Many property investors wonder about how to maximize their return and what type of property is best to purchase. We asked Sean Woolley, Director of Cloud Nine Spain to explain his experience with buying and renovating a run-down property, and one which was already to rent out to show the pros and cons of each approach and what you need to think about.
“I recently purchased two investment properties on the Costa del Sol in the south of Spain. The first of these was a tired two bed, one bath apartment in need of renovation, but located in a fabulous setting on Marbella’s Golden Mile, just a short stroll from the 5* Puente Romano and Nobu hotels and beaches.
The second property I purchased was a fully furnished two bed two bath apartment between San Pedro and Estepona, all ready to go and with no work needed.
I had initially chosen both options for rental investment, the first to be let out on a holiday rental basis and the second on a long-term rental. However, midway through the renovation of the Golden Mile property I realized that there was potential to add considerable value to the apartment and to perhaps re-sell the property at a higher price, covering the cost of the reform and returning a tidy profit.
One of the problems with buying a fixer-upper in Spain is the high cost of purchase and sale of the property. Depending on the region in which you are purchasing, you can expect to pay anything up to 10% in transfer tax, legal fees and notary fees. When it comes to selling the property, agents here in Spain will typically charge 5% plus VAT of the sales price. This means that unless you are making more than 20% profit, there is simply little point in going down this route.
However, an often unknown fact is that registered Real Estate companies and property development companies in Spain can purchase properties and only pay transfer tax of 2% (rather than the typical 7%), as long as they resell the property within five years and do not rent the property out. This considerably reduces the purchase costs and makes the fixer-upper model more attractive to professional investors.
Like anywhere in the world, location is critical. If you are buying a fixer upper, who is going to purchase your property once it's reformed, and who is going to rent the property to provide you with an income? If the property is in the middle of nowhere, it will be appealing to a very small audience.
Another important consideration is how much physical and mental input you can spare on your project. I was in the fortunate position of knowing and trusting an excellent project manager who I've worked with in the past, and once he had a full understanding of what I was trying to achieve and the level of specification I wanted, he basically took over. All I needed to do was pop into the property once a week to check on progress, so the project became a stress-free, hands-off investment.
The success of any project like this comes down to numbers. We negotiated what we considered to be a good price for the purchase of the Golden Mile apartment, but we didn't skimp on the reform. Instead, we created a boutique hotel environment in the interior and staged the property with classy furniture in order to resemble a luxurious show home. In this case, it helps that we have our own furniture business and we are able to source the materials at cost price, but I think it's imperative in any case to stage and dress the property for photos, whether it be for sale or for rental.
We have priced the Golden Mile property to re-sell at what we considered to be a fair figure. If we are not successful in attracting a buyer over the winter months, we will rent out the property to holidaymakers and expect to make an annual gross income of over 10% on the purchase price.
The second property required little to no involvement from us and we were able to secure a long-term rental tenant providing us with a healthy return on investment, and again creating a hassle-free, hands-off investment vehicle.”
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