With today’s low interest rates your rental return from your property could easily go towards paying most if not all of the costs, while you still have use of it for part of the year. With this obvious benefit in mind you should be aware of various important considerations while attempting to do this. This quick guide has been written to inform you about how you go about letting your property. As a landlord you have certain obligations to your tenants and renting is not without its pitfalls.
Choosing how to rent your property
First and foremost, be aware that there are two different ways to rent your property in Spain:
Long-term rental or vivienda
- Provides the tenant with a contract that affords him certain irrefutable rights
- Allows the tenant to renew his contract for up to 5 years.
- Short-term rental or arrienda de temporada
- Contracts are called a por tempordada and may be up to one year
- At the end of the rental period the tenant must leave the property.
Long-term rental
This strategy is really only suitable if you are planning on renting you property for several years. The current law of Urban Lettings 1995 governs the rights of both parties in this scenario and as an owner it is very important to know that a letting contract for one year can be prolonged by your tenant for up to 5 years.
The 5 year extension
Tenants on a long-term contract have an automatic right to continue extending the period of a rental contract for up to 5 years unless:
- You have made the specific provision in the rental contract that the property will be used for your permanent residency.
- You have informed the tenant in writing 30 days prior to the official end of the letting period.
- Over this period the rental rate is adjusted according to the annual inflation index published by the Spanish government; you as the landlord can only demand the higher rent after you have communicated the increase to the tenant in the proper written form. Even at the end of the period of five years, you have to communicate in writing to the tenant that the contract will terminate, otherwise the tenant may get a further extension.
Should you decide to sell the property during the period of either the long-term contract or the renewal your tenant also has the first option to buy (derecho de tanteo).
Be aware that any “unfair” clauses written into a contract are automatically null and void. So it does not help you as an owner to stipulate in the contract that the tenant renounces on his right to the automatically extend his/her rental period.
Short-term lets
These form of rental contract are not governed by the 1995 Law of Urban Lettings (Ley de Arrendamientos Urbanos) and do not provide for the five-year automatic extension. The por temporada contract requires that the tenant vacate the property when the contract ends. You as the landlord then have the right to increase the rent and to choose whether to continue to let the property to the same person.
Important consideration: One important thing to be aware of is that even in a short-term let scenario where you have let the property for six to eleven months on a por temporada contract and decide not to renew the lease, your tenant may have a claim to forcibly renew the rental agreement and thus bring it under the provisions of a long term rental with the full cover of the 1995 Law. If he can prove that the property has become his main residence and particularly if he has a family (with children) the courts will probably decide in his favour.
Taking deposits and payment
The rent can be agreed freely between the owner and the tenant and it is normal that a deposit be paid. For a long-term rental the 1995 Law has established a deposit equivalent to one months rent, however it’s also quite normal to pay a deposit on short term rentals up to a year. The rent must be paid within the first 7 natural days of each month, meaning in advance, in the form agreed between the parties.
Breaking the contract
If the tenant wants to move before the end of the letting period agreed in the contract, he must communicate this to you and pay part of the rent for the remaining time, if this has been agreed in the contract. If the tenant only leaves the dwelling and stops paying, you have the right to sue him for damages.
Eviction
There are many grounds for eviction in Spain, but to evict a bad tenant you must obtain a court order. This can take a long time (up to six months), so if you are planning on renting out your property for the long term or on a short term contract basis (over several months) ensure that you vet your potential tenant so that they supply a number of applicable references. It’s also extremely advisable that you register your contract with the Spanish Housing Department (and pay the small fee) which means that you will have full legal protection in the event of any court case.
Several changes to the law through new legislation will provide both tenants and landlords with additional rights. Local governments will provide special courts to fast track resolutions to rental disputes and hand out eviction orders, so expect many improvements in the sector over the coming year.
Taxes on letting your property
It is quite a common practice for non-resident owners of property, who let their properties out on a casual basis, not to declare the income to the tax office. Nevertheless income tax is due on any income arising in Spain. Particularly in light of recent government legislation that requires that tenants who make income tax declarations in Spain are now required to list their landlord’s name and tax identification number on their income tax form.
The tax implications for residents and non-residents differ
Tax on renting your property should be paid as part of your annual income tax return. If you are a non-resident you are liable for an income tax rate of 25% for all the income you make on the property.
Residents can take advantage of new 50% reduction of this figure. Furthermore, as a resident, if you declare your rental, you can put down the maintenance expenses of your property as a business expense and deduct this from your tax bill. Maintenance charges include costs such as the mortgage.
Outlook for the rental market
Due to the factors of oversupply it is highly likely that rental returns will fall in the short term (two bedroom apartments being most susceptible).However, we envisage continued strong demand because:
- An increase in interest rates will force more people to rent.
- More and more people will come to the Costa del Sol to retire and many will rent a property for the first year to get used to the area and to give themselves time to find the right property.
- With the increasing internationalization of the economy and the ease of doing business over the internet, it is likely that many people will be attracted to a Spanish lifestyle and look to running their operation from the Costa del Sol. This will have a positive impact on the rentals for both commercial and residential property.
- The Costa del Sol is accessible from most northern European airports, has great weather, good amenities and plenty of sporting facilities including skiing and golf during the winter months, all these factors help to attract the millions of visitors who keep returning to the area each year.
Choosing the right rental property
At the end of the day if your property is in a good location i.e. town center, beachfront, front line golf or conveniently located close to amenities with good community features, you will rent your property fairly easily. As mentioned previously there is now an oversupply of two bedroom apartments in certain areas of the Costa del Sol. However, supply for rental properties that are townhouses or villas is still comparatively low.
