Investing in real estate is one of the most attractive options for generating passive income. Buying an apartment and renting it out can be an excellent way, as well as a good strategy for obtaining long-term returns. However, the worst mistake when investing in rental properties is not to carry out a detailed analysis of the market and to have financial planning.

The lack of knowledge about the area in which the property or housing is going to be purchased for a vacation rental, the demand it has and the expected return can lead to a failed investment. These errors can result in economic losses and difficulty finding tenants. It is essential, therefore, accurately evaluate the market before making real estate investment decisions.

Here are some of the most common mistakes that investors make in the real estate market and recommendations to avoid them:

Disclaimer: This guide is purely informative and is not a substitute for specific advice or consultation with a professional in legal or financial matters in each particular case.

The 5 most common mistakes when investing in rental properties

A careless approach or lack of preparation before investing in rental properties can result in losses, both of time and money. To avoid this, we introduce you to the five most common mistakes when investing in rental properties and avoiding certain consequences such as prolonged unemployment, unforeseen and costly repair, or the risk of default:

1. Do not conduct a location study

The location of a property is one of the main factors that determine its long-term profitability. Failure to do an exhaustive analysis of the area before making the investment can have negative consequences.

It is important to check if the Demand for rent It is high, if the area has access to essential services such as transport, shops and schools, and if the value of properties in the area it is increasing or decreasing.

Investing in an unattractive location can result in difficulties finding tenants and generating an adequate return on investment.

2. Ignore associated costs

Another common mistake is to focus solely on the purchase price of the property and on the possible rent that may be charged, without considering all the associated costs.

These include expenses such as regular maintenance of the property, taxes, insurance, possible unforeseen repairs, and periods when the property may be vacant.

It's vital to consider all of these factors to do not underestimate the return on investment and avoid unpleasant surprises in the future.

3. Do not consider the condition of the property

Buying a property that needs a lot of renovations may seem like an attractive opportunity to increase its value, but it is essential to accurately assess the condition of the property.

Renovations can significantly increase costs and delay the rental of the property, which directly affects profitability. It's important calculate if the reforms will be profitable in the long term and whether it is possible to recover that additional investment by renting or revaluing the property in the future.

4. Not evaluating the right type of rental

Deciding between renting the property for the long term or for the short term is another of the main factors to be analyzed, which will be determined by whether it is rented as a vacation home or as a Home for Tourist Use (VUT). The typology has different characteristics and can have one impact or another on the profitability of the business.

Therefore, it is essential evaluate which is the most suitable rental model depending on the type of property you have and the demand in the area.

Tourist housing usually offers higher incomes, especially in areas with high tourist flow, but it requires more time and effort in management, as well as more frequent maintenance. On the other hand, long-term renting provides more stable and predictable income, with less need for daily management.

5. Disregard the legal regulations

One of the most serious mistakes is not knowing the laws and regulations affecting the rental of real estate, especially in the case of tourist rentals.

Each country, and even each autonomy or location, has specific regulations that regulate tourist apartments and long-term rentals. Not being aware of these regulations can lead to legal problems, fines and restrictions that directly affect the ability to return on investment.

In Spain, for example, the expansion of tourist flats has generated both economic opportunities and tensions in neighboring communities, which has raised important questions about whether communities can prohibit this type of rental. Being informed and complying with regulations is essential to avoid problems in the future.‍

Tips to avoid mistakes when investing in rental properties

Investing in rental properties can be an excellent source of income if informed decisions are made. The key to Maximize profitability and avoiding problems is planning and ongoing evaluation of every aspect of investing.

Here are some key tips to minimize risks and increase the chances of success when investing in rental properties:

1. Perform a comprehensive market analysis

Before buying a property, it is essential to carry out an in-depth analysis of supply and demand in the area where you want to invest.

Investigate if there are Demand for rent In the area and what is the profile of tenants. For example, in a university area, a small apartment or a shared flat may be an excellent option, while in a tourist area, it may be more profitable to invest in housing for tourist use.

If you choose to invest in vacation rentals or tourist apartments, make sure that the location is attractive to tourists. Cities with a large tourist influx, such as Barcelona or Malaga, tend to offer greater short-term rental opportunities. However, keep in mind that high competition in these areas can also affect prices and occupancy.

2. Make a realistic calculation of costs

When calculating the return on a real estate investment, it is important to take into account all the associated costs, not just the purchase price and the possible rent that will be obtained.

