When making an investment, it is important to be clear about the return that is expected to be obtained. In the case of investing in property in Spain, it is no different, but the calculation can be a little more complicated since there are a series of expenses (in the purchase but also periodically) that make it a little more elaborate.
To buy a home you have to take into account that there are some associated expenses that do not exist with other assets. On the one hand, there are taxes (VAT or ITP, depending on whether it is new or used) and notary fees and property registration. In addition, you have to take into account if the house needs a reform to put it up for rent.
VAT is 10% and ITP depends on each autonomous community, which can vary between 6% and 10%. There are some cases in which it can be even lower but normally they are for habitual residence, which we could not apply in this case.
Apart from these expenses, the house has some fixed expenses: the community fee, the IBI, insurance, maintenance costs and the mortgage fee (if you decide to take out a mortgage). The costs of supplies are not normally taken into account for the calculation of profitability since they are usually passed on to the client (it can also be done with the community fee and the IBI but it is not usual).
Investing in real estate is one of the most common and safest options, although, in order to get the most out of it, it is important to know how to calculate the return on a real estate investment. Unlike the stock market, which can fluctuate wildly over time, the value of a property remains relatively stable. In addition, it is a tangible asset and resistant to economic crises.
It is even advisable to take advantage of the low interest rate that Spanish banks apply on mortgage loans to buy properties and rent them in order to obtain guaranteed income. Large and small investors are taking advantage of these favorable circumstances to make real estate investments.
How can we calculate the profitability of our real estate investment in Spain?
The ROI (“return on investment”) is a financial indicator that measures the performance of an investment and its objective is to calculate the percentage of profit expected from an investment based on the initial bet. In fact, it is one of the most used metrics to know how to calculate real estate profitability.
Both companies and investors use this indicator. In the case of companies, ROI allows decisions to be made about the most profitable project or products, both before and after making an investment. On the one hand, investors can choose the most profitable investment project or product based on ROI in combination with other indicators, such as risk, benefit-cost ratio or investment recovery period.
To calculate the ROI we need two elements: the figure of the benefits in a stipulated time and the figure of the total capital invested in a certain operation. Depending on the investment, we must take a measurement time that allows us to obtain an ROI as accurate as possible, since a period that is too short can indicate fictitious losses, just as a very long one can make the earnings report irrelevant.
The benefits are obtained by subtracting the income generated by an operation (interest, dividends, letters, etc.), the investment made for its development (expenses such as insurance, operating costs, etc.). It is important that the expenses and income data are completely real and complete so that the ROI result is reliable. In addition, calculating the taxes generated during an investment is also essential when calculating the ROI, since these costs can significantly alter the benefits.
In any case, the ROI must always be interpreted, since, being a percentage indicator, it is necessary to take into account other factors such as the risk and the duration of the operation. If it is negative, the ROI indicates that the investment has made a loss, while when it is positive, the interpretation depends on whether the result is above or below 100%.
The ROI is therefore interpreted in two different ways, taking, for example, a measurement time of one year. Thus, in case the ROI is less than 100%, the result tells you how long it will take you to recover your initial bet, that is, when you really start to earn money. If the ROI is greater than 100%, it indicates that the investment is profitable from the first year. The result obtained reflects the excess profits generated by the investment.
What expenses differ from real estate investment?
When calculating the profitability of a real estate investment, the first thing we will have to do is calculate what the total outlay that we are going to make will be. Therefore, we will have to take into account both the initial expenses and the fixed expenses.
Initial costs:
- Purchase price: the price that we are going to pay the seller for the purchase of a property.
- Taxes: in case of buying a new construction home, we will have to pay VAT. If it is a second-hand home, we must pay the Property Transfer Tax, which depends on each autonomous community. In addition, there are certain profiles of taxpayers (young people, large families, single parents, etc.) who can benefit from a reduced rate of tax, thus reducing the total amount of their initial investment and increasing the profitability of the real estate operation.
- Fees: as a general rule, real estate fees are paid by the seller, although there are some figures such as the buyer’s exclusive agents or real estate personal shoppers who charge their fees for the procedures carried out.
- Refurbishment: if the property needs refurbishment to go on the sale or rental market, these expenses must be added to the initial investment to calculate the profitability of the real estate operation.
Fixed costs
In addition to the initial expenses, we must bear in mind that there are also a series of fixed expenses that we will have to consider when calculating with greater precision the profitability of the investment. Some of these fixed expenses are:
- Community of neighbors: this is a monthly fee assumed by each dwelling for the maintenance of community expenses (community electricity, elevator, cleaning service, etc.). When a property is rented, these expenses can be added to the rental fee that tenants will pay each month.
- IBI: the Real Estate Tax is levied on the cadastral value of the home and must be paid annually to the corresponding town hall, although it can also be split.
- Sporadic repairs: if we rent a property, we have to take care of any possible damage caused by the use of the property. If you have a mortgage on the property, it is mandatory to take out home insurance that covers certain damages.
Therefore, it is essential to carry out a complete study that provides real data if we want to make a successful real estate investment. Sometimes, the investor focuses only on the purchase price of a property. In this case, the return may seem high if the amount invested is low. But, to know exactly what the potential profits are, we must consider all the expenses.
