Spanish Real Estate Investing guide – (2 of 10)

Choose your local Market. What's the best city or town to invest?

That is our second article in a series of 10 articles. The objective of these series is to share our knowledge of the real estate market in Spain. We know that investing internationally can sometimes be challenging, but we want to make our small contribution, helping to alleviate possible difficulties. All the information contained on this guide is based on our experience operating in the Spanish market.

Why invest outside of my country or hometown?

One question that arises constantly when we deal with investors (or any kind of person interested in the Real Estate sector) is: Why do you invest in this city?

This question, that seems simple, it’s really complex to answer: there are many variables that can influence the choice of the right market. Also, some markets could be good for rental properties, while other markets are just for Fix & Flip operations.

The best advice that we could give you is: to invest in places you know. Because, even if you make a wrong investment decision, you know that you bought a property in a street or area that you feel comfortable and that many locals will have the same feeling as you.

Even living like a local for a year or two, it will give you that knowledge. Especially if you mix yourself with people from your adopted city.

Of course, sometimes, for many reasons, that’s just not possible. For instance, we are from Barcelona, but we are investing in other parts of Spain. We decided to explore other locations seeking higher ROIs and more liquidity.

The main reasons for us were:

  • Overvalued houses
  • Political turmoil
  • Really capital intensive market
  • A lot of competition

Probably this same reasons could apply to your case: some markets are too hot or too cold, to operate efficiently. There are even places, where it was never a good idea to invest in real estate.

The conclusion is that there are many reasons that could make you decide to invest in another country or city different from yours.

In order to choose the right market, we should use a set of analysis tools. That, it will allow us to understand what kind of investment, is the one that fits on the analyzed market.

Macroeconomic data

Boring, right? Well, the macroeconomic data allows us to compare the image of different countries and decide which one you may want to invest in.

What data should we look at? GDP, GDP per capita, GDP growth, economic freedom, index of property rights, taxes and especially in what part of the business cycle is that country. It is interesting to take a look at the historical data of the last 10 years for all these measures.

To select our type of strategy, the size of the market compared to GDP is important. For example: large market compared to GDP (Fix & Flip), small market compared to GDP (rentals).

Another interesting fact is the ratio of owners vs. tenants. Normally, a country with a large proportion of owners will be better for Fix and Flip strategies. Because most people will try to leave their status as tenants to become owners, especially in those countries where historically, the main financial asset of the population was their property. There are exceptions, for example, Germany has a large number of tenants, but due to legal rent limits, being an owner is not a good business.

That information will help us determine if this country is interesting to invest or not. It is important not to look at a couple of ratios and decide, it is necessary to understand the whole picture.

The best is to look at countries where the economy is doing well, but not excellent, for example, Spain. If you just look at high GDP growth economies, maybe you’re late for the party, or the competition is to high. That may be applied to cities and towns too. The most prosperous places or the ones that are on hype, may be not the best ones to invest. Instead, check for 2nd tier cities.

When comparing the data, it is better to look within the countries of the same continent or economic region, otherwise you may be overwhelmed by the amount of data.

A good source of data is the IMF website, especially their Global Economic Outlooks and the Global Housing Watch.

Some other interesting websites:

After looking at the whole picture, we are going to focus to the local level:

Local demographic statistics

That one is really important, and the information is really easy to obtain, especially in advanced economies. In our case: Europe, almost every city council has a statistics website (eg: Barcelona statistics site), where you could get all the relevant information. As for the entire European Union, it has the Eurostat website; that website is a really reliable source of interesting statistics that we can link to the real estate sector.

Basic statistics to know before investing in a specific place.

Looking at the growth or decline of the population could give us a reliable forecast of the future. In some cases, it could be interesting to invest in places where the population is decreasing, depending on the discount in the price that we can negotiate. Sometimes, buying a 50% discount and getting 30% less ROI can be a good investment. But in general, is better to invest in markets where the populations is growing.

The bigger the city, the better. That usually means a bigger real estate market. So more liquid.

As more young people are in the market, more potential transactions could be closed. Young people (especially those who create new families) are the ones who lead the demand for new housing or rents. In the future, that could change slightly due to the increase of single families, divorces or home sharing.

That ratio is important, because if we find a big city with a population that have a greater purchase power compared to prices of the properties, that means that offering the right product, will produce higher returns because we could sell at a higher price. Normally, that kind of situation is caused after a economic crisis period or after a Real Estate bubble, when the prices reach the bottom and start to rise again. That situation was experienced in Spain between 2013-2014 and is the best time to invest, specially for mid term investments.

Both ratios should be at least as the average ratios of the country.


