Refurbishing a Madrid investment property is one of the best ways to maximize your rental yield. In this article we walk you through what you need to know, and do, to create a well performing refurbishment strategy .
Things to consider beforehand
Before you fly to Madrid and start looking at properties, we recommend you take some time to figure out what you want to achieve by investing in a Madrid property.
Below: the floorplan of a property we helped a client purchase, refurbish and rent out. Scroll through this article to see before and after photos. This property is located in Madrid, in the neighborhood Embajadores, on Calle Isabel.
Determine your investment goals
We recommend that you ask yourself what you want to achieve with your property purchase, refurbishment and eventual property sale. Do you want to establish a regular passive income? Do you want to build wealth? Are you looking to make a quick return by flipping the property? If so, there are different things you need to ask yourself and different types of properties that will meet your needs.
If your objective is to generate rental income, we recommend you estimate your target monthly, and annual, passive earnings goals. You should also consider your income time horizon – do you need cash flow now or is this for long-term growth?
Wealth building takes longer and there are more factors to consider. You need to run a full spectrum of numbers including the potential for capital appreciation. Also keep in mind any capital gains taxes you will need to pay when you sell the property.
If flipping houses, carefully consider your renovation expertise: how much work can you do yourself if you are undertaking a renovation, your ability to manage the project or if you will need to hire an architect. If you are buying a property abroad, it will probably be necessary (and ultimately save you money) to hire an architect to manage any renovation project.
It’s also very important to consider your property investment as part of your broader portfolio. If you are fully invested in equities, investing in a property or two is usually an excellent way to diversify. Many people we come in contact with either hold their portfolios exclusively in equities/bonds, or are almost fully invested in real estate. For diversification purposes, it will ultimately help (and give you greater peace of mind) to diversify at least a portion of an equity portfolio into real estate. If your portfolio is almost exclusively in real estate in one area of the world, refurbishing a Madrid investment property would be a great way to diversify. If you are American, you can actually invest in real estate via your IRA. To learn more about this interesting, but not well known opportunity, we invite you to read our article: How to invest in real estate via your 401(k) plan or IRA.
Renovation case study: Before pic of a bedroom
Renovation case study: After pics of the bedrooms
Would you like to see more before and after photos of our renovations? Arrange a FREE CONSULTATION TODAY to make an appointment with us and learn more about refurbishing a Madrid investment property.
Consider how you are going to manage your property
Once your renovation is finished, the property will need to be managed. This involves a variety of things that many people don’t consider, such as:
- On-boarding new guests/tenants.
- Cleaning of the property between guests/tenants.
- Fixing any broken items.
- Paying bills.
- Dealing with utility companies.
- Linen service.
- Managing the various channels where your property is listed, and optimizing its rental price based on any seasonality.
Although most people think they can manage their rental properties themselves; few are able to do it nearly as well as a professional. It can be detrimental to your ultimate return if you receive poor reviews on rental platforms.
It’s easier if you are renting long term, but if you are renting your property short or medium term, you will ultimately save a lot of money by hiring a professional.
Clearly define your budget
Most people are good at estimating how much money they have to purchase a property, but they often don’t consider other costs that may accrue. There will be legal costs, the opportunity cost of your time spent searching for properties, transportation costs and ultimately, accounting fees. If you purchase an investment property in Madrid for refurbishment, you have to pay a notary and a 6% property transfer tax (ITP). This is Spain’s lowest ITP rating. Other regions, such as Valencia and Barcelona, have rates ranging from 7% to 11%. You will also have to pay a stamp duty (also known as IAJD, or Impuestos de Actos Juridicos Documentados). This covers the legal work required by the local authority to register the property with the land registry. These range between 0.3% and 0.7% of the purchase price of the property for sale Madrid. Finally, if your funds aren’t held in the euro zone, you will also have to pay currency exchange fees.
Renovation case study: Before pics of the salon
Renovation case study: After pics of the salon
Can you get a mortgage?
An excellent way to potentially increase your return on investing in a property is to take out a loan to purchase it. This is because returns are often greater than the interest rate you will have to pay the bank. Thus, you can make money not just on the return, but also on the difference between that and the interest rate. Leverage can also allow you to purchase more properties.
Investors from abroad can often get Spanish mortgages. This is an important factor to explore as, due to big differences in the US, euro zone and Spanish financial systems, Spanish mortgage rates are typically much lower than US mortgage rates.
The only caveat to this is that banks view lending to non-residents as riskier than lending to residents, so:
- You will have to pay a larger down payment than a resident.
- Your mortgage rate will be higher than those published for residents.
- The criteria for non-EU citizens may be different compared to those who reside in the EU.
This said, it is almost always better to leverage an investment property purchase. That is because leverage can significantly expand the potential for returns. To learn more, you can read our article Spanish mortgages for investors.
Decide how much appetite/bandwith you have to go through a renovation
Finally, it’s important to consider that undergoing a renovation can be stressful. If you are managing it yourself you will have to deal with contractors and other service workers. This hassle can be greatly mitigated by hiring an architect to manage the process, but headaches can still occur.
You have made the decision to invest in, and refurbish, an investment property in Madrid. Now what?
Renovation case study: Before pic of the kitchen
Renovation case study: After pics of the kitchen
First, let’s look at the numbers
In short, we have found that every 1€ our clients spend on refurbishment adds an additional 1.5€ to the value of their apartment.
For years, the Madrid property market featured old, dark apartments in relative states of disrepair. Many Spaniards preferred to buy new builds outside of the city center than to renovate older properties. This started to change as the country recovered from an economic crisis, tastes changed and non-Spaniards started seeing the potential in refurbishing Madrid investment properties. Although much has been done to reform the apartment stock in the city, there are still excellent opportunities to be found to renovate older properties and either hold them long term, rent them out or flip them.
The question we often get is how much does it actually cost to renovate an apartment in Madrid? In general, we have found that it costs 1,000€ per square meter. But this includes everything for a high quality refurb: materials, labor, furniture and decoration. This can add to your final budget, but the returns are usually well worth it. Real estate in Madrid is typically much cheaper than that in other European cities. Thus a 1,000 square meter apartment in Madrid is much cheaper per square foot, making it relatively easy to amortize your renovation costs. Madrid Estate clients typically earn net returns of 4-5% on their real estate investments.
Renovation case study: Before pic of the bathroom
Renovation case study: After pic of the bathroom
Determine the neighborhood in which to invest
If you are buying a property in which to live, or use as a second home, definitely spend some time reading about the various neighborhoods. We have a collection of articles on this site, detailing the best Madrid neighborhoods for real estate investment: Get to know your next neighborhood. After that, you can call us for a FREE CONSULTATION to look at properties over video, or even arrange a trip to Madrid and walk the neighborhoods you find most appealing.
If you are looking for an investment property, we currently recommend properties in the Center and Tetuán.
Regardless of your reasons for refurbishing a Madrid investment property, we will hold your hand every step of the way. We can help you find a property, obtain a mortgage, close on the property and manage your investment property. We invite you to arrange a FREE CONSULTATION TODAY to learn more and get started on your journey.
