6 things to consider when buying a property investment in Tenerife

INTRODUCTION

Investing in property in Tenerife should be about increasing your wealth and securing your financial future, but sometimes it can be overcomplicated and perhaps intimidating for the everyday investor with little experience. However, there are 6 basic factors that should be considered and although they may seem obvious, many people do not adhere to these guidelines when making an investment.

1) DECIDE ON THE TYPE OF INVESTMENT THAT YOU WANT

Determine what sort of investment you wish to make. Do you simply want a holiday home for the use of yourselves, family and friends, where a change in lifestyle is the priority, but also want to achieve the best Capital Growth for the future?

Or do you wish to invest in a property for both Income and Capital Growth, without a priority of staying in it yourself?

There is no ‘one size fits all’. Your priority should be to recognise your overall investment objectives, which will be influenced by your lifestyle requirements, investment attitudes, timescales and last but not least, your budget for this venture.

We will then source properties that will best suit your specific needs and tick all your boxes. We will establish which properties offer the best opportunities and suggest investment options and strategies that will deliver your primary objectives. This is a bespoke service that will maximise the chance of you buying the right property in the right place at the right time and for the right reasons.

If you are buying purely for investment, without the consideration of personal usage preferences, then never become emotionally attached to a property you’re thinking of buying as an investment. Uppermost in your mind should be that at the end of the day, it is an investment property, and you’re buying it mainly for the rental returns and the likely capital growth.

Don’t just look at a cheap purchase price and income returns, but also look for the potential Capital Growth, as that is just as important.

Be aware when buying for short term letting as opposed to long term letting! Understand the current laws regarding letting and be sure to purchase a property that best suits your circumstances and requirements. Click here for information regarding the letting law.

Be guided by us, who after more than three decades of helping our clients here, have a wealth of experience and your best interests at heart, all backed up with Professional Indemnity Insurance, to comprehensively protect you in respect to the advice, information and guidance that we give you.

So, apart from what we have mentioned above, what are the main things to consider?

2) LOCATION, LOCATION & LOCATION 

While it may seem overstated, that timeless phrase is true, and many people underestimate the power of well-located real estate. Regardless of the current condition of the market, is the property you are purchasing in a location that you would want to own 10 years from now?

Your property’s location will ultimately determine the overall success of your investment, affecting the amount of rent you can charge, the types of renters applying and your vacancy rate.

Before purchasing, do research with us. The more desirable your location, the lower the risk becomes and we can advise you regarding the best investment areas for the budget that you have available for this purpose.

3) CHOOSING THE RIGHT PROPERTY AT THE RIGHT PRICE 

The most reliable real estate investment strategy is one that focuses on value. Buying value means purchasing properties at or below their replacement cost (the cost to build the same building today). Real estate is literally a hard asset, which means that it is in limited supply, because there is a finite amount of land in the world. So, if you can buy property today at a good value price then over the long term, the price will inevitably rise.

Also, buy something close to the area’s medium price for the type of property that you want. If it costs 200,000€ and will give a long-term net rental return of say 1,000€ per month, would a 300,000€ property pay you 1,500€ per month? If it won’t, then you’re reducing your yield on the property, and it really isn’t worth spending the extra money, unless you are also looking at personal preferences and enjoyment of your own use.

Unlike buying shares where the value of a company is transparent, real estate is not so easy to price, but this however provides you with the opportunity to acquire an asset below its real market value if you are patient and knowledgeable. We have the knowledge, you need to be patient enough to be guided by us.

Different classes of property assets – Apartments, Villas or Land – can outperform each other over time. For example, vacant land will provide no rental income but may appreciate more quickly if purchased in an area with limited supply. Investing in an apartment might mean less maintenance costs than investing in an independent detached villa. Some areas offer higher rental yields, but it is important that you do your homework as generally these properties are more expensive to buy and may provide lower capital growth opportunities.

4) QUALITY & SUITABILITY OF THE BUILDING

Like a good location, a quality building that is well-designed and constructed pays dividends, especially over the long term. Higher quality buildings not only require less ongoing maintenance and repairs, they also tend to rent faster, perhaps giving a higher return. However, you must still look at the average rental return for any individual in comparison to its purchase price.

Having said that, it is not always a bad thing to buy a property that is not in peak condition because you get the opportunity to improve the value of the property by fixing the place up and this can increase your returns for both capital growth and rental income. You can’t do that when you buy shares!

Don’t immediately hone in on an apartment with cheap community fees. That may simply be a sign that a building doesn’t offer the kind of quality or facilities that tenants might be after and it might mean there is a major expenditure coming up that hasn’t been budgeted for.

Make the property attractive to renters. Go for neutral tones and keep the kitchen and bathroom in good condition. You’ll find that you will attract better quality tenants if you have a well-presented property and the last thing you want is a bad tenant.

Another point that is subject to debate is whether you should buy a property that you’d be happy to live in yourself. However, think about differentiating between your own home and your investment to avoid becoming overly involved; remember it is the home of your tenant and not your own.

It is important to remember the day will come when you’ll want to sell the property and if a home is appealing to not only property investors, but also owner occupiers, you’ll have a wider market for the property and this will maximise your selling price. Often, owner occupiers are willing to pay a little more for the property they are living in, because it becomes a more emotional purchase rather than a logical purchase.

