We have so many clients, friends and relatives who often say to us in our office, “I’m trying to decide between buying a property in Spain or buying (or worse still upgrading) a family home in Ireland/Scotland/Sweden/wherever”.
They ask my advice. Now, right from the start asking an estate agent’s advice is a bad idea. Would you really ask the barber if he thinks you need a haircut?
We’ve been told that buying a home to live in, maybe with a 30 year mortgage is a great investment. It’s just not.
Some very brief background here – I personally buy investment property both in Ireland and Spain, especially now with prices down dramatically since the boom years. What my company buys however is different- We buy real investments, not houses. Accountants amongst our readers are screaming at the screen- anything that appears in your asset column is an asset they are telling us. For me, I don’t buy that. My definition is anything that puts money into my pocket is an asset – Anything that takes money out, for example a family home/boat/horse is a liability.
Lets look at the situation from a couple of angles.
Remember the client in this hypothetical example must choose between buying a house in Spain and renting it or buying a home which they live in situated in their home country of England, Germany or Ireland as an “investment”.
BTW: Germany is the best example of a nation who tend not to buy their own homes- they buy property here in Spain instead. I know Ireland better, so I’m basing this argument on the Irish property market.
1. Is it a good investment?
Damage limitation: The average house price in Ireland in 2015 is 200,000 euro. The average price on the Costa blanca is just less than half that, say for the sake of easy maths, it’s 100,000 euro.
Let’s say there is another European slump in house prices.
If your typical Irish house loses 10% (Yes, its unlikely), you’ll be 20,000 out of pocket.
Your Spanish home, again unlikely can also lose 10% and you’ll only be out 10,000 euro.
2. Financing: When you initially buy, lets say you need finance. If you get a mortgage of 80%, that will cost you 40,000 euro down payment in Ireland, but only 20,000 in Spain.
Rental return in Spain is approximately 5% or 6%- In this case 6,000 per year. In order to get the same rental return in Ireland, you’d need to charge your tenant 1,000 pm or 1,200 euro- that’s not going to happen.
In fact, I guarantee you that you can become a tenant in a family home in Ireland for 700 euro per month. This means your landlord in Ireland, is earning less than 4%…. way less.
3. Ongoing costs: Tenant registry, Water charges, Property tax all need to be paid in Ireland. Yes, there are local taxes in Spain too- they are considerably less though that what you’ll pay in Ireland.
This means your potential return is considerably less than what you’d get in Spain. In Ireland investors tend to talk about % return before taxes, charges, etc. We only talk about profits after expenses.
So, to be clear you buy a property in Spain for 100,000 euro and earn 500 per month and you instead of buying in Ireland you can rent there for 700 euro per month and live in a house that cost the owner 200,000 euro. (Or probably waaay more).
More to follow in part 2.