Many owners wonder about rental profitability of their property, especially due to the complexity of the tax framework. In order to understand a home rental contract, it is necessary to know the difference between temporary and permanent rentals.

This article, will provide you an overview of the key factors that influence the profitability of these types of rentals. As an owner, you can evaluate which type of rental best suits your objectives.

Generally speaking, there are 3 rentals types, each with its own characteristics and advantages, which makes it more difficult to evaluate which is the most profitable option.

Profiability of the temporary rental

We highlight temporary rental as the type of rental that offers the most interesting profitability in the real estate market.

Both long-term or permanent housing and temporary rental are attractive options, but they present significant differences in terms of profitability, flexibility and risk. However the reasons we prefer the temporary rental are:

• Greater flexibility: one month up to one year contracts are more flexible and shorter than the typical 5 or 8-year contracts for permanent housing. This allows you to better adapt to changing market conditions.
• Greater revaluation: as contracts are renewed more frequently, prices can be updated according to demand.
  In long-term rentals, the price is generally limited to the Consumer Price Index (IPC).
• Higher sales value: by obtaining higher rents, part of the increase is reflected in a higher sale price of the property.
• Lower risk and default rate: renting to executives and individuals who come temporarily or for a few months, there is no interest in a stay at high prices, they leave without defaults and without damage to the property.
• Lower maintenance costs: there is no serious damage that would require a high reinvestment.
• Greater liquidity: it is easier to sell a property with a temporary rental contract, since it is vacated sooner..

Rental profitability factors in Madrid

There are three factors that stand out and help to understand why temporary rental offer higher returns, than regular home rentals.

1. Avoiding the inflation index

The IPC or consumer price index measures annual inflation. If the rental market in a city like Madrid increases by 10% per year and the IPC by 3%, this difference accumulates over the years in the ratio of 7% per year or 35% in 5 years.

For this factor alone, the profitability on a temporary rental contract will be above that of a permanent housing.

2. Higher price means higher profitability

In temporary rentals, tenants or lessees are willing to pay more (and over time or in prime areas up to 20% more) compared to long-term rentals.

This is due to several factors, but mainly because in many cases it is a temporary stay covered by the company, with a higher budget for that period of time. Rental profitability increases even more when the above IPC effect is added.

In other words, if we start in year 1 with a 15% price differential and add the accumulated annual differential from the previous point, the price difference between two apartments will rise in year 5 from 35% to 55% (35% for the IPC + 15% for starting with a higher contract).

3. Default risks and maintenance problems

The profitability of renting is much higher in seasonal rentals due to the low risk of non-payment of profiles looking for this type of rental. Seasonal tenants tend to have greater purchasing power, a better ethical profile and more strictly comply with their payment obligations. In addition, they have a greater interest in leaving at the end of the contract.

The maintenance of a rental property is a key factor affecting profitability. With seasonal rentals, maintenance is less, since tenants tend to be more careful as they are short stays and also, they can be more easily charged for the damage they cause to the property.

In permanent or long-term housing, the wear and tear is usually greater, being common to have to invest in the renovation of the property with each change of client. Many times these repairs may involve 2 or more months of vacancy, depending on the damage to the house.

Temporary rental has additional expenses such as the commission of a real estate agency for the effective management and marketing of the property. In exchange, the agency will be responsible for advertising the property, making the selection of tenants, formalizing contracts, collecting rents, etc.

Tax aspects of the profitability of rental housing

The tax regime applicable to the rental of a property depends on the type of rental and the personal and tax situation of each owner.
This topic deserves an article on the taxation of rental rates.

Personal income tax reductions (IRPF)

One of the main tax incentives for renting a primary residence is the possibility of applying a rental deduction in personal income tax of up to 60% of the positive net return

This reduces the tax base and, therefore, the tax payable. However, when doing the numbers, after deducting expenses and mortgage payments, in reality the savings are sometimes lower. In the case of temporary rentals, this deduction cannot be applied to personal income tax, but management expenses and commissions can be deducted.

Rental housing profitability in Madrid

Madrid is one of the most attractive cities to optimize rental profitability through the temporary rental contract.
Not only because of its position as the capital of Spain, but also because of the large number of multinational companies, prestigious universities and job opportunities that exist in the city.

The profile of tenants in temporary rentals in Madrid is usually people who move for work or educational reasons.

• Expatriate executives who come for limited periods with their companies.
• Professionals or digital nomads looking for a more authentic experience than a hotel.
• Master’s or PhD students, many of them from abroad.

Likewise, in Madrid there are several options to take advantage of temporary rentals.

• Manage it directly through web portals.
• Hire an Property Management agency in Madrid to take care of the property on an ongoing basis.

Whatever the option, temporary rental profitability in Madrid offer interesting opportunities for owners looking to optimize their real estate investment.

Conclusions to improve rental profitability

Temporary rentals have several advantages over regular permanent housing that make them a more profitable option.

Among them are

• the possibility of obtaining higher prices and adapting the same to market conditions, especially if the tenant or lessee is a company.
• It also offers greater flexibility in the duration of contracts,
• and a better quality of tenants.
• On the other hand, there is less exposure to risks when renting a house such as non-payments and problem tenants
• and easier sale of the property, if applicable.

In short, despite having to assume the payment of commissions, furnishing and not having the personal income tax deduction (IRPF) deduction, most of the indicators point to a higher net profitability with temporary rentals compared to traditional rentals of permanent housing.

Are you an owner and want greater rental profitability?

We recommend that owners who have a property in an area with demand for this type of rental, carefully consider the option of contacting the DFLAT rental management department in Madrid before deciding on a long-term contract.
It will allow you to maximize and make your rental income more flexible.

We take care of the entire process so that you only receive monthly income without worries, but improving the profitability of renting in Madrid.