The most common mistakes when calculating the profitability of a rental

According to data from the Tax Agency, approximately two million properties are currently rented in Spain. A figure that shows us that more and more owners are considering leasing as a safe strategy to obtain additional income.

However, as in any other practice, it is essential to be well informed and to consider relevant aspects in order to prevent the most common mistakes.

What are the most typical mistakes when calculating the profitability of a lease?

Understanding how to assess the financial viability of a lease is essential to ensure the success of the operation. This objective is achieved by identifying and recording the most common mistakes, including:

1. An incorrect assessment of additional costs.

It is often thought that leasing a property is limited to finding a tenant and collecting rent. However, the reality is that this process involves much more.

It is necessary to take into account all those elements that directly affect the profitability of a rental. Some of the most prominent?

• The Real Estate Tax (IBI).
• The community fees.
• The rates of urban waste.
• The costs of repairs.

2. Not properly calculating gross and net profitability

It is vital to first calculate the gross profitability and then the net profitability in order to have a complete idea of the real profits that the rental is going to provide.

Gross profitability is obtained by taking into account the rental income and the value of the property. To calculate it, it is necessary to follow three steps:

1. Multiply the monthly income by 12 to obtain the annual total.
2. Divide this annual total by the purchase price of the property.
3. Multiply the result by 100.

This calculation gives an initial estimate of the profit, but for greater precision, it must be complemented with the net profitability, which considers the cost of the investment and the fixed expenses. The steps to follow?

1. Subtract annual expenses from annual income.
2. Divide the result by the real estate investment costs.
3. Multiply by 100.

The standard for identifying a favorable – and, in this context, profitable – result is that the percentage exceeds 4%.

3. Ignoring the implications of the Housing Act.

The changes imposed by the Housing Act, in force since May 2023, directly affect the profitability of a rental, as restrictions on lease updates are included.

In fact, the linkage to the Consumer Price Index (CPI) was modified at the end of 2022 and restricts contract reviews to 3% throughout 2024.

4. Omitting the insurance against non-payment in the calculations

Despite being in front of a property in good condition and promising returns, non-payment by the tenant can completely undermine the benefits.

It is essential to have the support of professionals specialized in the real estate sector who choose tenants meticulously and work with insurance companies to guarantee timely collections.

5. Not relying on a specialized real estate agency

Personally managing the rental may seem, at first, advantageous, but the reality is that it requires dedication and knowledge in legal matters.

For that reason, in addition to all that exposed in the previous points, it is advisable to delegate in a specialized real estate agency to:

• Advertise the property.
• Elaborate the rental contract.
• Manage any incident.
• Obtain an integral management of the lease.

Maximize the value of your assets with KM2 Real Estate Services

Thanks to our more than 40 years of experience, in KM2 Real Estate Services we can affirm that we stand out for the implementation of a medium / long term management methodology, based on:

• The analysis of the real estate assets.
• The proposal of objectives.
• An action plan.
• The execution by means of a rigorous control of the risk/return binomial.

We are in constant contact with the owners and we focus on improving the attention to the tenants. Our team specialized in legal, fiscal and commercial aspects works to optimize the real estate investment.

Your property advisor will work solely with you to create a management plan customized to your needs, providing you with effective solutions and maintaining a positive attitude.

Do not hesitate to contact one of our agents for more information or visit us at any of our real estate agencies in Barcelona and Madrid. We look forward to seeing you!