. How does it rate in comparison to other similar properties in the area? Guides such as ours can give you an idea. Using the Internet to visit estate agents' own sites can also give you a good sense of market values and, of course, going round agents' offices and looking in their windows also works.
There is another test of value which I find very useful. If the house is on sale at less than the cost of construction - that is to say, the cost of the bricks, mortar, timber and labour used to build it - this is a good indication of value. Barring a complete collapse in the economy and wages, nobody is going to be able to come and build another property for the price you are paying. The cost of construction is also usually fairly easy to establish by local enquiry.
Whilst talking of distressed sales I must also make mention of 'short sales'. Short sales are sales of property that is under threat of repossession by a bank but where the bank permits the owner to sell the property and to sell it at a price less than the amount outstanding on the mortgage. They agree to write off the balance. Spanish banks will sometimes do this.
They do it for a number of reasons. In some cases, dealing with the property in this way can avoid it appearing as a distressed loan in their accounts and, as a result, can avoid the need for them to write off the loan and weaken their balance sheet. This is becoming more and more important as banks all over the world are having to strengthen their balance sheets by introducing more capital. The introduction of the Basel III rules
Basel III (named after Basel in Switzerland, the home of international banking) is a global regulatory standard on the adequacy of the capital held by banks. It deals with stress testing banks and assessing their market liquidity risk. It was agreed by the members of the Basel Committee on Banking Supervision during 2010-11.
This is the third generation of the Basel Accords, which date back to 1988. It was developed in response to the deficiencies in financial regulation revealed by the late-2000s financial crisis. for international banking (which increase the amount of capital required by banks) made this problem even more pressing.
This will greatly affect the property that you're going to buy. Are you looking to make money over five years, 10 years or 20 years? As a general rule, real estate investments do not work well for timescales of less than five years - although there have been some exceptions.
When you buy a property in another country it is quite likely that, in that country, they will use a different currency. This adds another level of opportunity and another level of risk to the transaction.
Currencies fluctuate dramatically, sometimes over a relatively short time frame.
If this works in your favour it can be hugely beneficial. If you buy a property that goes up in value by 30%, that is good news. If, during the same period, the currency has also risen in value against your own - say by 20% - this is a huge added bonus. On the other hand, of course, if the currency has fallen in value against your own then when you come to sell your property and convert funds back into your own currency you will not make nearly as much money and, in the worst-case, you could even lose money.
This may be obvious, but what can you do about it?
Nobody can predict with any accuracy and in detail what is going to happen to the value of any two currencies over the next few years but a little bit of study can help you understand whether it is likely that currency A is going to rise or fall against currency B.
There are a number of things that you can do. A good starting point is to look at the history of currency values. These can be found at many points on the Internet. XE.com is a good example.
You can also gain from a foreign exchange (FX) company's expertise and reduce your risk through their services. See our Guide to Foreign Exchange (FX).
Spanish banks are quite keen to grant foreigners with finance to buy property in Spain.
Most people who buy residential property as an investment want to rent it out. The question is, who are they going to rent it to?
There are two main tactics.
The first is to rent it out on the short term lets, typically to people taking their holidays. Rent per week will usually be much higher than you would obtain on a long-term let and you will be able to use the property yourself for the periods when it is not let. However, there are drawbacks. The administration is more complicated. The property management is more expensive because of the number of handovers required. There may be more wear and tear on the property. There will, without doubt, be longer periods when nobody is paying you any rent.
The alternative is to let the property on long term rentals. This will be less attractive if you wish to use the property, in part, as a holiday home but it can be a much less stressful way of generating rental income.
How are you going to turn this investment into a profit?
Do you have a clear strategy as to bringing the investment to an end? What is going to trigger the sale of the property? Is it going to be the expiry of a certain number of years (an easy option if there are a number of you investing in the project and you want certainty) or is it going to be when the property makes a certain amount of potential capital gains or, dare I say it, loses a certain percentage of its value?
If you are buying a property with a view to selling on at a profit, exactly who is it who is likely to want to buy the property from you at the time when you want to sell it? Is there a clearly defined target market? What evidence is there that it exists? What evidence is there that they will pay you the mark-up that you wish for?
Have you got experience buying a property in Spain? Tell us about it by emailing email@example.com.
Spain’s property market is getting stronger and now could be a good time to invest in Spanish real estate. But make sure you do due diligence, work out the risks vs the rewards and take professional advice.
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We hope you have found this guide useful. If you need any further help, please contact us.Manzanares Abogados S.L. 15 June 2016