The real cost of investing in Property in Spain €100K loss?

Why You Might Lose €100,000 Investing in Spanish Property (Read This Blog Before You Buy!)

Imagine investing in property in Spain, that property appreciating in value, and you losing money when you sell it. I know it sounds Bonkers, but it happens all the time and that's what this blog is all about. Don't invest in Spain without reading this blog.

Spanish Property Investment: The True Costs In and Out

What we're going to be covering in this blog are the different sales costs and purchase costs when buying a property in Spain, and I define them as costs in and costs out. We're going to cover appreciation, we're going to cover inflation, we're going to cover agency cost, and everything you need to know in order to understand market value before you make any investment in property in Spain—whether it's a relocation home, a property investment for a holiday home, or just an investment to rent out. Listen to this.

Understanding Market Value: The Key to Smart Investing

So the first thing we need to talk about is market value, right? So when we talk about appreciation or depreciation, the market value is what's going to command where we are. It sounds quite obvious but let's just talk about the two cases when you buy a property in Spain.

The first case: if you buy a new construction property, generally speaking, if you buy in the early stages, depending where you buy in Spain, you're able to get properties which are under market price. And what does that mean? That basically means developers offer properties under market price because they're in the early stages.

Then you've got resale properties. Generally speaking, when you buy a resale property, you're buying something at market price. To get a resale property under the market price, you need to find yourself a very good deal, a distress sale, someone that has to sell, or you have to be a very good negotiator. That sounds quite simple but that's quite important. So unless you buy very well, the only way the property is going to appreciate is by the market appreciation. Let's say on average 3 and a half% per year. So if you have a property for 10 years, your property will appreciate 3% times by 10 years. That's the only way of gaining appreciation if you don't buy something in the early stage or you don't buy a bargain or a bargain bargain.

The Hidden Costs of Buying and Selling Property in Spain

Having said that, that's the appreciation angle of property. Let's talk about property costs: purchase cost going in and purchase cost going out. And the out part is what people don't talk about, and that's what I want to share with you guys—no fluff, no sugar coat, the reality when you buy a property in Spain.

I'm going to give you an example: I'm going to talk to you about numbers in Andia where we are based. This varies autonomous region to autonomous region, but in Andalia the purchase costs are the following: first of all, you're going to have ITP, which is transfer tax in the case of resale properties, and you're going to have VAT in the case of new properties that are sold for by a developer. ITP is generally 7% in Andalia, and VAT is 10% in Andalia.

Okay, so apart from that, you're going to have lawyer fees. When you buy a property, you're transacting a property in Spain, you're going to have a lawyer do the due diligence and make sure everything is correct from urbanistic standpoint, incumbrances, and blah blah blah blah. We've done plenty of blogs about this topic, so feel free to check them out. And then apart from the lawyer, you have notary and land registry fees. Then you have various costs such as, you know, document copies and so on, but let's say that your purchase costs are going to range between 9% up to 13.2%. That's your purchase cost, right? So let's remember that—13.2% up to 13.2%.

Renovation, Furnishing & Ongoing Costs

There are other costs which are associated, which could be renovating a property, changing a bathroom, changing a kitchen, all the way up to refurnishing a property. So furniture and renovations need to be in your calculation. So those are the costs going in. Then for the period of time you own the property, you have the running costs of course, but let's talk about the costs going out.

What Does It Really Cost to Sell a Property in Spain?

And this is what is not talked about enough because you're very excited because you're going to buy a property, but what does it actually cost to sell a property now in Spain? Ready for this? To sell a property, you're going to be charged between 4 to 5% from an agency perspective. So agencies all over Spain work at different rates. You won't need to take care of any of the marketing costs, photos, and all these other things because the agency does that, including in their fees. So that's a 5% round sort of figure. But when that agency finds you a buyer, you're going to need a lawyer, if you use a lawyer, which we always recommend to make sure that your position is, let's say, looked after. And that lawyer is going to charge you the same as he charged you on the purchase of the transaction. He's going to charge you 1%.

So all of a sudden, on your exit costs—leaving the investment, selling your property—you have to pay the agency 5% plus your lawyer 1%. Until now, 6%. Is there any other costs? Well yes, there are. The other cost will be plal, plal Municipal. Plal Municipal is a tax you pay to your local Town Hall when you sell the property, and it's a fee you pay on the increment of value of the land itself. It's different to capital gains tax. This is what you pay to the municipal tax, okay? Which, let's call it, on average you own a property in in mikas for, let's say, 5 years, you going to be pay in a few grand—okay, let's call it three and a half grand. It really depends on the property itself.

And the last one, which is the big one, is capital gains tax. Now, while capital gains tax is calculated on the net profit, capital gains tax is 3% for non-residents. So if you're a non-resident and you're selling a property, the buyer is going to by law retain 3% of the property purchase value from you and then deposit that in the tax authorities. And then you have to go up to the tax authorities and say, hey, I made this amount of money and actually what's been paid on account of my taxes is this, and they'll either refund you the difference or they'll pay you, uh, or you'll pay more.

