Refinancing in Spain (BRRRR?)
Badalona, Spain · Member since 2020 · 7 posts · 8 votes
Hello BP community!
This is my first post (and first day as an active BP member). First off, I live in Barcelona—actually, Sant Adrià—and I am just starting my education process to begin investing in rental properties, hopefully within a year or two. I am currently reading the BRRRR book by David Greene and this strategy seems very reasonable—at least in the US.
I will be looking in the Barcelona area and want to set an objective of how much capital I should aim to save up (pago y señal o al contado). My basic question is: Can a property purchased in cash be easily refinanced to convert it into a mortgage? Is that a thing here?
Thanks in advance for your responses.
Robert
Got back from talking with the mortgage broker.
In general, the explanation goes like this: difficult because of xyz here in Spain. The mortgage system is different between the US and Spain in that in the US the refinance mortgages are supported by institutional investors - the largest of them being the US government. Here in Spain this is not the case, especially not after the '07/'08 financial crisis. They have no providers of these money lending partners to enable refinancing/BRRRR operations.
This is just a difference in their mindset he says. Because, of you think about it, refinancing a property after renovating could be seen as even more reliable than normally financing a property that still needs work.
However, the BRRRR method could still be possible in Spain though as explained in the above answers. They would be willing to provide refinancing if you already present a new property that you are planning to buy. The mortgage broker told me that the total LTV of the two properties together could not exceed 60%, which basically means that you will need to keep bringing a significant part in cash.
This gets me thinking what the next loophole could be to still make it work
Following. I am from Valencia, as far as I know is fairly complicated, I looked into it a couple of years ago and was pretty difficult to find an answer. There are some guys making it happen in barcelona. I am also still extremely interested in the topic. @Erwin Groenendijk is always very helpful. Mucha suerte!
Thank you @Joaquin Camarasa for the reply. Yeah, since I posted this I saw another post about BRRRR in Europe in general and it looks like I may have to toss the refinancing part of the idea in the trash. That's OK, the part about adding equity to a home through rehab is also an interesting thing to consider (though not immediately rewarded, in terms of an appraisal and getting your cash back out).
Hi everyone! BRRRR in Spain is difficult but it can be done. You can request a mortgage for a property that you own. The bank will make a valuation (tasación) and will give you up to 60-70% of what it's worth.
The trick, as always, is in buying under market price and rehabbing it to increase its value. For example:
You buy a flat for 50k and you put 20k into it to rehab it (all cash). After the renovations it's valued at 100k. You go to the bank and they give you 70% of the appraised value = 70k.
This way you take all the invested money out of the operation, plus the 30k that is "in" the property, plus the monthly cashflow from the rent. Important to note that the bank will normally only refinance you if you're going to invest that money into another property.
It's not an easy process but I certainly know people who are doing it. Of course, you will still need to have a good credit history.
Hope it helps!!
Hi guys and @Robert Downs nice to meet.
The answer is completely in line with what @Celia Fernández is saying. So, refinancing/BRRRR is partly possible in Spain and partly not.
If we continue on Celia's story - the money that you are getting 'out' after refinancing in Spain you are not really getting out because the bank will only allow you to refinance if you invest directly that new value of the first property in a second property as a mortgage. In other words, you need to take a mortgage on the before renovation value of the second property and don't have the possibility to invest with cash from the first property doing the BRRRR set up that @Joaquin Camarasa for example is used to in the US.
Now, in order to still make this work, the question is how easy it will be to do a refinance on the second mortgage after 6 months or a year into the agreement with that specific bank. I suppose that this will be two folded - one side will be difficult because for the bank this is a hazzle and they haven't really made money on your mortgage yet (plus you will need to pay a redemption fine most likely), however, on the other side they might be willing to do so because this will mean a higher second mortgage and allowing you to take on another mortgage with a third BRRRR project.
Especially at this last part some feedback would be appreciated.
Will ask my mortgage broker contact the same meanwhile we are talking here too.
Hey everyone, thanks for the responses. @Celia Fernández, regarding your example of a 50K down payment, 20K rehab, 30K in equity (which stays in the mortgage as the down payment after the reinance), this would be the ideal BRRRR situation. The problem (entre comillas), as @ explained, is that I would have to wait until I have the second property ready to purchase in order to take out that capital and reinvest it “immediately”.
Here is where my additional questions come in:
As @ said, feedback from somebody who has attempted this transaction would be valuable. Thanks again to everyone who responded, I will be speaking with the bank that provided us the mortgage on our condo and ask my agent about the possibility of doing a refinance on a future purchase. Hopefully I will have an answer within a few days.
Here in the States, refinancing a property we bought in cash and having the bank give us cash hasn't been a problem. (A few have said no, but most have said yes. Although this was much different just after the financial crisis.) I would suspect it is similar in Spain but can't say for certain. Buena suerte!
Hi Robert, good to e-meet you. Completely agree with Celia and Erwin. A pitty we don't have a more straightforward banking culture here in Spain.
About the appraisal: Most banks will let you choose the appraiser as long as it is within the list of companies approved by the Bank of Spain. If you need one, I know a couple of good guys working with them.
The appraisal may take 2-3 weeks at most (in fact, it takes 2 days only but needs to be approved by some people and if it takes longer it seems as if it is a big deal...).
On occasions, the bank will appoint the appraiser, but it has never happended to me.
Hello @Javier De la Rosa, thank you for the reply. OK, that is good and positive information (although it's curious that you can assign your own appraiser, which is prohibited in the States. Along those lines, I would definitely be interested in talking to you about your favorite appraisers when the time comes...).
