Long let rental apartments: where to invest in Costa del Sol

Investing in rental apartments

Even though we might think that a buy-to-let real estate investment, or long term apartment rental, is an old, traditional, even “basic” type of investment, we are actually wrong.

Doing some research, you can find out that in the U.S., the share of purchases of single family homes bought by individual investors was only 4% in early 2000s, to grow to 8% in 2012. Link to source

In the U.K., where today there are more than 2,65m official land lords, only with the Housing Act of 1988 landlords and lenders had confidence that tenants would only reside in the property for a fixed period. And only from 1996, banks in the UK started to offer Buy-to-Let specific mortgages. (https://en.wikipedia.org/wiki/Buy_to_let)

Having said this, the rapid growth of such an investment strategy has been remarkable everywhere in the developed world. It has become a prominent source of investment income in most developed countries. In Germany, for example, 39.9% of homes are privately rented, a percentage similar in Switzerland and Austria.

Buying a property for investment is a long-term commitment. And buying a property for investment purposes is a delicate and difficult process. Nowadays most information is available online. What used to be a very time consuming, bureaucratic and risky process, has been transforming into a branded “passive” income.

 We tend not to agree with the word passive, because, in Holox Invest, we know very well how painful a process to search, negotiate, purchase, work, build, maintain and deal with tenants can be if you are on your own. Even if most information is available online, the work is real and really time consuming. This is the fundamental reason why Holox Invest solves a common problem to all property investors: we do everything for you!

Even though not really passive as DIY, investing in rental apartments has become mainstream and popular as it offers a buffer against inflation: as rental prices and property values tend to increase over time they provide an investment return that can adjust to changing economic conditions. It is like an insurance to the world you are living in. In periods when it’s going well for everybody, your investment goes up; in periods when isn’t going so well, your investment might not go too well.

But over long time, the society tends to get financially better, and inflation deteriorates savings if not properly invested. Having an investment in real estate or a portfolio of properties, provides income to cover for costs, and a profit to improve your quality of life today and your long-term pension when retired.

When we started investing in rental apartments in Costa del Sol, we begun studying the supply-demand factors in both the selling and the rental market. This allows us to understand what are the main factors which affects a district or a neighbourhood, and how this might develop in the future.

After that, we compared those factors and analysis to all districts, so we could get a clear picture of which areas offer best value to maximize rental returns and sustainable capital appreciation in Costa del Sol.

Where to invest in rental apartments in Costa del Sol

As explained in our previous blog “How to calculate thereturn on your investment property”, calculating rental yield for a long let is pretty simple. Check it our if you haven’t already.

Rental apartments offer a periodic return from rentals and a long term revaluation according to the local home prices revaluation. Hence, its total return derives from the sum of rental return and capital appreciation. An attractive rental yield in a good rental apartment investment is anything above 5% net, which means all rent remaining after having paid all expenses to run its letting. That is usually because your mortgage interest would be at 5% or below, so it is more convenient to buy and run a rental apartment with the money borrowed from the bank.

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Capital appreciation is a long term factor and many buy-to-let investors think that, in the long run, price revaluations are pretty homogenous among different regional areas. We tend not to agree 100% and actually think there might be considerable differences. However, in this blog, we will focus on what is considered predominantly the major item to work on for successful rental apartments investments: rental yields.

To analyse and compare how attractive some areas in the Costa del Sol are for rental apartments, we calculate the average gross rental yield of any area. This is done by dividing the average annual rental per square metre in any given area as reported by many sources, by the average asking price per square metre.

When we analyse and compare areas by using the rental yield per square metre we have some basic information. We can find out which area have, on average, a high rental demand compared to the market price of the average available properties in that market.

Most press, media, estate agents and property investments specialists rely on this kind of research to highlight where to invest. Sometimes ranking  provinces like Malaga or Murcia or between regions like Andalucía or Valencia.

According to Idealista data, the latest average Malaga province gross rental yield is 5.57%, while among its most relevant districts here are some of the most popular rental apartments destinations:

However useful this data, largely used in the press and media, we think this is an overvalued information for a rental apartment investor.

In fact, it is too generic to say that in one district as whole, rental yield are higher than others, to establish that you will get a higher rental yield on any property. It depends on many factors like average apartment size in the area, market size in sales and rentals, dispersion across apartment types etc etc.

At Holox Invest, we know that a much deeper and considerate analysis must be undertaken in order to target truly valuable comparable rental yields across property types and locations. We constantly monitor all areas in Costa del Sol for its rental and sales market, precisely to analyse such kind of opportunities and advise our clients on property investments in the region.

How to identify best areas for rental apartments in Costa del Sol

A very useful tool that we use to analyse which area offers best value and why, is the historical average rental yield per square metre of any district of our reference area, to really understand what types of dynamics the market presents.

In the graph below, we have analysed the historical rental yield per square metre in three popular districts for rental apartments investments in Malaga region: Malaga Teatinos, Torremolinos and Marbella. Find the results below:

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The results are remarkable. Not only we can understand how the average rental yield moves in time, but more importantly, that it can move quite a lot. In our example, an area like Torremolinos has changed its overall average by more than 2% from June 2011 to December 2016. On the contrary, other relevant rental areas, like Teatinos in Malaga or Marbella, have maintained a base condition through time at around 4.5/5%.

In relative value terms, it is also remarkable to see that while stable areas like Teatinos or Marbella don’t offer much difference one another, Torremolinos volatility has provided a spread over time of between 0.9% to 2.5% to the more stable markets, offering a relevant information on when is a profitable moment to invest and when is less so.

Right now, we can affirm that the relative higher average rental yield in Torremolinos makes it attractive compared to other rental areas and that must come from the market structure in those specific areas.

Torremolinos, offers proximity to Malaga, closeness to many services including the beach and amenities, and abundance of small apartments historically built in the seventies for summer holidays. As a result, it has become a favourite rental destination for young single workers and young families, while selling prices remains relatively more convenient as most properties need renovation and/or improvements.

To wrap up, only a deep quantitative and qualitative analysis can help targeting cheap areas where to invest.

Alike Torremolinos, there are many other attractive areas for rental apartments in Costa del Sol:

Benalmadena

Marbella

San Pedro de Alcantara

Malaga Victoria

Estepona

Typical rental yields in these areas might be between 6 to 8% average, depending on apartment size, condition and number of bedrooms.

If this kind of analysis might look simple, we must warn that understanding a market structure and its dynamics alone, does not provide guaranteed success in long let property investment either. Local expertise is key to understand qualitative factors too.

We strongly recommend to seek professional help to guide and evaluate across available investment opportunities.

Our Holox Invest specialists, skilled professionals in local markets and culture, with many years of experience, can assist you from assessing the best strategy to stock picking and managing successfully rental apartments matching your  goals. We can transform rental apartments investments in truly passive sustainable returns.

Contact us now to get a free consultation on how to invest comfortably in Real Estate!