Investment Property in Barcelona

January 2008: Please note this section is now out of date. The property market in Barcelona has gone cold, and asking prices are falling, in some cases by as much as 20%. I expect them to continue falling for at least the next 12 months.

Properties in Barcelona are rented out on a short-term basis to tourists, business travellers and students. Short term lets range from one day to several months, though few agencies will accept bookings of less than 3 or 4 days.

New regulations have been introduced which make it difficult to rent out property in Barcelona on a short-term basis to tourists. If renting out is part of your plan, be sure to have a lawyer check what you can do with a property before you buy it.

The regulations are complex, and vary from district to district. Generally speaking, you can only rent out property to tourists (legally) if you have a licence from the town hall. In the popular old town district the town hall will not grant any more licences, so buying a property that already has a licence is your only option. In other areas, there are different conditions that determine when a licence will be granted. And in all areas of Barcelona, you must have a permit from the regional government to engage in this activity if you are to do it legally. People may tell you that these licences aren’t important, and that everyone rents out regardless. You would be wise to ignore these people, and check everything on this subject with your lawyer before buying.

Bear in mind that, if you try to rent without a permit, you risk being reported to the authorities (neighbours unhappy with rowdy tourists usually oblige on this front), and if anything happens to a tourist staying in your apartment without licences, you could be in serious trouble.

Renting out property in Barcelona on a short-term basis to tourists can make life hell for your neighbours, so bear this in mind before you decide to go down this road.

Anyway, due to competition it is steadily getting more difficult to rent out apartments in Barcelona successfully on a short-term basis. The runaway success of short-term rental properties in Barcelona over the past few years is largely to blame for the present difficulties. Word got out about the great returns and resulted in a considerable expansion in the number of apartments being offered on short-term rentals. Catalan property investors have gone in hard, and overseas buyers are not far behind. The flood of new apartments has coincided with a big increase in the number of hotel beds in Barcelona. Greater competition from both hotels, which have dropped their prices, and other rental apartments means that occupancy rates and prices are falling, driving down returns. This is not the easy, lucrative business it once was.

One of the biggest challenges for non-resident owners who wish to rent their apartment on a short-term basis is to find a good agency to market and manage their property. As the supply of short-term rental properties in Barcelona has expanded so to has the number of agencies marketing and managing these apartments. However some of them cannot be trusted to do a good job and fewer still comply with the law. Common problems with rental agencies include:

• Unprofessional opportunists who will take advantage of overseas owners and pocket rent that the owners don't know about.
• Agencies that do not take adequate care over screening rental clients, which can result in a high level of wear and tear that owners end up paying for.
• Unprofessional agencies lacking audit procedures so that over time everything that isn't nailed to the floor is stolen (by clients and staff) from the apartment.
• Agencies that rent out apartments on a short-term basis without having the tourist client sign a short-term rental contract despite the fact that it is mandatory. This exposes the owner to a potentially huge problem should a rental client decline to leave the apartment for whatever reason.
• Agencies that only market properties and do not offer any management services. This might be acceptable for owners who live in Barcelona but is no solution for non-resident owners. Owners who decide to manage their own properties are responsible for getting the appropriate government permits.

We suspect that few agencies have the necessary government permits to engage in this business. To market and manage short-term rental properties legally an agency has to comply with detailed regulations and have the necessary permits, insurance and guarantees. Furthermore all the apartments they rent have to be inspected by the local government (residential properties cannot be rented out on a short term basis without a permit from the government). We do not recommend using an agency that does not comply with the law. If anything serious were to go wrong - for instance a bad accident befalling a rental client in your property - you could find yourself in deep trouble.

Unfortunately the best high-profile agents that satisfy all regulatory requirements cannot effectively market and manage more than around 100 apartments, possibly even fewer. Every day the best agents are offered new apartments to rent out as more owners try to enter the business. However some leading agents are actually downsizing their portfolios rather than taking on new apartments to rent. With the present abundance of apartments on offer for short term rentals the best agencies are only interested in the most rentable properties offered by owners with reasonable rental expectations. Contracting a good agency is an essential part of achieving decent short-term rental returns but in the present climate it may be difficult to get a new property listed with a good agent.

Other points to bear in mind when buying an apartment in Barcelona with a view to renting it out on a short-term basis:

• Don't buy an apartment that will compete head-to-head with hotel rooms. Therefore avoid 1-bedroom apartments that sleep 2 people. Best go for a 60-70-m2 apartment with 2 or more bedrooms and a sofa bed.
• Buy in an area that is well-communicated and close (walking distance) to key attractions. Look for a property that is on a quiet street whilst being close to the action.
• Most short-term rental apartments are in Old Town districts like Barceloneta, the Born, Gothic Quarter and the Raval. These are also the districts of Barcelona with the highest incidence of petty crime. Consider buying in a safe area such as the central Eixample where both the rental clients and agency staff will have fewer personal safety problems. The Eixample is attractive, comfortable, well located and very safe in comparison to the Old Town. Given the large number of apartments on offer in the Old Town it helps to be able to offer something different.
• With increasing competition and rental clients more demanding than ever you need to offer more than bog-standard (unless you plan to go cheap). Good locations are key but sunny interiors, terraces, views and tranquillity also count in the battle to differentiate from other apartments. Interior décor and furnishings are other areas where you can offer more value. Minimalist urban chic is usually a good bet - it looks good and is easy to maintain. Fully fitted kitchens, dummy proof washing machines, big button CD and TV/DVD systems, cable / satellite and broadband internet connections are all features that are increasingly offered and which you should consider if looking for high occupancy. Few properties in central Barcelona come with parking but it is a big plus if you can offer it.
• Only use a rental agency that can demonstrate the necessary permits. If you are non-resident be sure to use an agency that offers property management as well.
• Always have appropriate insurance if you plan to rent out your property.
• Short-term rentals are less profitable now than in the past due to increasing competition. It is important to have realistic expectations when determining rental rates.
• Think of your neighbours. From their perspective there is nothing worse than a short-term rental apartment next door, as some rental clients are noisy, thoughtless, and self-centred. Unless you are very careful about whom you rent to, you will get nothing but animosity from your neighbours, and can expect them to complain to the authorities at the first opportunity. This will land you in hot water if you don't have the correct licences, and don't pay your taxes.

Despite increasing competition it is still possible to make a success of buying property in Barcelona and renting it out on a short-term basis. The difference is that whereas in the past success was almost guaranteed it now requires a more intelligent approach coupled with more down to earth expectations. It won't do to buy any old apartment, furnish it any old way, rent it through any old agency and expect to make a killing from rental income and capital gains.

Another investment strategy is to buy property for renting out on a long-term basis (rental contracts of one year or more). Overseas buyers that do this cannot use their property when visiting Barcelona and rental yields tend to be lower. However rental income is often more predictable so risks are lower and long term tenants tend to take better care of the properties they rent, reducing maintenance costs. Agency costs are also lower for long-term rentals; in most cases the agency costs are borne entirely by the tenants.

Buying a property with a view to renting it out to long-term tenants is generally an easier option with less risk. Expected rental returns are lower but capital gains, if there are any, will be the same. Spanish residents also benefit from tax incentives on properties they rent out to long-term tenants.

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