Buying Investment Property in Costa del Sol
Costa del Sol has been a favourite area for buying holiday homes and investment properties for decades, due to its climate and easy access from most of Europe via Malaga Airport.
The explosion of new builds, as well as the continued supply of second hand properties, have not dampened the demand so far in the Costa del Sol. Prices have recovered, having dipped after the global financial crisis, and the pandemic has not made a dent in demand or prices.
Many buy properties in the Costa del Sol for holiday homes, hoping to generate sufficient revenue through vacation rental, which makes the property ownership cost neutral. This is due to the high demand on the Costa for holiday rental properties. Some buyers do purchase properties for investment purposes, as well as those who buy for their own exclusive use.
What to look for?
The most important measure for investment has always been the yield, which is the annual return on investment a property can deliver.
Yield is directly impacted by a number of factors:
Purchase Price – Buying at the right price is extremely important. The higher the price, the higher revenue you need to generate, in order to gain a reasonable yield, or achieve a possible break-even point.
Interest Rates – For those requiring a mortgage, interest rates impacts the nett income in two distinct manners:
Firstly, the higher the interest rate, the higher the yield you need in order to justify tying up capital in a property. With low bank interest rates, you can improve your RoI (Return on Investment), as the capital will not earn much by being locked up in an interest earning bank account.
Secondly, interest rates determine your cost of borrowing. The higher the interest rates, the higher the mortgage repayments, hence the need to generate a higher revenue. An expensive property does not always mean higher rental income, as “location” and “glass ceiling” come into play (see below).
Rentability – Some areas have higher demand for rental (long term rental or vacation rental), so make sure you do your homework, and talk to a Rental Specialist.
Your Estate Agent is not the right person to guide you in this, as they are interested in selling you a property. Return on Investment is simply not on their radar, nor is of interest to them. Rentability ultimately determines your ability to generate revenue, and hence make any return on your investment.
What determines Rentability in the Costa del Sol?
There are distinct aspects of a property that determines the rentability in Costa del Sol. Some of these only apply to long term rentals, and some only apply to vacation rental, so you need to decide what is best for your investment objectives.
Long Term Rentals are impacted by:
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- Number of Bedrooms
- Availability of employment
- Availability & distance from Public Transport
- Proximity to Services (Shops, Restaurants, Bars, Supermarket, etc.)
- Proximity to Schools
Vacation rentals are impacted by:
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- Number of Bedrooms
- Proximity to the Beach
- Proximity to the Airport
- Proximity to Services (Shops, Restaurants, Bars, Supermarket, etc.)
- Proximity to Public Transport
- Views and outside space
The relationship between the rental achieved and these elements are directly linked. For example, for vacation rentals, the closer you get to the beach, the higher the rental. The same regarding to being close to services, or distance from the airport, etc. So choose your location carefully and get a Rental Specialist to give you advice.
The Rule of 10
The following are the points that directly impact rentability, as well as saleability in the future. In simple terms the “Rule of 10” consists of:
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- 10 Minutes walk from the Beach
- 10 Minutes drive from the Beach
- 10 Minutes walk from Shops, Bars, Restaurants
- 10 Minutes drive from Shops, Bars, Restaurants
- 10 Minutes walk from Public Transport
You don’t have to be a property expert to workout the walking distance always beats the driving distance!
For example, a property within 10 minutes walking distance of the beach versus driving distance to the beach can in some cases command 50% higher rates for a vacation rental property per week in High Season. However, you need to consider the Glass Ceiling on prices (see below).
What is the “Glass Ceiling”?
Regardless of the location, each area has a maximum achievable price for Sales, Rental, and Vacation Rental.
Beware that many vendors overplay their hands on this, hoping to maximise their selling price. A savvy buyer should examine closely both achievable rentals, as well as real achieved sale prices in the area. A good rule of thumb is “Never buy the most expensive house on the road”, and don’t forget the Rule of 10.
Taxation
Inevitably any income generated from the property will be subject to tax in the country that the income was derived within. In the case of a property in Spain, the income is generated in Spain, and is subject to income tax in Spain, irrespective of where the owner lives, or registered for tax. So think carefully about the price you pay, as your real return on your investment is based on “Net Income” and not the “Gross Income”.
Click here to check out our guide in taxes on rental income for EU and non-EU nationals.
Summary
Whilst a house purchase is very much an emotional purchase, buying a property for investment, or holiday home must not be clouded by emotions. Buyers need to be very much focused on costs, as well as real potential income, ignoring claims by the vendor, or their agents, about any potential income. In many cases, they are wishful thinking or aspirational rather than the reality.
Contact a professional Property Management company, before you part with your money to get the realistic estimate of the potential income, and hence yield from your investment.