This is the most specialized and specific tool that we are going to analyze, it allows us to decide to invest or not in this specific market and to filter the range of prices that we desire for our investment.

There are different techniques to study if the price of the property that we are evaluating is the right one for our investment strategy. First of all, it is important not to focus only on one of these techniques when evaluating our property. We have to use a global vision, otherwise our analysis will not be valid to calculate if we buy at a good price or not.

We will start with the most used one:


Many of our partners and investors are already really acquainted about the price to earnings ratio, this one, is one of the most used among the stock market investors. The expected values for a stock market company that’s fairly priced, is between 9 and 18. Anything that is below or over these values, is considered cheap or expensive. But we could use that same ratio for Real Estate, and the fairly priced values are really similar.

The ratio should be calculated with the following formula:

Price of the property / Gross yearly rental income Eg: 100k euros property / 10k yearly rental income = 10 is undervalued (in 10 years you get your investment back).

With this easy calculation, we can know if our property has a relatively high price in relation to the expected income that could be generated.
The following table will give you a better insight.


5 20 Very Undervalued
6,7 15 Very Undervalued
8,3 12 Undervalued
10 10 Undervalued
12,5 8 Borderline Undervalued
14,2 7 Fairly Priced
16,7 6 Fairly Priced
20 5 Borderline Overvalued
25 4 Overvalued
33,3 3 Overvalued
40 2,5 Very Overvalued
50 2 Very Overvalued

From the previous table, we could raise two standards, which are quite true, and are based on supply and demand:

Low Price/ Rent ratio values

Tend to be found on markets that will rise soon. If rental yields are high, this will tend to mean that the interest cost of buying a house is low. This is a buyers market.

High Price/Rent ratio values

If rental yields are low, this will tend to mean that the interest cost of buying a house is high. This a tenants market.

We could use the gross rental yield (yearly) as a market thermometer:

– Below 4%, could mean a dangerous market. Prices are too high.

– Above 11%, time to buy. Prices are too low.

Each market is different, but you could use that information in a way to guide yourself, in order to know at what stage is the market.


Price to replacement cost: If house prices are much higher than the cost of building (construction costs), developers are motivated to put up buildings. In the case of Spain, laws and regulations make land expensive, but construction costs are affordable (in many places, you will have to wait 15 months to obtain a new construction license). That is why the trend of renovations is increasing.

Price Databases

You could use these Real Estate prices database to compare and use as a reference:

Without forgetting about the most important one:

Local Knowledge

Here, it gets more exciting. For me personally, it’s my favorite part of the Real Estate game: to explore the area seeking for opportunities.

Once you decided that you want to invest in a specific place, that you know the kind of property that you want to buy and the price range, it’s time to start visiting properties and building your network.

The idea is really simple, but not easy (really time intensive and you need to have some social skills), If you can’t count on reliable help on the ground, you will need to do it yourself. You need to select your desired area or neighbourhood, and start visiting properties.

The best way to do it, is to settle yourself for a while in the area, visit as many properties as you can. A good number could be 100 properties, that means 5 properties per day on weekdays during one month. Focus on distressed properties, with an average size, the kind of property that locals are used to buy (in the case of Spain, 80 sqm -100 sqm flats with elevator).

After visiting all these properties, you will have a clear idea about the market, much better than most part of the real estate agents. Once, you know the real value of the properties, and the differences between neighbourhoods, you could start filtering, and selecting the ones, that you’re more interested.

From there, you can start to offer lowball offers all the properties that will be interesting according to your analysis. Lowball offers should be a minimum of 30% -50%, since the lower the offer, the higher your margin.

We have been in this changing market, adapting to the new context, and evolving with it, improving our capabilities as investors. For that reason, this guide was designed in order to help the investor (from amateur investor to senior) to avoid problems and get the desired ROI.

Please, feel free to have a look to the rest of our guide and our website. You will find the index of the guide below these lines.

Choose your local Market. What’s the best city or town to invest? (2 of 10)
Choose your type of investment. Fix&Flip? Or buy to rent? Residential, touristic or commercial? (3 of 10)
Buy distressed. How much it costs to rehab a property? How to rehab a property? (4 of 10)
How to deal with the different agents? Buyers – Sellers – Real Estate Agents – Others (5 of 10)
Banks. How to deal with the banks and how they behave in Spain (6 of 10)
Pricing. At what price I should sell? The maths behind the investment (7 of 10)
How to find properties? Online & Offline (8 of 10)
Risks. What kind of risks are involved in Real Estate investing in Spain (9 of 10)
Taxes. Taxes involved on the purchase, tenure or sale (10 of 10)