Is seasonal renting more profitable than housing? An Analysis of Profitability in Rentals
Many of the owners with whom we have had a business relationship for a few years now, ask us for an analysis of the profitability of renting their apartments, they would like to know how their net remuneration remains of tax obligations that are obligatory for them.
This consultation is logical because it is motivated by the deduction of 60% tax on rental income in the income tax of individuals.
The best logical recommendation is to take advantage of the deduction for housing that seasonal housing rent. Let’s see if this is true.
In the rental of housing the income will be taxed as Income from Real Estate Capital, in the case of rents of habitual residence it will be possible to apply the 60% reduction, for rents with seasonal housing contracts, ie that the rent does not meet the permanent housing need of the tenant, it is not possible to apply this exception.
And in this sense, are we clear about what IRPF consists of?
It is an obligation or tax imposed on the yields in the period of one year, with its profits and losses. The nature of this tax is progressive, that is to say that it is defined in accordance with certain brackets published by the Treasury each year and which indicate the amount of the percentages to be taxed according to income.
In the same way we have the marginal rate of IRPF, which is part of the tax, is an additional variable to be paid for each euro more income over the previous tranche, for example: The rest of income obtained from pensions, work and other income.
IRPF sections in Spain:
Every year the Tax Administration publishes the table in which the percentage applied to income is determined. This is done on a taxable basis, which includes net income subject to tax, discounting family minimums, contributions to plans and other aspects.
To continue, we want to clarify how the tax works in the case of rental housing, because of the income obtained, these are taxed at the marginal rate; it will go depending on the economic situation of the taxpayer and therefore, to advise you, it is essential to know what level of income you have and thus know what marginal rate should be applied.
If you prefer to keep this data private, you will have to calculate it by your own means or rely on our analysis table.
That is to say, the individual who exploits, declares and has low or no income, will have a low marginal rate that in some cases can even be “0”, so the deduction of 60% is “0” euros in those cases. On the other hand, if your income is high and you have a marginal of 40%, you save 40% of that 60% of the income obtained.
This is a high amount and in that case the exploitation per season must compensate this situation, however, having such high incomes is not the usual thing and surely it is not your case, even so it is convenient to check it.
The first conclusion we can reach is that if your marginal rate is low, you must improve the house, furnish it and put it into production with a company specializing in corporate rental, and if your income is high and you have doubts, you should consult with a specialist, DFLAT is a specialist in this and much, as we handle more than 650 apartments in season.
The marginal rates by income bracket, for 2019, are those annexed in this table below if you want to make your own calculation.
However, to better understand the subject, we have made a comparative table of a home valued at € 250,000, with a flight of 50% and 5 owners who have a marginal respectively of 0%, 10% is equivalent to a Spanish with a low income and others to 20%, 30% (average income) and another to 40% (high income) to know what happens in each case and what interests you most.
The calculation has been made for a 10-year production or holding. It should be remembered that the new Royal Decree Law obliges habitual residence rents for a minimum duration of five years with a tacit renewal of three years if the owner is a private individual, which would make a total of eight.
Then we are not very far away. We have put 10 years to include the full legal depreciation of the furniture.
We suppose that the rents obtained from renting a habitual residence at five years is lower than the rents of flats furnished in season, in a differential of 15% plus the cost of an amortization of the furnishing, amortized to 10 years.
This premise is conservative since the average duration of a seasonal contract in many years is six months (two contracts a year) and therefore the average annual price is usually higher and the differential sometimes exceeds 30%.
We have included, for simplicity’s sake, an annual increase in the price of a main residence of 1%, when in the season in the 10 years, in Madrid and prior to this article, they have risen above 7%, so that the difference was not so great, we have put 5%. Again, conservative if we look at what has happened in the last 10 years.
The commission is assumed to be paid for a habitual residence of 8%, once only, for a client who is 10 years; for a seasonal housing contract is paid 15% per year for each annual contract.
In this case we remember that when the owner is available and makes some arrangements our commissions can be up to 10%. That is to say we penalize again the hypothesis of temporary rent because many owners pay our minimum of 10%.
A real estate expense of around 4,000€ is established, which will be amortised over 10 years, while in the case of housing rentals there is no need to furnish and therefore it is not amortised.
It should also be considered that when calculating the profitability in rents, it should include the probable delinquency and maintenance costs. According to the Bank of Spain the figure could be around 4.5%, so we could assign this probability to your apartment (probability of not receiving the committed rents).
In cases of habitual residence, when there is a delinquent, the reality is that it costs much more than 4.5%, being able to reach 150% of the annual income, since on the one hand we can take between 6 and 12 months, in addition we will have to pay the fees of lawyer and solicitor, generally when this point is reached there are usually significant damage to the home.
Putting only 4.5% is almost an act of generosity because experience tells us that owners who have had large and serious problems in the rental housing. In contrast, the default rate in seasonal rentals is 0% when the client is a business and 0.5% when they are employees who come from a company hire as a private individual.