A common mistake is no consider additional expenses such as maintenance, taxes, unforeseen repairs and periods in which the property may be unoccupied.

A practical example would be buying an apartment in a tourist area with a view to earning a high income from vacation rentals, but not taking into account the off-season months, when the apartment may be empty. To avoid surprises, a good strategy is dynamic pricing or smart pricing. Through dynamic pricing tools, a calculation is made of rates that are adjusted based on demand, local supply, seasonality or booking trends, among other factors.

3. Control basic supplies: consumption and associated expenses

Controlling basic supplies, such as water, electricity and gas, is a key aspect of maintaining property profitability. A mismanagement of these expenses can significantly increase operating costs, affecting profits.

To facilitate this task, at Polaroo we offer a technological solution through the comprehensive management software for basic supplies, which allows you to manage all the supplies of a property under a single platform; reducing administrative tasks, saving time and, most importantly, money. In this way, you have a centralized control of all consumption and associated expenses, optimizing property management, thanks to a control panel where you can view data by periods of stay, number of tenants or type of supply for each property asset.

In addition, the team of experts is continuously working on optimization studies analyzing the market, whose objective is to find the best combination between current rates and the quality of the service offered by the suppliers of each basic supply.

In which cities are there higher returns on rental properties?

The profitability of rental properties varies by city. Some of the places with the highest demand for rent and, therefore, with the highest profitability are:

1. Madrid: The high demand for rentals in Madrid, both long and short term, is supported by its status as the country's capital, its economic dynamism and its large population. The scarcity of rental housing in central areas and the constant arrival of international students and professionals also drive this demand.
2. Barcelona: Although regulations on tourist flats in Barcelona are increasingly strict, it is still a very attractive city due to its tourist appeal, its international connectivity and its position as an economic and cultural center. This maintains demand in both the residential and vacation markets.
3. Valencia: Valencia has seen significant growth in the real estate market in recent years, with prices that are still relatively low compared to Madrid and Barcelona. The growing demand, both from local residents and foreigners, has made investing in rent in this city an increasingly interesting option.
4. Malaga: The tourist boom in Malaga and the Costa del Sol in general, with a constant flow of tourists throughout the year, has made the city one of the most profitable destinations for vacation rentals. In addition, the favorable climate and international air connections reinforce this trend.
5. Seville: Seville has experienced a growth in tourist interest in recent years, along with the economic development of the region. The growing tourist demand has made investing in real estate, especially for vacation rentals, an attractive option.

If you want to learn more about the income, expenses and management of tourist housing in different cities in Spain, we invite you to explore the Report on tourist housing in Spain 2023, where we break down key data based on the management we have done at Polaroo of the supplies of more than 2,000 homes for tourist use.

Study on tourist housing in Madrid:

Recently, Patricia Valenzuela, our head of strategic alliances at Polaroo, has collaborated on a study led by the Polytechnic University of Madrid and the University of Alicante, on how the characteristics and location of tourist homes influence their price.

In a context where collaborative economy platforms are redefining the tourism sector, housing behavior has been analyzed in Madrid; one of the most segregated European cities, with more than 3 million inhabitants and with three large distinct geographical areas.

In the study, published in the scientific journal Sustainability by MDPI, the findings of the analysis appear in the Spanish capital, and that, using a hedonic pricing model, it allows us to evaluate the impact of key factors that condition the price of such homes. In other words, both the number of rooms, bathrooms, guest capacity, and above all, the proximity to public transport stations are analyzed.

Among the main findings in Madrid are:

• Location is key: Properties located in the center of Madrid and close to public transport stations (buses, metro and trains) have higher prices per night, reflecting the importance of accessibility for tourists.
• The characteristics of the accommodation: Properties with larger capacity and more bathrooms have significantly higher prices, suggesting that tourists value comfort and space.
• The impact on peripheral areas: Oddly enough, areas farther from the center don't necessarily see a “decay by distance”. In fact, peripheral areas with better accessibility to public transport can increase their attractiveness, especially in seasons of low demand.

This analysis reveals that improving transport infrastructure in peripheral areas of cities would not only increase the number of reservations, but would also promote greater social and economic cohesion in vulnerable areas of Madrid.

In addition, this study highlights the importance of designing urban policies that reinforce transport connectivity in neighborhoods farthest from the center, favoring tourism growth and boosting the local economy.