Real Estate Investing in Spain – What You Need to Know

Spain has always been a major draw for ex-pats and second homers, especially amongst the British, who have been relocating to Spain in droves since the 1970s, but increasingly for Americans too.

 

It’s not hard to see why.  The balmy climate and beautiful scenery of the coasts, as well as Spain’s cosmopolitan and history-rich cities such as Madrid, Barcelona and Seville provide a standard of living second to none in Europe.  There are currently over 40,000 Americans living in Spain, according to the Spanish office of national statistics, INE.

Spanish real estate is potentially a great investment too, whether you plan to eventually relocate, or turn a profit from the property.  Let’s look at the two main methods of profiting from property in Spain, even if you don’t plan to live there.  The two options that work best are Buy/Renovate/Sell and Buy-to-Let. 

Buy/Renovate/Sell

Buying homes in Spain with the intention of selling them after renovation can be a great way to turn a significant profit but it does come with significant risk.  In the time between purchasing the property and managing to sell it, the economic climate can change.  The recent global pandemic is a perfect example of a circumstance that nobody could have foreseen which has resulted in many investment plans rapidly changing.

The pandemic has engendered a property value decline of between 1.4 and 1.6 percent, as reported in The Local.  Economic recovery is tentatively predicted to be good, however, so if you time it exactly right, you may be able to pick up a property at a bargain price then watch it rapidly rise in value.  The Local reported US credit agency Standard and Poor’s analysis thus: “within the space of one year, house prices in Spain will experience one of the biggest price fluctuations (fall to rise) of Europe’s main economies, from a 1.4 percent fall to a 4.5 percent rise.”  Against all expectations, 2021 may prove to be one of the most lucrative years to buy cheap real estate in Spain.

So how easy is it for a foreign buyer to snap up property on, for instance, the Costa del Sol?  The simple answer is – extremely easy!  With no restrictions on foreign property investment, all you need to consider is exchange rates, visas, local taxation and fees. 

Spain uses the Euro, a strong currency which is protected against significant fluctuation by its uptake by nineteen European Union countries.  It’s currently doing well against the dollar, but this may change in the coming months.  When renovating, you’ll have to factor in various hidden fees, as well as the cost of materials and labor.  It would be wise to work in partnership with a trusted and experienced local developer, rather than going it alone.

As well as the renovation costs, do bear in mind the usual fees and taxes:

  • Spanish Transfer Tax – this is payable by the buyer on the sale of all non-new homes. A national baseline of 7% can fluctuate regionally; for example, it is 10-11% in Catalonia (includes Barcelona) but only 6% in the Basque Country.  It can also depend on the value of the home you are buying.
  • VAT (locally impuesto sobre el valor anadido or IVA) – if you are buying a new-build property, you’ll pay this at 10% instead of Transfer Tax.
  • Notary and Registration Fees – payable by the buyer and come in at around 0.5 – 2%
  • Stamp Duty – (termed AJD locally) legal registration fees at 1.5%
  • Urban Land Appreciation Tax. Until recently, a tax was payable to local authorities on the sale of a property if it could be shown that the value of the land underlying purchase properties had increased in value.  The formula for the taxable base is the cadastral value of the land multiplied by the number of years it has been held by the owner times a coefficient set locally between 3 and 3.7.  Local rates vary up to 30% of the taxable value.  This tax has been legally challenged and is awaiting a Spanish Supreme Court ruling but it might be prudent to factor a nominal amount into your budget in case these fees must be paid.
  • Capital Gains Tax is payable at 29% of any gains made when you sell.
  • Commission or fees payable to local agencies, solicitors, or surveyors

 

Although Spain is incredibly open to foreign property investment, you’ll benefit from local knowledge and fluent Spanish speakers negotiating on your behalf.  Fortunately, there are many experienced and trustworthy local developers and agencies to partner with, and Avalanding can help you find them.

Better still, there’s something called the Golden Visa program.  Available to foreign investors spending more than $700,000, this is a residency visa that permits you unlimited travel within the EU Schengen region, an amazing deal, even if you don’t eventually plan to relocate.  This visa could prove especially helpful if you plan to spend a lot of time in Spain overseeing your renovation. 

For more information on visas, visit Expatica.com or enquire via the Spanish Embassy.

Buy to Let

 

If you’re a little risk-averse and want a quicker return on your investment in Spanish real estate, you may elect to buy into the rental market.  Profits can be considerable, with the Bank of Spain predicting a return of 5.6% in the rental market in November 2020. 

Although 80% of Spaniards own their own homes, there are over 137,000 properties listed on Idealista, Spain’s largest property website.  It’s a good idea to look through some of these sites, both to check current rental rates, and to see what regions are in the highest demand.

As might be expected, the big cities – Madrid, Barcelona, Seville, and Valencia – are major draws for rental apartments.  With high student and business traveler populations, these urban centers experience a higher demand for lettings.  Here’s a comparative guide to rental yield in European cities.

You can see that Madrid, Barcelona and Alicante come across particularly well, offering between 4.5 and 5% return.

 

Also significant is the holiday timeshare and second home market, focused on the coasts (Costa del Sol, Costa Brava, Costa Blanca, and Andalusia).  You’ll also find retirees settling in these idyllic southern climes, and sometimes renting rather than buying, retaining their first homes in the US, Britain or elsewhere.

 

With a projected profit of up to 10% on investment (factoring in all fees, costs and taxes), Spain remains an excellent choice for rapidly turning round and reselling properties. 

What Taxes and fees do I need to Consider?

 

Here are some of the expenses you’ll need to factor into your budget:

  • Spanish law considers rent received from properties belonging to non-residents to be investment income and charges a flat fee of 24% on gross receipts. You cannot deduct rental expenses against this tax. 
  • If your property is not currently receiving rental income, you’ll have to pay a 1.1% or 2% imputed income tax (dependent on whether the property was valued prior to 1994).
  • There is also an annual registration fee payable to the Chamber of Commerce, Industry and Navigation. This is set currently at a sliding scale from 0.75% for income up to 60,000 Euros down to 0.01% for those earning over 24 million Euros.  This levy is, however, deductible against income tax.

Conclusion

 

Whether you’re considering a buy to let property or a renovation and quick sale, Americans buying real estate in Spain should turn to a trusted Spanish partner. 

Here at Avalanding, we offer exactly that.  Come and visit our site for further insight and expertise.