When you have doubts between selling or renting, you have to take into account profitability and also other aspects related to both operations.
How do you know if it is better to sell or rent?
If you own a property and are thinking about obtaining the highest possible profitability from it, you may hesitate between renting it or selling it.
There is no clear answer to this question, as it depends on the particular needs and possibilities of each person.
However, there are some steps that can help you make this decision:
- Calculate rental profitability. With this operation it is possible to know the benefits that can be achieved if you rent the home.
- Market study. Compare the profitability of the property you own with that of the rest of the nearby area to know if it is positive to rent.
- Analyze the advantages and disadvantages of renting and selling. In addition to purely economic aspects, there are also other elements to take into account before making this decision.
The profitability of the rental is the result of the calculation using a simple formula that can help you know the percentage of profits that you could achieve by renting your home. To calculate it, the income received is taken into account but also the investment and expenses necessary to obtain it.
Calculation of rental profitability
To calculate the rental profitability, the following formula is used:
Annual net profitability = (Annual rental income – Annual expenses) / Money invested x 100
The concepts that appear in that formula are obtained:
- rental income is calculated by multiplying the monthly rental amount by twelve.
- The annual expenses include those of the rental, such as the IBI and the community, and the interest derived from the mortgage, if applicable.
- The money invested is variable depending on the personal situation of the owner:
- Purchase of the property in cash. The amount will be equal to the purchase price plus the expenses of the operation.
- Purchase of the apartment with a mortgage. The amount will be equal to the savings you have contributed to be granted the loan plus the capital amortized at the time of calculation.
- Acquisition of the house by inheritance. The money invested will be equal to what you have paid to receive the inheritance, such as inheritance tax or management and notary fees.
For example, if you bought the property in cash for a price of 120,000 euros, the IBI is 250 euros and the community is 100 euros per month and you charge a monthly rent of 600 euros, the calculation would be:
Annual net profitability = (7200 – 1450) / 120000 = 4.8%
The calculation of the profit or profitability of the sale is simpler than that of the rental, although both are similar in some points.
Calculation of profitability of the sale
The profitability derived from the sale of a property is also called capital gains profitability. This profitability is the increase in value of a property over time.
To calculate the profitability of the sale, or profitability due to capital gains, the following formula is used:
Profitability of sale=(Sale price-Purchase price) / Purchase price x 100
The result of this operation is especially relevant when long-term investments are made or in places where prices are changing.
For example, if you bought a house for 150,000 euros and you are going to sell it for 200,000, the calculation would be:
Profitability of the sale = (200,000-150,000) / 150,000 x 100 = 33.33%
So what is better to sell or rent?
As we have seen in a previous point, it will be better to sell or rent depending on the economic needs we have or the personal preferences of each one. Life prospects also influence.
However, if we take into account only the financial aspect, we must take into account the calculation of benefits in both cases. If the current rental value is less than the sales price, it will be better to sell the house and, if not, it will be better to rent it. This means that if the sale price is higher than the sum of everything that will be received from the long-term rental, the option of selling will be more profitable than renting.
For example, if you compare the two previous examples, to obtain the 200,000 euros of the sale price, it takes more than 27 years. In this case, selling is more beneficial than renting. To know if it is better to sell or rent, you must calculate the profitability of both operations and also take into account other advantages and disadvantages. In the case of rental, the profitability is calculated by taking the amounts of monthly rent and investment, as well as annual expenses. For the sale, the purchase price and the sale price are taken into account.
This article is part of our service Real Estate Lawyer in Spain. Visit this section where you will find all the useful information on this topic, including a complete guide on How to buy a house in Spain.
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