Now let's talk about exactly that. So 3% varies. 3% is a retention, so it's not really a cost, but it's something you have to pay out. So at the moment of signing title deed at notary, you're going to get 5% knocked off by the agency, and it's 5% plus VAT, don't forget, so it's technically a 6%. Then you have 1% lawyer fees plus VAT, which is 1.21%. So all of a sudden you're at 7.2% with agency and lawyers, and then you have another 3% non-retention tax. Disclaimer: that may not be the end tax you pay, but it's going to be retained from the beginning. So all of a sudden, you're at 10%. Now, what does this mean?

That means that exiting a property at €500,000, that means that your total cost to selling is 50 grand, which means that you're going to end up with a net of €450,000. You've heard that right.

Spanish Real Estate: Do the Math Before You Buy or Sell

Having said all of that, let's run through these numbers again: you buy a property for €500,000 and let's say you've got a cost going in of around 10%, again depending if you buy new construction or resale property, but let's just go with 10 for the sake of this argument. That means you got 50,000 going in as purchase cost, so your grand total investment getting the keys of the property is 550,000, right? It's different to 500. And then you sell that property for €500,000—well, all of a sudden it's cost you 550 but don't forget that if you do sell at 500,000, you still need to put on top of that the exit costs, which are around the 10%. So if you sell at €500,000 and your exit costs are around 50 grand, more or less 10%, you're netting 450 but it's cost you 550. Congratulations, you've just lost €100,000.

Something that might be valuable to you guys is we've created this buy and sell calculation. So you can input, for example, I buy a property for €575,000, right? It calculates the ITP automatically and then here you can put how much you're selling it for. So let's say you want to sell it for €680,000, 1 2 3, it does the entire calculation of you the net profit. So I'm going to link this into the description of this blog so you guys can play around with it, download a copy, and play around with what it cost in terms of going into a property investment and also going on—hope it's your value.

Define Your Timeline: The Secret to Smart Spanish Property Investment

So the reality is you need to understand your timeline of sale. If you jump into the market—then this is sort of a conclusion—if you jump into the market and you jump into the resale market and you buy a property right now at resale market value, you're at market value. How is that property going to appreciate? Well, unless you invest into the property and make it amazing, but that's also capped because even if you paint it with gold paint, it's not going to appreciate by the value of gold. That property is going to appreciate, generally speaking, with the trend of the market, which is on average 3–3.5% per year. So over 10 years it can appreciate 35% with appreciation.

So I think the key question here is understanding your timeline. If you're buying a property and you're thinking of selling it within a short period of time, you need to buy well under market price or find a really good deal in order to not lose money. If your timeline is, hey, I want to buy a property and I want to enjoy it for the next 15 years as a holiday home, well you're going to do absolutely fine. And that's the key difference of, you know, understanding your timelines.

How to Find a Real Bargain: Buying Under Market Value in Spain

If you were to buy a property under construction—and this happens a lot—you get agencies to go, hey, I can offer you a property which is 25%, 30% below market price, which is actually the case when you buy really early stage. And yes, you are buying under market price. And just for reference, when I say you buy a property under construction under market price, that would basically be me calculating how much that property would be worth in the finished market. That's how we calculate under market price.

Now, we did a blog on how to find a bargain in Spain, which I found quite interesting. We did it with Matt, and we talked about a bargain compared to a bargain bargain. And having been in property for 12 years, the way I see this is really straightforward. For professional buyers, people which buy and flip for a living, if you buy a property under market price by 10%—so you go into Kalah Honda and you get a property that's a resale apartment in as cascadas, and let's say for argument sake it's worth 400,000 and you pick it up for 370,000—yeah, you've got a bargain depending on your situation.

But if it's a professional, professional, uh, let's say company that buys and flips, that's not a bargain—they will not make a margin. It needs to be a bargain bargain, which means they need to buy 30–35% below market price in order to make money. That's the way it works in Spain.

Your Checklist for Success: Tips for First-Time Buyers and Investors

So going back to bargain versus bargain bargain—are you William looking to buy a holiday home in Cal and it's a 15-year project? You buy 10% on the market price—you've done a great deal. If you're Tim and you want to buy a property which you're going to be selling in two years, if that's your timeline, you need to keep this really in mind because you may even end up losing money.

So let's talk about the ways around it. Are you a professional buyer? Well, if you're a professional buyer—and what I mean by that is someone that's really entering this market to buy and sell and flip—I'm sure you know your ways around it, but there is one way around it and it's basically buying with a registered company that has the object or is registered to buy and sell properties. And in that case, you can register yourself for a bonification of 2% on transfer tax, and that makes a hell of the difference. So, um, yeah, that's the only way around not losing that much on the going in costs.

Final Thoughts: Knowledge Is Your Best Investment

I hope this was of value and a lot of information thrown your way, but I really think that if you're going to be buying a property in Spain, investing in property in Spain, you need to know this. So the biggest piece of advice I can give you guys as first-time buyers or, you know, if you're about to enter into buying and flipping or whatever you're going to be doing, is understand the market value, make sure that you're actually buying something at the right price. If it's at market value, don't expect for it to appreciate by 20 or 30%—it's not going to happen. Define your timeline. Communicate to the agent you work with what your expectations are so the professionals in the sector can align with what you're looking for. So if you're looking to buy something and appreciate by 20 or 30%, establish or make sure that from the beginning you can tell the property professional you're talking with what your expectations are, and expectations are the growth of the property, the timeline in which you want to exit that investment, and number three, what your gross profit and what your net profit projections are.