Any estate agent in Marbella and on the Costa del Sol will gladly sell you a property and tell you to rent it out on an ongoing basis. Of course long-term rentals can provide an excellent steady source of income, but they come with potential pitfalls that property owners should be aware of from outset.
Perhaps the most important thing when renting out a property long term regardless of the location is the due diligence on the prospective tenant. Among other things you should ask and verify questions such as:
- Do they have a reliable source of income?
- What percentage of their income will cover the rent?
- Do they have references from previous landlords?
- Will this be their main residence?
All of these are important, but one is absolutely critical to know when it comes to renting long term in Marbella or anywhere on the Costa del Sol as we will find out when I tell you Allan’s story.
Moral of the story is – understand the law and know what rights both renters and landlords have. Read on…
Pitfalls of Long-Term Rentals: Allan’s story
Allan saw an opportunity back in 2016 to buy two properties in Marbella, Costa del Sol. One was for personal use, the other for investment and short term rentals. Things were going to plan with the investment property in Dama de Noche and Allan was making a solid return with the property rented for several weeks a year to holidaymakers.
Come March 2020 with the pandemic lockdown and everything stopped. A calendar full of bookings evaporated into thin air and all that was left was monthly mortgage payments, community fees and annual property tax.
Of course no one knew how long this situation was going to last, so thinking ahead and in a bid to at least cover his running costs Allan decided to rent out the property for a year.
To attract potential tenants, Allan set the rent well below the going market price for the area, a strategy that worked wonders. He was bombarded with potential tenants. Among the applicants Allan hit it off with Glen. Glen was down on his luck (as many people were in early 2020) but appeared earnest and Allan thought he had found a great, reliable tenant, so in late 2020 signed a one-year contract at a very low rent to help Glen out.
Throughout the year Allan had a good relationship with his tenant Glen who paid the rent on time each month. Come the end of the year, Glen asked to stay on and Allan agreed on condition that the rent be increased. After some negotiations a new one-year contract was signed. It was still 600 Euros a month under the going rate, but Allan was satisfied enough with the situation. He had a paying tenant, his costs were covered and his property was going up in value.
In the last quarter of 2022, Allan decided that he wanted to realise his gain and sell his property and contacted Lion Trust Property. He found us on the web and was an avid reader of our blog during the pandemic months. We suggested that we ideally needed the property to be empty to present the property in the best possible way.
Allan explained this to Glen who reluctantly said that he accepted the situation (he knew he was on such a good thing) and said he would look for alternative accommodation but that it would not be easy. He requested an extension for 6 months so that he could find a new place which Allan reluctantly agreed to.
He could not make him leave!
After 6 months Allan and I agreed to visit the property to assess a marketing price and establish any work that needed doing before marketing the property.
Allan did not expect what came next. Glen and his family had made no attempt to move out of the property and it was clear he was very happy paying a highly reduced rent.
Glen played the role of cooperative, helpful tenant saying he was happy to allow any viewings from prospective buyers. When he was questioned as to when he would move out, he became agitated and said he had no idea as he needed to find somewhere else to live for the same price and quality! When Glenn was asked what notary date Allan could commit to in a sales contract with a buyer (contractually confirming the property would be vacant), Glen waffled about looking to buy somewhere or rent another place. It was clear to Glen that he had been rumbled!
Allan found himself facing one of the pitfalls of renting out property long-term in Costa Del Sol.
Tenant protection laws in Spain mean that if the tenant can prove that the property is their first residence, they have a legal right to stay in the property for up to five years, even if the landlord wants to sell.
The fact that they had signed two annual rental contracts and a six months extension actually meant nothing! The tenant knew his rights from the outset, but Allan had no idea! He had unknowingly given up his legal right to get access to his property for 5 years. Unwittingly, he found himself stuck with a tenant he could not get rid of, even if he wanted to. It was a tough lesson for Allan who has had to accept that the tenant will have the legal right to remain in the property for a further 2.5 years.
Moral of the story
The moral of Allan's story is that you need to know the situation about a prospective tenant’s residency status before you rent out the property on a long term basis and you need to know their legal rights.
You need to know that renting to someone who can prove that the property is their main place of residence means a commitment of potentially up to five years, regardless of the duration on the contract signed.
ALWAYS seek professional advice before entering into a legal contract to ensure you are in compliance with all legal requirements and know your rights.
In conclusion
Long-term rentals with good tenants can be an excellent way to ensure an ongoing income stream. Some landlords are happy to sign 5 year contracts with tenants from the outset.
Landlords need to understand that if a tenant can prove that the property is their main place of residence means a commitment of up to five years, regardless of the duration on the contract signed.
From setting an appropriate rental price to creating a solid lease agreement, landlords should pay close attention to the legal implications and requirements of renting out their property.
It is essential to seek professional assistance to minimise any issues down the road.
Allan’s story is far from unique. Several foreign owners are not aware of the laws and rights of long term tenants and thus experience the same situation.
If you are thinking of buying a rental investment make sure to read our blogpost about “Let’s talk about rentals” What you need to know before buying your rental investment.
Interested in what the market looks like? Check out Lion Trust Spain 2023 market forecast to find out!
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