Many landlords wonder about the net rental yield in Madrid of their home or property, especially due to the complexity of the tax framework.

Broadly speaking, there are 3 rental types, each with its own characteristics and advantages, making it difficult to assess which is the most profitable option. Permanent housing (long-term rental) and temporary rentals are attractive options. However, there are significant differences in terms of profitability, flexibility, and risk.

In this article, we provide an overview of the key factors that affect the rental yield in Madrid for these types of rentals so that, as a landlord, you can assess which one best suits your objectives.

Temporary rental or permanent housing

We prefer seasonal rentals, as it is the type of rental that offers a more interesting rental return in the real estate market, and it presents advantages over long-term rentals that make it a more profitable option.

  • Higher rental yield: One-year contracts offer greater flexibility and are shorter compared to the typical 5 or 8-year leases in primary residence rentals. This allows for better adaptation to changing market conditions, especially in response to rising housing prices.
  • Yearly rental increment: By renewing contracts more frequently, prices can be updated according to demand. In long-term rentals, prices are usually limited to the Consumer Price Index (CPI) and by laws such as the LAU (Urban Leases Law).
  • Increment in the selling price: By generating higher rental income through seasonal renting, part of that increase is reflected in a higher property selling price.
  • Lower risk and default rate: Renting to executives and individuals who come for a few months or temporary business or study projects means there’s no interest in staying at high prices, they leave without defaults and without damage to the property.
  • Lower maintenance costs: With over 20 years and thousands of contracts, damages are virtually non-existent or limited to occasional furniture replacement. There are no significant damages requiring a high reinvestment.
  • Greater liquidity: Selling a property with a seasonal rental agreement is easier as it becomes vacant sooner.


Rental yield factors in Madrid

There are three key factors that help understand why seasonal rentals offer higher rental yield in Madrid compared to the traditional long-term rental option.

1. IPC Effect

The”Consumer Price Index (IPC) or Consumer Price Index, measures annual inflation. If the rental market in a city like Madrid increases by 10% annually and the IPC (Consumer Price Index) by 3%, this difference accumulates over the years at a rate of 8% annually. Therefore, in five years, the price difference between two properties, one in seasonal rental and the other in long-term rental, will be 40% (5 years x 8% annually).

Compared to a long-term rental at €1000, there will be a seasonal rental fetching €1400 in year 5 (a 40% difference).

In summary, solely due to this factor, the rental yield in Madrid of a seasonal rental property will be significantly higher than that of a long-term rental.

2. Price

Tenants of seasonal rentals are willing to pay more for the property (up to 20% over time or in prime areas) compared to long-term rentals. This is due to several factors, mainly because, it is a seasonal stay covered by the company, with a larger budget for that limited period of time. Rental yield increases even further when combined with the IPC effect mentioned earlier.

In summary, 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 properties will increase in year 5 from 40% to 55% (40% due to IPC and 15% due to starting with a higher contract price).

3. Default Risks and Maintenance Issues in Traditional Contracts

There are greater maintenance issues in long-term rental contracts. It is common to invest in renovating the property with each new tenant. Moreover, these repairs can lead to over 2 months of vacancy, depending on the damages incurred by the property.

The default risk is minimal in seasonal rentals compared to long-term rentals, which can result in an additional loss of another percentage. Seasonal tenants usually have higher purchasing power and a greater interest in leaving at the end of the contract, fulfilling their payment obligations more strictly.

Once again, we have another improvement, as we reduce the default risks to almost nonexistent levels and the monthly review ensures that maintenance costs are almost negligible.

For example, if we value this improvement at 3%, the final rental yield in Madrid in year 5 is 58% higher than that of your neighbour’s long-term rental with the same property.

4. Other considerations that affect the housing rental yield

  • Maintenance: Maintenance of a rental property is a key factor affecting profitability. With seasonal rentals, maintenance is lower since tenants tend to be more careful due to shorter stays, and damages they cause to the property can be more easily documented.
  • In long-term or traditional rentals, maintenance is typically higher. Additionally, by law, routine maintenance is the tenant’s responsibility, but in practice, the landlord often has to handle damages from use and major repairs.
  • Commissions: in temporary rentals, there may be additional costs, such as the commission of a real estate agency for the management and marketing of the property. In exchange, the agency will be in charge of advertising the property, selecting tenants, formalising contracts, collecting rents, etc.Therefore, both models entail expenses to consider, albeit with different items. It is ideal to calculate these expenses in the financial plan to have a realistic view of the final net profitability.

 

Tax aspects in the rental yield in Madrid

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

Reductions in Personal Income Tax (IRPF):

One of the main tax incentives for renting a primary residence is the possibility of applying a deduction for rent in the income tax return of up to 60% of the positive net income. This allows for a reduction in the taxable base and, therefore, the tax to be paid. However, if you do the math, after deducting expenses, mortgage payments, you will see that in reality, we are talking sometimes about a smaller saving

In seasonal rentals, this deduction is not allowed in the IRPF, but management expenses and commissions can be deducted.

Optimizing the rental yield in Madrid

Madrid is one of the most attractive cities for optimizing rental yields through seasonal leasing contracts, not only due to its position as the capital of Spain but also because of the large number of multinational companies, prestigious universities, and job opportunities available in the city.

The tenant profile for seasonal rentals in Madrid typically includes individuals relocating for work or educational purposes:

  • Expatriate executives are coming for limited periods with their companies.
  • Professionals or digital nomads seeking a more authentic experience than a hotel.
  • Master’s or Ph.D. students, many of whom are foreigners.

The most sought-after areas are central Madrid and neighborhoods like Chamberí, Salamanca, and Retiro. The demand for furnished short- and medium-term rentals remains active throughout the year.

Additionally, in Madrid, there are various options to capitalize on seasonal leasing:

  • Managing it directly through online portals.
  • Hiring an agency or property manager in Madrid to handle the property consistently.
  • Renting to a company that then leases it to its employees if access is available.

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

Conclusions to improve rental yield:

Seasonal leasing offers several advantages over traditional long-term rentals that make it a more profitable option for property owners, with only one drawback.

These include the possibility of achieving higher prices, especially if the tenant is a company, greater flexibility in contract duration, price renewal, better tenant quality, speed in adjusting rental prices to market conditions, lower exposure to risks such as defaults and problematic tenants, as well as greater ease in selling your property.

In short, despite having to assume commission payments, furnishing costs, and the lack of a deduction for primary residence, most indicators point to higher net profitability for the owner with seasonal leasing compared to the traditional long-term rental.

Therefore, owners of properties in high-demand areas for this type of rental are advised to carefully consider the option of hiring rental management services in Madrid before opting for a long-term contract.

This will allow them to maximize and flexibilize their rental income.

Are you a property owner looking for higher rental yields?

We offer various options for apartment owners in Madrid. The success of our business lies in providing acorporate apartments in Madrid, executives, expatriates, business schools, or consulates through various channels: B2C, B2B, relocation agencies, moving companies, travel agencies, and our own channels like this blog.

With DFLAT, you can forget about the typical problems of renting out a property. We take care of the entire process so that you only receive worry-free monthly income, while improving the rental yield in Madrid.

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