Renting out properties has become one of the most secure businesses, which has been professionalized with new technologies. Get to know the different types of rental, as maximizing rental profitability has been highly professionalized in Madrid.
There are several questions you should ask yourself before making the decision to rent out your property. These include the level of complexity you’re willing to undertake, the resources you have for property promotion, and the type of customer you desire. You might need to account for VAT, issue invoices, or hire a management company.
The 3 main types of rental agreements
First and foremost, it’s essential to understand the type of property you own and the services you wish to provide in order to identify the most suitable rental arrangement. There are three types of rental agreements, each with its specific contract and legal framework: regular residential rental, seasonal rental, and tourist rental.
1. Regular residential rental
This is the most common type of rental agreement, offering greater stability over a longer period in exchange for moderate to, sometimes, low profitability.
It’s accompanied by a seemingly favorable taxation scheme, as 60% of the income is exempt from taxation.
It apparently generates profits with a pre-tax yield of 4.5% according to Bank of Spain figures and its profitability is above that of other investments, such as the yields obtained from Treasury bonds.
However, significant drawbacks include legal uncertainty for property owners due to tenant protection, potential payment defaults, the time and judicial costs of evictions, and limited rent increases below market rates.
The contract duration, longer in this case, ranges from 5 years for single natural persons to 7 years for legal entities or corporations, with annual rent increases capped at the Consumer Price Index (IPC).
2. Seasonal rental, also called “temporal rental”
This type of rental offers high returns, positioning itself between regular residential and tourist rentals.
It’s legally classified as “Lease for a Use Other than Housing” and suits landlords who prefer to regain possession of their property at the contract’s end and adjust the rent annually according to market conditions.
Properties leased under this arrangement endure less wear and tear, requiring less maintenance compared to tourist rentals, while still yielding higher returns than regular residential renting.
The relationship between the parties is governed solely by the clauses specified in the contract, mutually agreed upon. This allows for annual rent increases based on market evolution.
Among its disadvantages are the absence of the fiscal benefits associated with regular residential rentals and an increased workload.
One major drawback is that tenants are not confined to a specific channel. DFLAT Madrid, for example, excels in this aspect by renting to international corporations, among others.
The advantages include minimal payment defaults and legal issues, along with higher long-term profitability, even without considering tax deductions.
3. Tourist rental
One of the main advantages of this arrangement is the freedom it affords in contract formation and, notably, its high profitability in exchange for higher risk.
Yield can range from 5% to 15%, after deducting high management costs, sometimes exceeding traditional contracts’ returns by up to 50%.
The profitability of this type of rental depends on tourist demand. It can experience downturns during specific seasons or due to international situations, conflicts, or events like Covid-19.
Its disadvantages include high workloads, intense property use, neighbor complaints, and elevated operational and management costs.
Which type of rental is suitable for maximizing property profitability?
Each rental type has specific requirements, and as any good Property Manager would confirm, not all properties are suitable for all scenarios.
The recommendation will depend on factors such as the property’s location, type, investor profile, desired profitability, number of units, and estimated selling time. However, the location remains the primary variable defining the type of exploitation.
For instance, if the asset is situated in central Madrid, tourist rental might be the best option. In a financial district, temporary corporate rentals could work well, while residential areas are better suited for regular residential leasing.
The legal and fiscal framework
This warrants a separate article. It’s crucial to understand the laws surrounding various rental types, the taxation for each contract form, clauses for protecting the business, and, of course, where the best clients are to be found.
Given its lucrative nature, taxes must be paid, whether through personal income tax, corporate taxes, or VAT.
Ignoring this is deceiving the tax authorities and all contributors to the common welfare.
A summary for property owners
- Regular residential rental is the most tax-efficient, as well as the clearest and most recognized form.
Disadvantages include lower short-term returns and the risk of non-payment and squatters, while advantages include the ability to conduct long-term operations and access tax deductions.
In DFLAT, we do it, but we do not recommend it as 80% of our investors go for the temporal contract
- The second-least complicated but often the most profitable one is the seasonal contract, which caters to various client profiles.
While not the most profitable, it offers better security and higher rental rates. It requires more effort than regular residential rentals but less than tourist rentals.
In DFLAT, we are experts, with 20 years and hundreds of companies requesting our accommodations.
- The most income-generating contract is tourist rental, provided the property is well-located.
On the downside, it involves more workload, not to mention licensing issues, constant property wear, and maintenance expenses.
In DFLAT, we do it, but only for complete buildings or more than 20 units together with complete licence
- Whatever your final ceision is, please take care, Tax authorities are tightening control over the property rental sector, increasing the number of inspectors dedicated to this industry, and demanding information from real estate companies. Concurrently, hoteliers are combating the illegal tourist accommodation market.
If you’re looking for a profesional in Madrid
We are an ie Business School-founded company in 2003, with more than 400 apartments and thousands of contracts per year. As a proof and example, you can browse our seasonal corporate apartments list, as well as apartments for students, temporal apartments, apartments per moths or holyday apartments.
Consider a property manager in Madrid for the highest level of security and reliability.