In June 2016, I bought a home in Valencia, Spain. You are probably asking yourself why someone who owns property in Spain would be writing this article. But buying property abroad is a complex, lengthy process, and it takes insider knowledge to divulge the truths of buying property in specific countries. Let me explain…
Recently I was looking at properties with an American couple of retirement age, who were in Valencia for the first time. Our initial communications had led me to believe that they were interested in a property in the central historic district that would serve as their home for part of the year and provide some rental income when they were not in residence.
After previewing several properties in different parts of the city, the husband stated, “I believe in getting straight to the point… find me a management company that can guarantee a 7% return.” I was taken aback. I had thought that the primary purpose of their purchase was to provide an alternative life experience. It was now clear that return on investment was paramount.
-First Things First
I share this story because when buying a property overseas, you must be clear about your objectives. The preeminent question should be whether you are buying primarily as an investment or as a lifestyle purchase. Unless you are clear on your intentions from the start, you will end up wasting your time, and missing out on potential purchases.
This is not an article full of tax details and financial recommendations. I am not an accountant, and you probably have a unique financial portfolio that requires a specialist.
What I will share is the path that led me to Valencia in the hope that this might help you with your own decision… even if my experience may convince you that Valencia (and possibly all of Spain) is not right for you.
Here is a list of the influences that I used to determine if Spain was my best option. I have also included some important questions I considered during my search, which may apply to a property search in any country.
-Initial Considerations
1. Urban Or Rural?
I chose Valencia because I wanted a pedestrian-friendly, walkable city that would allow me to live downtown without owning a vehicle. I knew I wanted to be within walking distance of all that a city has to offer. Valencia provided this, plus the huge bonus of a beach. Ask yourself:
- Is owning and driving a car in a foreign country too daunting?
- Does an isolated location concern me because of potential security issues?
- Do I prefer a rural location, and if so, how important is my proximity to a city versus the privacy I gain from a more remote area?
2. Large Or Small?
I spent most of my life in Nashville, Tennessee. In 2021, Nashville’s metropolitan area included nearly two million people. The metropolitan area of Valencia is estimated to have a population of approximately 1.7 to 2.5 million (depending on how the metropolitan area is defined). So my transition to Valencia was easier than if I had chosen a much larger city such as Barcelona (population 5.6 million) or a smaller city like Santiago de Compostela (population 180,000). Ask yourself:
- Do I want to immerse myself in a busy metropolis, or does a smaller city suit me better?
- Are the costs of living in a bigger city within my budget?
- Do I want everything within walking distance, or am I willing to hop on public transport to get around a bigger city?
3. Apartment Or House?
I was happy to choose apartment living in Valencia due to the ease of upkeep, security, and functionality. Generally, you will have to opt for an apartment in cities, unless you have the funds to invest in a house and are happy to live on the outskirts.
If you are keen on having more space, maybe even your own garden, you should focus on properties in smaller towns and rural areas.There you will find houses at a much lower price than in cities. Ask yourself:
- How much space do I actually need to live a comfortable life?
- Do I want the hassle of maintaining a larger property?
- Would the noise that often comes with built-up apartment blocks bother me? Do I need the peace and quiet which I would more likely get in a house?
4. Cultural And Lifestyle Attractions And Distractions
I wanted a significant university presence. Valencia has a university with an estimated 50,000 students at its three main campuses. I wanted history. Valencia was founded over 2,000 years ago. I wanted entertainment option—Valencia boasts the Orquesta de Valencia, multiple venues for opera and ballet, the Berklee College of Music campus, and more. Valencia also has the iconic Turia Gardens running through the city. Think about how you enjoy spending your free time and what aspects of your neighborhood are important to you. Ask yourself:
- Is a beach important? Or do I prefer mountains?
- What kind of atmosphere do I enjoy in a city?
- What amenities are must-haves for me?
- What entertainment options do I need to feel fulfilled?
- Is the lack of certain American cultural attractions a deal-breaker? For example, what if there is no NASCAR racing or American football?
-Stage Of Life Issues
1. Appreciation Versus Income
When I bought my apartment, I was 64 years old. I concluded that income would be a good thing and that appreciation potential was less important. If you have already celebrated your 50th birthday, your time horizon might dictate a different set of guidelines for a purchase to those yet to hit the 50th birthday mark. Ask yourself:
- What is my main priority with this investment? Do I need to make a profit?
- Should I prioritize profit, over a property I would prefer living in?
2. Part-Time Or Full-Time?
My original intention was to spend six months a year in Valencia and six months in another country, probably in North America. That is still my long-term plan. This decision determined the level and cost of decoration and personalization of my property. Ask yourself:
- Will I view this property as a primary residence or as a vacation or part-time home?
- Will I be able to rent out the property when I am not there? Is it a popular holiday destination? Is there a demand for short-term rentals in that area?
- Does living there part-time mean I have to stay during the off-season, ensuring I maximize rental returns during the holiday season?
3. Health Care
Spain is ranked in the top ten best health care systems in the world. Valencia boasts one of Europe’s largest hospitals. A Spanish private health insurance policy for a person aged 65 or older is around 125 euros per month. I also pay for Medicare (without the Part D drug coverage) and Supplemental Health Insurance since I live part of the year in the States. Ask yourself:
- Is health care a priority? Even for a healthy 50 year old… it should be.
- How much can I afford to spend on private health insurance?
- What health care services do I need in close proximity?
-Five Reasons Why You Should Not Buy A Property In Spain
1. Fast Residency Options
Some countries offer expedited residency with a reasonable property purchase, a modest business investment, or a monetary deposit in a local bank. Spain only offers a Golden Visa with an investment of 500,000 euros or more in Spanish real estate. This steep minimum requirement limits the number of applicants to a small universe of wealthy investors.
2. Discount Programs
Other countries offer generous discount programs to attract foreign retirees, such as Panama’s pensionado program, which entitles applicants to discounts on medical expenses, utilities, loans, and more. Spain offers no such program, although there are discounts for public transportation using the Dorado card, which is available for those age 60 and over.
3. Tax Implications
Many countries have a lower tax rate for foreign investors. Portugal, under the Non-Habitual Resident Program, grants significant tax reductions after an individual declares Portugal to be his or her tax residency. Spain offers no such abatement program.
4. Property Taxes In Spain
For my renovated two-bedroom apartment in a 100-year-old building, I was required to pay 10% of the purchase price as property tax within 30 days of closing. The good news? My annual Spanish property tax is still approximately 15% to 20% of the tax for a typical two-bedroom apartment in Daytona Beach, Florida. The bad news is that it will be seven to eight years before I have recaptured the upfront cost of the 10% tax.
5. Rental Income
In Spain, rental income is taxed at 24% for Americans, while EU residents pay a reduced tax of 19%. Professional managers charge 20% to 30% of rental income to manage a property. These management costs can be reduced with rentals longer than 30 days, but long-term rentals are not as lucrative as short-term rentals.
-Final Thoughts For Investing In Spain Or Anywhere Overseas
- Identify your primary objective. Do you want to make money or make a life?
- Do your homework about the cities and countries that hold a special interest for you, and keep an open mind.
- Rent before you buy for a minimum of two months. Nowadays, this easy and economical using sites such as Airbnb or VRBO.
- Hire a good tax advisor to steer you through the sometimes choppy waters of investing overseas.
Michael Herndon
This article was first published in 2018 and has been recently updated.