Essential Insights Before Investing in Residential Property

Essential Insights Before Investing in Residential Property

Investing in the real estate market can be a profitable and solid strategy, but it also carries significant risks if not carefully planned. Acquiring a property as an investment requires a thorough evaluation of key aspects such as location, market, financing, taxation, and long-term profitability strategy. Below, we break down these factors to help you make informed decisions and avoid financial and legal surprises.

1. Location: the foundation of profitability
Location is decisive in any real estate investment. An area with high demand, good infrastructure, and growth potential ensures higher occupancy and appreciation over time. Conducting a market study that considers sales and rental prices, as well as historical trends and future projections, is essential.

2. Conducting a detailed market analysis
Beyond knowing prices, it is important to analyze other indicators such as available supply, competition, vacancy rates, and demographic profiles. Understanding the neighborhood and community is key, as factors like the quality of residents can significantly impact the experience of living in or renting out a property.

3. Proper financing: mortgage and interest rates
Financing is a critical component of the investment. Choosing between a fixed or variable mortgage, the loan term, and securing a competitive interest rate are key decisions. In Spain, by late 2025, it is still possible to obtain fixed mortgages below 3 %, sometimes around 2.5 %, especially for creditworthy clients.
A well-structured mortgage — preferably with terms of 10 to 15 years — prevents excessive total costs and ensures that debt does not exceed 30 % of household income, following UN affordability guidelines.

4. Taxation and associated fees
The tax burden in real estate investment is substantial. For new builds, VAT plus the Stamp Duty on Legal Documents (AJD) applies, ranging from 0.5 % to 1.5 % depending on the autonomous community. For second-hand housing, VAT is replaced by the Property Transfer Tax (ITP), which ranges from 6 % to 11 %, plus AJD.
When selling, a capital gain subject to income tax (IRPF, 19 % to 28 %) may be generated, and the municipal capital gains tax (plusvalía municipal) must also be paid, calculated based on the increase in cadastral value and years of ownership.

5. Type of property: new build, resale, or renovation

• New build: Higher quality, energy efficiency, and developer guarantees. However, prices are usually higher and delivery may take time.
• Resale: More affordable and immediately available, though it may require renovations.
• Renovation project: The option with the greatest potential for value appreciation if done properly. However, costs, timelines, and permits can complicate the project.

6. Long-term investment strategy
Defining whether the strategy will focus on renting, short-term resale, or a flexible combination will shape the entire process. Idealista recommends setting a clear strategy from the beginning.
In Mallorca, gross yields can reach 18.8 %, with favorable conditions expected by the end of 2025 despite rental price caps.
Net yields, however, are usually much lower after taxes, maintenance, renovations, and financing are deducted.

7. Price context and market expectations
Mallorca’s real estate market is currently experiencing high prices: in Q2 2025, prices rose 18.8 %, the highest increase in more than 18 years.
Nevertheless, industry experts expect medium-term stabilization, while ruling out a sharp price drop over the next 15 years. They stress the need to increase supply to balance the market.

8. Unforeseen risks and responsibilities
Beyond financial risks, there are less obvious factors that may impact the investment. The quality of the neighborhood and community is one of them.
Unexpected issues such as renovation costs, lack of maintenance, prolonged vacancies, or extraordinary expenses can also reduce expected profitability.

For those considering their next step, we invite you to review our exclusive portfolio of properties for sale. Our curated selection is designed to match diverse investment strategies and provide professional guidance at every stage of the process.