27 Apr Ten Golden rules of real estate investment
We are currently in a scenario of reactivation of the real estate investment in Spain. On the one hand, the statistical data traditionally used to measure the pulse of the market (number of granted mortgages, of new approvals granted by the Architects’ Association, etc.) make it possible to be optimistic about the trend of the real estate sector. On the other hand, certain locations (large cities and tourist areas) and certain sectors (residential, commercial) have experienced significant dynamism.
Any real estate investment should be analyzed and planned from two points of view essentially: (i) financial (what is the foreseeable return on investment, what resources I need, how to obtain them …) and (ii) legal.
Legal advice is essential because it allows, firstly, to limit the risks of the investment and, secondly, to properly plan the necessary resources by specifying what will be the cost of the investment (taxes and other costs).
We have synthesized in ten points the most relevant legal aspects to consider when making a real estate investment in Spain:
- Foreign investment in real estate does not require any prior authorization or communication from the authorities, except in special cases (investments from tax havens, for example). However, there is an obligation to notify certain investments once they have been made to the General Directorate of Commerce and Investment, for administrative, statistical and economic purposes.
- Regulations that prevent money laundering impose on those who wish to participate in real estate transactions the previous filing of certain documents evidencing their identity, their business and professional activity, and the origin of the funds.
- An essential decision is to determine the type of vehicle most suitable to make the investment. It is worth considering whether the investment should be made directly or through a company. There are as well other vehicles in the Spanish market to carry out investments in realty, such as real estate investment funds and listed real estate investment companies (SOCIMIS, i.e. REIT’s); even crowdfunding initiatives have recently appeared in the real estate market. It is very important to know the characteristics of each option to assess the risks of the investment and to determine the foreseeable tax costs over the expected profitability of each of them before making any investment decision.
- Any person who wishes to make a real estate investment, either directly or indirectly, must apply for a foreigner’s identification number (NIE) in the event of individuals, or a tax identification number (NIF) in the case of companies.
- The review of the legal aspects of a real estate investment comprises matters of (i) various legal matters (civil, tax, town planning, consumer protection, etc.) as well as (ii) different territorial jurisdictions (state, autonomous community and local).
- The Spanish legal system provides for full guarantees to real estate investors consisting mainly of the existence of a Public Land Registry and the intervention of a Notary. Under this system, who fulfilling certain requirements inscribes their acquisition in the Land Registry is protected against third parties of better right. However, there are a number of assumptions in which this principle does not apply. The intervention of the Notary does not replace the need for full legal advice from the investor.
- It is advisable to carry out a series of checks prior to the signature of any document, although unfortunately, in practice, the review is often carried out after the signature of a reservation contract or a precontract (“arras”). These checks should include, among others, details on: (i) the ownership of the asset and its registration in the Land Registry, (ii) charges and encumbrances, (iii) the cadastral situation, (iv) urban planning aspects of the asset (v) existence of a community of owners, (vi) possession status (i.e. whether it is leased or occupied), (vii) expenses and taxes inherent to the ownership and if payments are up to date, and (viii) the physical state and maintenance of the property. The scope of these checks must be adapted to the type of asset on a case to case basis (it is not the same to purchase a building or one under construction), the use of it (residential, commercial, etc.) and the purpose of the investment (property developer, private use, etc.)
- Taxation of the investment operation is an essential issue to be analyzed. In this respect, we would like to emphasize that both taxes arising from the investment as well as taxes deriving from the tenure of the assets should be analyzed; that is to say, charges that the investor will have to face on a regular basis (for example, the Real Estate Tax, and in the case of non-residents, the Non-Resident Income Tax, etc.). Regarding costs, it is convenient to consider in addition to the tax, the costs of formalization of the operation (Notary, Registry and administrative costs). These expenses may be negotiated between the parties, but they are usually assumed by the buyer. In addition, it is appropriate to consider the existence of other ancillary expenses, for example, the amount of the premiums if the asset is ensured or the costs of the supplies.
- If the investment operation is financed by third parties, it is normal for the financing party ensures the repayment of the loan amount by means of a security over the property. The most common is the granting of a mortgage over the asset.
- Investments in real estate assets over 500,000 Euros entitle non-EU investors to apply for a residence permit for investors (so-called “golden visa”). This right may also benefit certain relatives of the investor. This authorization lasts for 2 years and allows the holder to reside and work in Spain.
The team of Navarro Llima Abogados, S.L. is expert in advising on all the legal aspects of any real estate investment. In future posts, we will discuss some key legal issues in buying dwelling premises.