Spanish Real Estate Investing (4 of 10)
Spanish Real Estate Investing guide - (4 of 10)
Buy distressed. How much it costs to rehab a property? How to rehab a property?
That is our fourth 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.
It’s important that if your goal is to master fix & flip operations and become a full time investor, you must become an expert on how to renew a property. In fact, it is not necessary to know how to do things yourself (such as plumbing or electrical wiring), but to know what is happening in the workplace (the materials that are being used, how the contractors are executing the works,. .). You don’t need to take courses on that kind of skills, you will learn through observation and experience. At the beginning you will make some mistakes, but eventually you will learn to solve them. The most important thing is that you don’t only pay and leave, but you must involve yourself in the renovation process.
In this article, we are going to talk about renovation works in Spain, in other countries it will be totally different, because it is really determined by the local environment and the buildings and constructions that you will find in the market. For example: the concept of a house or a flat is really different in the United States than in Spain.
Pricing and timing
Mastering timing and pricing, that’s the key on renovations. You must know, the price of the materials and the price per working hour of your contractor. This way, will be really easy to budget correctly and to finish the renovation on time.
What prices, you should expect?
That are the averages prices per item:
This approximate budget is for a 100 sqm flat with average materials and average looking renovation (2 bathrooms, 3 bedrooms, one kitchen and one living room).
Total (including taxes): 20.300 euros*
*The range will be between 18.000 euros and 30.000 euros. Depends on contractor and materials.
Of course, a renovation budget could be as expensive as 100.000 euros, but that depends mainly on materials, architects and the cost of the workforce. Our recommendation is to keep it the lowest possible without risking the quality of the materials or the commitment of your contractor.
Stages of the renovation
One of the most critical stages of the renovation is the hiring process of the contractor. You will find that to find the right contractor could be really difficult, at the end you will need to apply trial and error system. But there are some strategies, that will allow you to reduce the potential problems with contractors.
It’s important to negotiate for the beginning the following questions: price, length of the renovation, quality of the materials (if it’s the contractor who buy the materials), insurance, contract,…
Signing a binding contract between you and the contractor will give you a tool in order to protect your investment. The most important points of the contract are the ones related to time and money.
- Time: setting the time that should be spend on every stage of the renovation and limiting the time of the renovation. Setting a monetary fee in case of a delay. For example: 100 euros for every delayed day.
- Money: setting a limit to the total cost of the renovation + taxes (IVA).
The contract will allow you to go to the court in case anything went wrong.
Better to buy the construction materials yourself going straight to the supplier. That system, has some pros and cons.
- Control of the prices. You could buy on bulk and get better prices.
- Learning the process of budgeting correctly. Learning one of the most important stages of the renovation (to buy the materials), will allow you to have much better control of the renovation process and increase your margin on your investments.
- Financing. Many suppliers (especially the small ones), are able to provide financing without interest for few months.
- Time consuming: doing the shopping and organizing the logistics will make you spend some of your time on that kind of tasks.
- Storage space: you will need to buy in bulk in order to get the best discounts on the materials, for that reason, you will need to set an storage space for your material (that’s an extra cost). That could be a problem, if you’re not prepared for it. Also, for the transportation of the materials from the shop to the storage place, and from your storage place to the renovation site, you will need someone to transport it for you (or you will need to use a van for it).
- Increasing cost of the renovation: at the beginning, you will need to learn about prices and logistics. That means, that the first renovations that you will manage through this system, will cost you a little bit more, that if the contractor does it himself. With the time, you will learn to be more efficient.
A good strategy, could be to have a general contractor for the whole renovation, but hire hire specialized professionals for certain works. What kind of works? Wooden floors, windows, plumbing, electricity,.. all this specific works could be outsourced. The general contractors will control everything, but hiring these professionals independently, will be a good fire wall protection if any of the professional involved fails. For example, if the electrician fails, to hire a new one, will cost much less, than needing to dismiss the whole staff of the rehab. Also, these independent professionals, could be your ears and eyes on the workplace, and vice versa, with your general contractor.
For non-complex renovations, for example, a standard flat from the 60s to 80s, an architect is usually not needed. However, an architect will be useful for some types of jobs, such as: making simple design plans, doing paperwork and creating 3D pictures. In most of the Spanish cities you can find an architect who, for a few hundred euros (200-300 euros), will do this simple architectural work.
For more complex operations, such as new developments or renovations of entire buildings (installation of elevators, major changes in design, …), the architect’s work is sine qua non. In these specific cases, you must be very careful when selecting the candidate. Our recommendation is to hire the architect separately from the contractor, the reason: it is because in this way you could negotiate both budgets without affecting the final result.
Actually, the services offered by the contractor and the architect are really different:
- The architect: paperwork and project. In short, his job is to write the guide for the contractor and deal with the public administration.
- The contractor, executive work and management. He is the one who does the work.
Keeping all tasks separate and budgeted separately will greatly facilitate the control of both professionals. Imagine that the architect fails in the project, or that the contractor is failing in the execution, if these professionals are independent of each other, it will be much easier for you to replace them. The more you can compartmentalize the work, the better.
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.