Many people today consider investing in apartments for rent seeking to obtain a reasonable return on the savings you have in the bank and that do not give you anything, or what they have invested in the stock market, hoping that nothing strange happens and that they do not lose what that I have invested.
But above all what they are looking for is security, before profitability. It has already been seen on several occasions that money invested in banking and the stock market can be lost. In real estate investments, the price may fall, but there is a physical asset that has a value and it can be traded.
Investment in real estate has always been for the conservative investor profile. I did not expect great returns, but I knew that if you manage the rent well (selecting the tenant well) and have patience, not only do you get the capital gains from the rent, but also that when you sell the property, it has appreciated.
That today there are many people who doubt it, but it is irrefutable with data. In Spain, in the last 40 years, the average revaluation of flats has been 5% per year.
An investor in real estate must be well advised, not only at the time of purchase to correctly choose the property to buy based on their expectations of profitability and liquidity, but also in obtaining financing, in managing the property, in taxation, etc. Leaving any of these points to chance can derail our investment expectations.
But what return should we expect from a good investment in apartments for rent?
Anything that exceeds a net profitability of 5% is more than acceptable, but you have to do the numbers right because if we don’t calculate them correctly we can be misled. Sometimes they present us with returns that are not true and it is necessary to know how to separate the wheat from the chaff.
The profitability of the investment is calculated as (INCOME – EXPENSES) / INVESTMENT, where the INCOME are calculated annually (rents), the EXPENSES are the housing operations (IBI, Community of Owners, Management, Maintenance, …) and the INVESTMENT is the money that we have disbursed to acquire the property (purchase, taxes, notary, registration, mortgage constitution expenses, …)
If we buy a flat for € 140,000 in Madrid and pay it in cash (purchase costs € 12,600), we rent it for € 750 / month, € 400 IBI, € 60 / month Community, … these numbers would come out:
PROFIT = (750 * 12 – 400 – 60 * 12) / 152,600 = 5.24%
As we have mentioned, if it is possible to rent that apartment at that price in a stable way, the profitability would be 5.24%, which would be more than reasonable.
But, how can we do that with a floor with characteristics similar to the one in the example, we can obtain returns of 20%? Is that possible?
The answer is yes. But you have to refine much more in what is bought, where, in tax benefits, financial leverage, … in short, go hand in hand with a specialist.
If we buy this € 140,000 flat in a suburb of Madrid, with a high demand for rentals, we finance 80% of the investment at a fixed rate of 1%, and we benefit from the reduced ITP for investors in the Community of Madrid, the return we obtain (even discounting the costs of the interest we pay on the mortgage, the rental management costs and the non-payment of rents insurance) is 26.75%.
If we also count the average revaluation of the area, it goes to 48.75%.
A luxury available to anyone, who is well advised.
Director of the REALTY PLUS Real Estate Group