news date: Friday, June 18, 2004
Letting your property
Buying to let is nothing new in Spain. It has been going on for a long time. Nevertheless, there is a genuine boom in this form of investment right now.
With today's low interest rates and high rentals, you can buy a flat on the Costa del Sol, mortgage 70% of the purchase price, and sit back while your rental income pays off the mortgage.
If you are paying mortgage interest of five or six per cent effective annual rate and your rentals are bringing in a return on capital of seven or eight percent, you are making a profit of two or three per cent.
This doesn't seem like much, but you are doing it with the bank's money, not your own, and you are paying for your property. Plus you have the use of the property for part of the year because not many holiday lets attract tenants for 12 months of the year.
You also enjoy capital appreciation as your property grows in value. Many Marbella properties have doubled in value in the past five years, for example, making them a better investment than today's sagging stock market.
This certainly sounds like a tough deal to beat, not only for thousands of investors but also for people who do not consider themselves as investors but rent out their Costa property sporadically or regularly to help pay off their mortgage until they are ready to retire here.
This became so popular that visitors to the Costa del Sol who stay either in property they own or in rented villas or flats now outnumber tourists who stay in hotels.
While you are raking in the rent money, though, you should remember that you have certain obligations, both to the Spanish taxman and to your tenants. Being a landlord in Spain is not altogether without problems or risks.
Letting Law
Spain's current Law of Urban Lettings, the Ley de Arrendamientos Urbanos, went into effect on January 1, 1995, but many letters and renters, especially foreigners, are still unaware of its provisions.
The law brought some good news for those Spanish property owners who are stuck with sitting tenants under the pre-1985 law, and it also brought good news for tenants who were victims of arbitrary price rises under the law in force from 1985 to 1995.
The 1995 law ended a maze of contradictory Spanish legislation that made life difficult for tenants and landlords alike and all but ruined the rental property market in Spain.
Two of its main provisions make life easier for both landlords and tenants.
1. The current law ends the forcible extension provision of the 1964 law, which made rental contracts indefinitely renewable by the tenant. The present law allows landlords gradually to raise the old controlled and ridiculously low rents of 1964 to market prices today, and, eventually, to recover their own property.
2. The law also provides tenants with more security than the 1985 law stipulated, now obliging landlords to renew residential contracts each year for up to five years.
Three rental situations
We must distinguish three possible situations for rentals existing in Spain today, depending on when the original contract was made.
1964-1985: Under the terms of the rental laws in effect from 1964 to 1985, tenants were so protected that landlords gave up in despair and stopped building rental apartments, which led to a critical housing shortage. Almost half a million apartments in Spain are still occupied under this old law, which protected a tenant so strongly that he could pass on his rights to his children and even his grandchildren. Further, his rent could never be raised, or raised only by a small percentage related to the inflation rate.
Incredibly, there are almost 500,000 apartments in Spain whose tenants pay less than €50 a month, and in Madrid there are grandchildren of the original tenants living in spacious flats in prestigious areas and paying rents of only five euros a month. Until 1985, the landlord was helpless to do anything about it, even though his real estate tax is €1,500 a year and his community fees are another €1,000. Next door, another tenant might be paying €1,200 a month for the same type of apartment, having signed his contract after 1985.
Some foreign property owners on the Spanish Mediterranean coast fell into this trap before 1985. Thinking to make a little money on their holiday flat or eventual retirement home, they rented it out, with a contract for some specific time period.
Later they were horrified to discover that their tenants refused to vacate and become entitled to the forcible extension of their contracts, regardless of the landlord's desire to end the letting and recover his property.
Many landlords chose to leave their apartments empty rather than risk the dangers of a sitting tenant. Landlords refused to repair the crumbling buildings that brought them no profit, and nobody would even think of constructing new rental property.
