Are you considering buying a property in Madrid for investment purposes? If so, there are many factors you should take into consideration to get the highest return. This article walks you through everything you know to find the perfect investment property and maximize your rental yield.
1- Determine how much you want to use the property
If you want to have a dedicated rental property, we recommend you focus your property search in the most desirable rental neighborhoods, such as the Center of Madrid, Chueca, or Chamartin.
Because Madrid is a late night city that is famous for its nightlife, neighborhoods in the Center can be very loud, and experience a lot of foot traffic, all night long. If you want to have the apartment available for you and your family during the year, you might prefer a more residential neighborhood like Chamberí, Salamanca or Retiro. If you would rather enjoy a morning yoga class, or take your kids to the playground, you will probably be happier in a neighborhood away from the major tourist attractions.
TIP: If you are planning on spending time in your Madrid property, strategically choosing when you do this will help you further maximize your rental property yield. The Madrid market is seasonal. Because the winters are cold and the summers can be very hot, the occupancy rates are highest in spring and autumn. As you can see in this chart, occupancy rates for Madrid Airbnbs peak in October (92%) and are at their low in January (67%). Thus to maximize your short or medium term rental yield, plan to spend time enjoying your Madrid property in January, February and August.
Another thing to take into consideration when choosing when to enjoy your Madrid investment property is the average daily rate your property can achieve. According to data complied by the research firm Airdna, April is the most lucrative month to rent your property short term, when the average daily rate for short term rentals is $149 per night, including cleaning fees. Somewhat surprisingly, the lowest rate is in August.
2- Decide if you want to have a short, medium or long term rental
Do you want to rent your property short term (as in an AirBnb property), for a few months at a time or long term (for a year or more)? Short term rental properties have rental yields that are 2-3x that of medium and long term rentals.
The problem with renting your apartment short term is that it must be furnished and it will experience a lot of wear and tear. Moreover, you will need to pay all the utilities and will have much higher property management fees than if you rent medium or long term.
Case Study: Short vs. Long term rental yields
Property: Calle Ayala, 17 in the neighborhood of Salamanca. It is a two bedroom, two bath property. Purchase price: 1,160,400€ (including closing costs)
Long term rental
Annual revenue rented long term: 42,000€ (3,500€ per month)
Annual costs if rented long term: 7,560€. These include a 10% property management fee, community fees, property and waste taxes and house insurance.
Net rental yield: 2.02% (42,000-7,560)/1,160,400)*100
Short term rental
Airdna estimated annual rental revenue: 120,600€. This is with an estimated average occupancy rate of 73%.
Annual costs if rented short term: 40,401€. These include a 20% property management fee, power, gas, internet, community fees, property and waste taxes and house insurance.
Net rental yield: 6.9% (120,600-40,401/1,160,400)*100
As you can see, the net rental yield from renting this property short term is three times that of renting it long term. Thus, even with its much higher property management fees and lower occupancy rate, renting a property short term is the best way to maximize your rental property yield.
3- Determine the size of apartment you want to purchase
Another way to maximize your rental property yield is to strategically choose the optimal size of apartment you purchase. If you are renting your property short term, as an Airbnb, one bedroom apartments are the most in demand, followed by two bedroom apartments. Larger apartments and studios are less in demand and thus have lower occupancy rates. A big reason for this is that Madrid is not a very family oriented tourist destination. It tends to attract people that want to enjoy the city’s night life or visit the many fine art museums (which most kids don’t have a lot of tolerance for).
4- Find the right neighborhood
Investing in the right neighborhood is one of the most important things you can do to maximize your rental property yield. Once you know the answers to the above questions, you are ready to find the optimal neighborhood to maximize your rental property yield. Here are the best neighborhoods for rental properties:
Centro- best for short term rentals
Neighborhoods in the center of Madrid are extremely good places to purchase real estate if you want to rent your investment property short term. If you want to rent your property long term, central neighborhoods such as Sol, La Latina and Huertas are not so desirable as they are often filled with tourists and can be very loud at night. Moreover, restaurants in the center tend to be more traditional, as your average tourist prefers to try “typical Spanish food.”
Malasaña- good for short and long term rentals
Malasaña is the focal point of Madrid night life. The neighborhood is filled with bars, restaurants and small clubs. Although it can be very noisy at night, it is so dynamic that many people do like to rent here longer term. It is also very close to the center and major tourist attractions, so it is good for both short and longer term rentals.
Chueca- good for short and long term rentals
Nestled between Salamanca and Malasaña is the neighborhood of Chueca. It is is filled with trendy boutiques, tapas bars, sidewalk cafes and night clubs. It is a very LGBTQ+ friendly neighborhood and the center of Pride month in Madrid, which draws people from all over the world. It is also very close to the main tourist attractions in Madrid. Because of its diversity and location, it is good for both short and longer term rentals.
Justicia- best for medium and long term rentals
Justicia is a very beautiful neighborhood; many streets feel a lot like Paris with their upscale boutiques and higher end restaurants. It also has some of the most expensive real estate in Madrid- only Salamanca is more expensive. It’s a very desirable neighborhood in which to live, but doesn’t have as many tourist attractions as the neighborhoods in the Center. It is best for longer term rentals, but there are many shorter term rentals located here as well.
Salamanca- best for medium and long term rentals
Salamanaca Barrio is an old, elegant neighborhood. It is filled with high end fashion boutiques and posh big brands like Chanel and Dior. However, it is a little harder to get to the main tourist attractions from this neighborhood. It is more residential than neighborhoods in the center, and English is pretty widely spoken in shops. Thus, it is optimal for medium and long term rentals.
Castellana- best for medium term rentals
Castellana is located in the northern part of Salamanca. It has become a very dynamic neighborhood as the prestigious IE Business School is located here. It has a number of upscale restaurants, including the avant-garde DiverXO, which carries three Michelin stars. As it is relatively far from the center and major tourist attractions, it is best for medium and long term rentals. It’s probably the best place in the city for medium term rentals, due to the large number of affluent students that attend the business school.
Chamartín- best for long term rentals
The central business district of Madrid is located to the north of the city center, in Chamartín. Because so much business in Madrid is conducted over long lunches, it also has some excellent restaurants. The residential areas in Chamartín are very desirable for those that wish to walk to work. There are international schools located close by, so many expat families choose to live here. It is far from the major tourist attractions, with the exception of the Santiago Bernabéu football stadium. Although many tourists come to Madrid to see a football game or tour the stadium, they typically stay closer to the center so they can go to the bars and enjoy the night life. Thus, Chamartín is best for long term rentals. If you want to purchase a larger apartment and rent it long term, this is arguably the best neighborhood in Madrid to purchase an investment property.
Conclusion
If you want to maximize your rental property yield on your Madrid investment property, the optimal strategies are:
- Rent your property short term
- If you want to spend some time in Madrid and stay in your property, do so in the winter
- Purchase a one or two bedroom property
- Purchase a property in the Center, Malasaña or Chueca
Do you need help finding an investment property in Madrid? Madrid Estate offers a full array of real estate services in Madrid. We can help you find a property that will produce a rental return well above average and help you manage that property. Arrange a FREE CONSULTATION TODAY to learn how we can help you.
