What is a “buy to let” or “buy to rent” real estate transaction?
In this article we will develop the most important aspects.
What is Buy to Let?
Buy to Let, “Buy to let”. It refers to the real estate operation carried out by those who buy real estate with the aim of renting it later and obtaining an economic return from this rent.
It can be carried out in any sector: housing, offices, logistics, commercial premises,…
When buying and selling and leasing operations are carried out, when looking at the legislation, we will be interested in observing the Civil Code, in all matters relating to buying and selling, and the Urban Leasing Law, in all matters relating to the leasing of these properties.
However, what are the characteristics of this type of property investment?
The main advantages of this model are the following:
- The current economic situation, after a process of paralysis in the real estate market generated by the health crisis, we find ourselves in a moment of economic reactivation. Historically low interest rates, rising inflation prospects and policies to stimulate the sector are reflected in the current strong demand.
- Recurring income. With an optimal occupancy level of the building and good solvency ratios of the tenants, recurring income is assured.
- Renting is generally quicker than selling. In addition, if the property is located in a highly demanded area, and if it is in good condition, it is possible to rent in days or even hours.
- Selling the property. The sale of the property can be a profit, as the difference between the purchase price and the subsequent sale price.
The disadvantages of this model are
- One of the main disadvantages is that the capital invested in the purchase of the property will take years to recover. Therefore, if you invest, you will have to wait for some time until the investment starts to be profitable.
- It is also important to bear in mind, as with any investment, the risks that may arise as a consequence. Among them, we can find a situation of economic fragility, the appearance of a new crisis, an unstable geopolitical framework, all of which can destabilise the markets and as a consequence can lead to the loss of the value of the property, or the inability to be able to support it economically.
- Another aspect to take into account are the expenses (maintenance or insurance for example) for the correct maintenance of the property. As with any investment, this will continue to generate expenses that may delay the amortisation of the property.
The risks to take into account in the operation:
When buying and selling the property
When buying the property it is necessary to ensure that:
- There are no problems with the ownership of the property, inheritance, condominiums, rights of preferential acquisition of third parties.
- That there are no encumbrances and limitations on the ownership of the property, such as mortgages, easements, the need for the consent of the Community of owners to carry out certain activities.
- Urban planning problems: That certain activities cannot be carried out on the property, that the use of the property cannot be changed, that certain works, divisions or segregations of the property cannot be carried out. Complementary services may be required to carry out the activity, such as accessory parking spaces, etc.
- That during the purchase and sale process unforeseen events arise that were not contemplated in the contracts prior to the purchase and sale, such as not being granted licences, not obtaining the financing requested for its acquisition, not obtaining permits from the community of owners,…
- Failure to comply with the contracts prior to the signing of the deed of sale, breach of deposit contract, down payment contract, which leads to the sale not being carried out, resulting in the loss of the investment made due to the sale not being carried out.
- In the sale and purchase of properties for future construction or in the process of construction, there may be delays in the execution deadlines, administrative delays, changes in the quality of the materials or modifications to the project that were not contemplated in the purchase and sale contract signed.
In the case of leasing:
A specific lease contract will have to be drawn up for the type of use to be made of the property (housing, commercial activity, tourism, seasonal).
The contract must be adapted to the rotation of tenants that you wish to have, paying special attention to the following:
- The periods of obligatory compliance
- Amount of the rent and its updating
- Possibility of works by the tenant
- Assignment and subrogation of the contract
- Possibility of submitting to arbitration in the event of conflict resolution to speed up deadlines.
In order to make sure that none of these risks are affected, both in the purchase and rental process, please contact us.