The stabilization process in the real estate market has been closely related with the market value of the sector’s assets. The majority of current debates have been focused on the valuation of real estate assets, leading to the situations of uncertainty among the potential buyers or investors.
Finally, the market value of these assets has been reduced to the value that has to be paid by the buyer or investor, as a consequence to satisfy their needs of the lifestyle, leisure, business, profitability, etc.
The real estate investment is growing thanks to the many reasons that motivate the investor or buyer at the moment of investing in real estate; however, it is necessary to give a special attention to the capitalization of direct income from the leasing of the assets.
By dividing the annual income (gross or net to be decided) by the interest rate required for the investment operation, we obtain the maximum amount to pay for the asset. Thus, we get the desired profitability, depending on the annual income from the rentals.
A simplified option of this formula allows us to calculate the implications of investment as well as to discover the future trends and the price evolution of real estate assets.
The current result of attractiveness of the real estate investment is consequence of the falling of the values of real estate assets, that have been higher than leasing, a situation that has resulted in an increase of the constant and certain profitability.
It shows the potential boom of demand, currently there is a higher percentage of sales transactions in cash that financed by mortgages.
Based on that end, and applying the formula in practical terms, there is opportunity to earn a profitability of 7%, depending on the type of property you want to purchase (in the case of commercial premises, an amount is about 7%).
As we can see, these incomes are above the 1.6% offered by the Spanish Treasury for 10 years.
Therefore, taking into account the current binomial profitability and the risk, a capitalization of direct incomes from the leasing of real estate seems to be one of the best alternatives for a small investor.
Leonardo Cárdenas Armesto
Head of Real Estate Department
AGM Abogados – Barcelona