Many owners wonder about rental profitability of their home or 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.

Temporary rental vs. permanent housing

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.

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

We highlight temporary rental as the type of rental that offers the most interesting profitability in the real estate market.
Among the advantages it offers over long-term rentals are:

  • Greater flexibility: 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, especially rising house prices..
  • 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) by laws such as the LAU (Urban Leases Law).
  • Higher sales value: by obtaining higher rents with temporary rental, 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

Both models involve expenses to be considered, although with different items. Ideally, these expenses should be calculated in the financial plan in order to have a realistic view of the final net profitability.

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

1. IPC Effect

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 8% per year.

Therefore, in five years, the difference in price of two homes, one in temporary rental and the other a permanent housing, will be 40% (5 years x 8% per year).
As opposed to a permanent housing that rents for €1,000, there will be another in temporary rental that rents for €1,400 in year 5 (a 40% difference).

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

2. Price

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 40% to 55% (40% for the IPC + 15% for starting with a higher contract).

3. Default risks and maintenance problems

The risk of defaults is minimal in temporary rental contracts and higher in permanent housing contracts, which may result in a loss of another additional percentage.

Temporary tenants tend to have greater purchasing power, are more compliant with their payment obligations and generally 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.

In addition, by law, regular maintenance is the responsibility of the tenant, but in practice it is the owner who is responsible for damages due to wear and tear and major repairs.

4. Commissions

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.


Make rental housing profitable 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.

Most requested areas are the Center of Madrid and areas such as Chamberí, Salamanca and Retiro.

The demand for short and medium-term furnished rentals is very active throughout the year.

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

  • Manage it directly through web portals.
  • Hire an agency specialized in Property Management to take care of the property on an ongoing basis.
  • Rent to a company that then rents it to its employees, if you have access to it.

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

Conclusions to improve rental profitability

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

Among them is 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 hiring the rental management in Madrid before deciding on a long-term contract.
It will allow you to maximize and make your rental income more flexible.

With DFLAT, you can forget about the typical problems of renting. We offer several options to owners of apartments in Madrid.
We take care of the entire process so that you only receive monthly income without worries, but improving the profitability of renting in Madrid.

The success of our business lies in offering corporate apartaments for executives, expatriates, business schools, or consulates through various channels: B2C, B2B, relocation agencies, moving, travel and our own channels such as this blog.

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