5) PURCHASING NEW BUILD / OFF PLAN PROPERTY

If you are looking to purchase a new property in construction, then the quality of build and track record of a developer is an important measure. An ethical, competent developer is critical to the success of any real estate development. Like with any company, an experienced developer has the ability to manage the inevitable ups-and-downs and can make all the difference between failure and success of a project.

So, if you are looking at new property, then it’s important that research and due diligence has been done with regard to both the promotor and the builder and see what other projects they have done and their financial stability. We at Tenerife Property Shop, apart from having extensive experience in this respect, also ensure that all deposits paid to a developer are covered by a Bank Guarantee, plus there being a 10 Year building guarantee on completion.

Apart from this, we provide for our clients a 20 Year Insured Title Deed Guarantee, which covers virtually every problem that could possibly occur in the future, including ensuring that all paperwork is correct, such as making sure that License of First Occupation, Habitation Certificate etc., are all in place. The additional good news here is that we pre-pay the premium for the 20 Year term of the policy and gift this to you on completion. This insurance policy has been negotiated by us with Caser Insurance Company, one of the biggest insurers in Spain, being the insurer of the National Savings Banks. It is unique to us in Tenerife and cannot be obtained from any other Estate Agent, Insurance Broker or Bank.

You can purchase a newly built property that has been completed, but there is also the possibility of purchasing early in construction ‘off plan’ whereby in addition to capital growth and yield from rental income, substantial gains can be made from purchasing at the early stages of construction.

Fundamentally, the building company sell the property at the early stages of the project. These properties can be apartments or houses, which are generally at prices lower than the normal market value price.

The purchaser pays a deposit, which is usually 10% on signing a purchase contract, followed by perhaps 30% of the selling price when the foundations are in, then a further 30% may be payable when the structure reaches roof level and the final 30% payable on completion and receipt of freehold title deeds. In some instances, if a mortgage is being taken, the final two payments amounting to 60% may be deferred until completion.

Payment of these deposits provides the building company with capital, thereby, reducing the amount of bank borrowing needed by the developer to finance the project. The developer will have a built in structure of price increases during construction, whereby more often than not, the final selling prices when the development is nearing completion will be 20% more than the initial prices. Often a development will be sold out by the time it reaches roof level, so if you have paid just 40% of the purchase price at that time, you will have made a 50% profit on your outlay during that period.

Assuming property values continue to increase during construction, then by the time the property is completed it will have risen substantially in value without you having paid the full price for it. Endeavour to secure a property at the beginning of the project when you can reserve the most desirable plots at the keenest prices.

This is a speculative property investment where you could lose money in the event that property values fall, but this would be the same if you purchased a resale property outright. However, historic performance of property values in Tenerife have shown continued increases in property values during the medium term. This is attributable in no small way to the market in Tenerife being more ‘desire or aspirational’ rather than ‘need’ driven as is the general trend in most people’s home countries.

Also, the property market in Tenerife is not directly linked to one single economy, as property owners in the South of Tenerife consist of many differing nationalities and with demand increasing alongside diminishing supply, the future of property investment here continues to look good, giving returns above normal expectations.

6) USE OF MORTGAGE FACILITIES

The amount of mortgage on a property will magnify both your investment returns and risk. With very low interest rates currently payable on mortgages, it makes sense to take advantage of this to increase your purchase/investment power. Probably every multi-millionaire has a maximum mortgage on their property, because it is cheap money and the investment return and capital growth on investment in property will be far higher than the interest payable.

As the real estate industry starts to boom again and bankers begin to compete to give out real estate loans and decide to increase the amount of debt that they are willing to lend, your equity can buy more real estate.

As you increase your leverage and total debt amount, you increase the amount of property you can purchase and therefore potentially profit from.

However, you should remember that increased leverage also exposes you to greater risk liability. We believe that a healthy amount of debt lies somewhere between 60% – 70% depending upon your individual circumstances.

Although investing in property is a proven path to long-term wealth, you should consider it a medium to longer term type of investment, so you’ll want to make sure that you can afford to maintain your mortgage repayments over the long term. You will not want to have to sell your investment property until you are good and ready and if you were to encounter some financial stress, this could force you to offload the property at the wrong time.

Remember that interest rates can vary over time but the good news for property investors is that in times of rising interest rates you can normally expect to be able to increase the rent. Remember that rates usually rise in line with property prices, so increasing interest rates are not always bad news for property investors as they have more than likely had a win on the capital gains front.

Leveraging equity in your home, or equity from another property investment, can be an effective way to buy an investment property here in Tenerife. Equity is the amount of money in your home that you actually own. It can be calculated by working out the difference between what your property is worth and what you owe on the mortgage, which will give the amount of equity in your property. Using the equity in your existing home can allow you to borrow more money towards your investment property, which may also increase your tax deductions.

CONCLUSION

Remember that property is principally a medium to long-term investment and the longer you can afford to commit to a property the better it will be and as you build up equity then you can perhaps consider purchasing a second investment property. Don’t get too greedy. Find the right balance between financial stability and being able to enjoy life. Financial security is very important, but your quality of life is priceless.

Finally, be aware that unlike shares, managed funds, banks or building societies, you can’t just sell part of your investment property if you need money. So, be cautious, but consider that record migration levels due to global warming, together with increasing tourism to Tenerife, and demand from potential purchasers combined with a property shortage, are crucial factors favouring investing in property here.

We are very happy to have a meeting with you, or an initial chat over the phone, to establish the right strategy and structure for you, and help you to maximise your own personal investment possibilities in Tenerife property for your future wellbeing.