Every saver has at some time thought of investing his savings in a second home, because it is an asset that has a series of advantages in contrast to other assets (such as financial assets or artistic assets) that require knowledge that not everyone has.
Among the advantages of acquiring a second home are, roughly speaking:
-It is a tangible asset, i.e. it is not an account entry floating in the telematic space of the world's computers and monitors.
-We can make use of it during our holidays or even let our relatives use it.
-We can obtain an interesting income: income from renting or transferring the property, or capital gains from the transfer of the property title in the future.
-It is a "pension plan" for our retirement: an interesting way of obliging ourselves to save periodically (if there is external financing, i.e. mortgage) in order to consolidate consolidated rights in the future. These vested rights, i.e. the market value of the property, will depend on many exogenous factors such as the area where the property is located, the economic cycle, legislation...
Recently, three other factors have come into play that only two years ago were so improbable that nobody had in mind when weighing up the risk of this type of investment:
-Climate change: many scientific studies already predict a rise in sea level that will inevitably affect areas bordering the coast. That is the case of La Manga del Mar Menor in Murcia and many other towns. Investing €400,000 in a penthouse on a beach with a high probability that it will be impracticable in the future is a somewhat risky decision.
-Pandemics: Covid 19 has put on the table what some Economic Gurus, such as Bill Gates, already announced a few years ago and it is the risk that exists today of the emergence of new diseases. The impact of Covid on world tourism has been devastating.
The almighty tour operator Thomas Cook collapsed the national market at the end of 2019 but the effects of Covid 19 have caused GDP to fall by more than 106,000 million euros in 2020, that is, a 68% drop compared to 2019 revenue.
Not to mention the stock market crash of the hotel companies and the aviation sector listed on the Stock Exchange.
If we choose to invest a certain amount in a property, hoping for a certain rate of return, it may be that for one of these reasons, you have an empty apartment for so long that the opportunity cost of not having invested that money in other assets is high.
-Social riots: we saw how the pro-independence social riots in the heart of Barcelona affected merchants and residents or how in the main cities of Spain, riots broke out due to the discontent of the younger population due to the imprisonment of a "rapper" for call this character somehow.
These are some of the most important advantages of acquiring a property as an investment. We could list many others but I will take these as the most noteworthy.
But we must also weigh the disadvantages:
-High payment of taxes at the beginning and during the life of the asset: depending on whether we are talking about VAT or Property Transfer Tax, the truth is that we must face the payment of between 4% (super reduced rate) or 10% on the purchase price, in the purchase of a home, together with the invoice of the corresponding Notary and the Land Registry. Not to mention the municipal taxes that are accrued each year, home insurance and maintenance, repair or conservation expenses.
From an IRPF or IRNR point of view, we also have the obligation to attribute an income to our income, called Income Imputations, for the mere fact of having a second home.
What's more, the AEAT does not care exactly whether our home is expected to be rented, because according to a recent ruling by the Supreme Court, the period of time in which the home is not rented must be considered for the purposes of article 85 of the Personal Income Tax or 24 of the IRNR as an imputed income and to make matters worse, the expenses that have been incurred to set up that house, will not be tax deductible.
-Risk due to insolvency: if a bad economic period befalls us, we can fall into default or even lose the property, also losing all the money (or even our personal assets) that we have invested in it, until paying off the debt and the contracted responsibility.
-Liquidity risk: if we need liquidity for any compelling reason, liquidating a property can be an operation that takes months or even years and the worst thing is that, if we need the money immediately, our negotiating power in the sale price would be clearly reduced, so it is likely that we will have capital losses
-Risk for renting in habitual residence: breach of contract by tenants, damage to the property, collapse in general justice that slows down eviction procedures, etc... make the owner fear who increasingly opts for vacation rentals in the short term (which is not 100% risk-free either…)
As a Financial and Tax-Fiscal Advisor, I always advise my clients to choose those assets that best suit their personal circumstances, because for that there is a wide variety of assets and possibilities.
The investment time horizon, risk aversion, cash flow generation capacity, family circumstances and expected return-risk (Sharpe Ratio) are, among others, some of the pillars on which we must base our investment decisions.
Additionally, we must incorporate good tax planning that encompasses the treatment of profits and income generated and the future transmission to our heirs.
In our next article we will deal in depth with the details of the taxation of the tourist vacation rental
In Alicante on May 3, 2023
Gabriel Diaz Garcia
Collegiate Economist of Alicante 3611
Actuary and European Financial Advisor