1985-1995: Revised rental laws passed in 1985 by the Socialist government aimed to remedy this situation in the best capitalist way, by making rental properties good business. The revised law provided that all contracts ended when they said they ended, without provision for forcible extension. The law also ended any restrictions on rent increases. Landlords immediately began to raise rents sharply and to offer short-term contracts with little protection for the tenant. Now it was the tenants who suffered, because they were unwilling to settle into a flat from which they might be evicted in one year's time, or be forced to pay sharp increases.
1995: The 1995 rental law now in force is designed to provide a better balance between the rights and needs of tenants and landlords and to bring at last a final solution to the generations of sitting tenants.
If you are one of the foreign property owners stuck with a sitting tenant, you are now able to recover your property, though it can take you the tenant's lifetime, plus two years. However, you will be able to raise the rent to a normal level over either five or ten years, depending on the tenant's income.
If the tenant earns less than €28,000 a year, his rent can be gradually raised to market levels over 10 years. If he earns more than that, his rent can be raised in five years to a market figure.
The old-law tenant still has the right to pass on the apartment to his spouse and children, and they can pass it on to their children, but only for two years. After that, the landlord will at last be able to take possession of his own property. In the meantime, of course, he will have been able to raise the rent to the price levels of today.
Landlords in this position should take legal advice from property specialists in order to make sure they are effectively exercising their rights.
There are a number of legal steps that each landlord must take before he can begin raising his rents, such as citing the tenant to declare his income. If the tenant does not respond, the landlord can then begin raising the rent to bring it to a market level within five years, the faster option.
Contracts renewable up to five years
The present law provides that residential contracts, as distinct from short-term holiday lets, are subject to yearly renewals up to five years. Rental contracts are usually made for one year but the law requires that the contract is renewable for a total five-year period of tenancy.
A landlord can offer a contract of two years or three years but, if the tenant decides that he wants to stay on, this contract is renewable for a total period of five years. If the tenant himself wishes a contract of only two or three years, this is all right. The rent can be revised upward by an inflation factor each year.
At the end of the five years, the landlord can raise the rent as much as he chooses, either for his new tenant or for his existing tenant, if he chooses to stay on at the new and higher rent.
Deposit
The current letting law establishes, for the first time in law, the landlord's right to a deposit as a guarantee against damages. The deposit can be held by an agency independent of both landlord and tenant. This agency will not release the deposit until both parties agree.
The deposit consists of one month's rent for a residential unit and two months' rent for commercial premises.
The deposit, called a fianza, can be held by the housing department of the local government. In Andalucía, for example, it is deposited with the Consejería de la Vivienda of the Andalucian autonomous government, which has offices in major cities.
Eviction
For what reason can a landlord evict a tenant and regain his property? There can one of several different reasons, including failure to pay the rent (courts have often ruled that these arrears must exceed six months before any action can be taken), damage done to the property, use of the property for immoral purposes, subletting without permission from the owner, causing a serious nuisance to the neighbours, and so on.
In any of these cases, a court order must be obtained against the tenant and many months could pass before you get him out.
Necessary notification: If you have let your property on a five-year vivienda contract (see above) and you wish to take possession of your property at the end of that time, remember that you must officially notify the tenant well before the end of the contract that you do not intend to renew it. If you do not do this correctly, the contract can be regarded as renewed for two years at the same rent.
Holiday rentals have separate rules
The new law does not affect short-term holiday rental contracts, called arrienda de temporada. These holiday contracts do not grant the tenant any right to automatic extension. They require that the tenant vacate the property when the contract ends.
Foreign property owners can be assured of this legal protection when they let their holiday homes for periods of several months. However, they should still take some care with vetting tenants because the legal procedures for eviction of a tenant who refuses to leave can take more than six months, even when the law is on the landlord's side.
There have been a number of recent cases in which unscrupulous tenants have signed up for holiday rentals, say for two months, and have then simply remained in the apartment without paying any further rent. Four to six months later, the landlord is able to obtain an eviction order, but the tenants have lived rent-free for that period. Even though a court enters a judgement against them for the amount of rent owed, they simply move to another town and do the same thing all over again.
(Source: 123 Property News)
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