My biggest doubt is when I refinance the first property (and if they allow it), whether the bank would obligate me to invest ALL of the money from the first mortgage into the second property as principal/taxes/fees, or whether it would allow me to split this amount between principal and rehab costs. @Erwin Groenendijk, do you know the answer to this? The first case would be a big problem, as the second property would have to have a much higher purchase price (around €220k).
If the bank is flexible with how I use the money (as long as it is invested into the second property), the BRRRR method would basically work in packs of two. You pay for the first property in cash, and use its equity to finance the second property. If you want to repeat, you have to save up to purchase the next property in cash again.
I will report back on what the bank tells me.
@Robert Downs Normally banks are not including the renovation costs as this is seen as something different than a purchase of an apartment. What they could do is lending you the money for the renovation as a shorter term loan (prestamo) with a higher interest rate.
I might have a contact that could include the renovation costs in the whole amount if you like.
Got back from talking with the mortgage broker.
In general, the explanation goes like this: difficult because of xyz here in Spain. The mortgage system is different between the US and Spain in that in the US the refinance mortgages are supported by institutional investors - the largest of them being the US government. Here in Spain this is not the case, especially not after the '07/'08 financial crisis. They have no providers of these money lending partners to enable refinancing/BRRRR operations.
This is just a difference in their mindset he says. Because, of you think about it, refinancing a property after renovating could be seen as even more reliable than normally financing a property that still needs work.
However, the BRRRR method could still be possible in Spain though as explained in the above answers. They would be willing to provide refinancing if you already present a new property that you are planning to buy. The mortgage broker told me that the total LTV of the two properties together could not exceed 60%, which basically means that you will need to keep bringing a significant part in cash.
This gets me thinking what the next loophole could be to still make it work
Very interesting Erwin. It reminds me when I was looking to finance a portfolio of properties which were already cashflow positive. Every bank offered me X amount to buy my primary apartment, accepting the risk that I could loose my job next day. However, they would never lend me the same amount to buy the portfolio of properties, which I aways considered a safer option...but we have to play with the Spanish rules and find the loopholes as you mentioned.
Thank you so much for this info, Erwin Groenendijk. Let's throw logic out the window about which transaction is more reliable for the bank and play with the cards we're dealt in the Spanish system. Thus, an optimal (¡idealísimo!) BRRRR transaction in Spain would play out like this:
In this optimal situation, you put down €70K in cash and get two mortgages worth €310K. Now, let's imagine a traditional approach to both properties, paying 20% down plus 10% in taxes to acquire each of them. Let's just say this included fees, for simplicity. We would have paid:
BRRRR Method:
1st Property
€50 for purchase, taxes and expenses
€20K for the renovation
2nd Property
€0 for the down payment, taxes and expenses
Traditional Method:
1st Property
€15K for the down payment, taxes and expenses
€20K for the renovation
2nd Property
€70K for the down payment, taxes and expenses
Please correct me if I am wrong!!!
All in all, it seems like it would work, especially if the plan is to do this multiple times. The important thing to note, however, is that you are obligated to pay more than you want for the second property and must take out a hefty mortgage. That said, if these types of investments are your plan, you just saved yourself €35K (best case scenario). Case closed??! Thanks everyone!
@Robert Downs, not sure if I am completely understanding you. Will send you a private message and plan a call to go over it
Just got back with the call with Robert and we went through the numbers.
In summary, if everything above is correct the BRRRR method makes sense in Spain if you manage to scale up with your 2nd/3rd or 10th property. The higher value or at least the value of the last refinanced property the consecutive properties will have, the easier it gets to play within the 60% combined LTV that they are willing to finance.
And, coincidentally, this is normally what we are after for in doing more projects right?
Thank you so much for this info, Erwin Groenendijk. Let's throw logic out the window about which transaction is more reliable for the bank and play with the cards we're dealt in the Spanish system. Thus, an optimal (¡idealísimo!) BRRRR transaction in Spain would play out like this:
In this optimal situation, you put down €70K in cash and get two mortgages worth €310K. Now, let's imagine a traditional approach to both properties, paying 20% down plus 10% in taxes to acquire each of them. Let's just say this included fees, for simplicity. We would have paid:
BRRRR Method:
1st Property
€50 for purchase, taxes and expenses
€20K for the renovation
2nd Property
€0 for the down payment, taxes and expenses
Traditional Method:
1st Property
€15K for the down payment, taxes and expenses
€20K for the renovation
2nd Property
€70K for the down payment, taxes and expenses
Please correct me if I am wrong!!!
All in all, it seems like it would work, especially if the plan is to do this multiple times. The important thing to note, however, is that you are obligated to pay more than you want for the second property and must take out a hefty mortgage. That said, if these types of investments are your plan, you just saved yourself €35K (best case scenario). Case closed??! Thanks everyone!
Hello there, amazing analysis, but my question is what it would be the next step to buy the 3rd and 4th property?
Again thank you, Robert, for your analysis, doing BRRRR in Spain I thought it was impossible.
@Juan Henao buying properties that have an even higher valuation
Thanks so much for all the information guys @Erwin Groenendijk and @Robert Downs Would love to hear how it's going now 1-2 years on from this conversation. Has the BRRRR theory worked in practice?
Pleasure @Simon Thomas.
This is for @Robert Downs to comment.
What we have been doing to simulate the BRRRR method is creating company entities and selling the property from one entity (usually the developing part) to another (the property management part). By doing this, the property management entity can obtain financing up to 70ish% and pay the developing entity. The interesting part is that you can own both entities yourself.
This set-up we are now doing this on big scale and yes it is working
@Erwin Groenendijk congrats!
That's quite intriguing indeed! Interestingly, just last week I was reading something about the use of LLCs for BRRRR strategies. But I've also heard company setup in Spain is not easy!?
Given my somewhat limited knowledge of Spanish remortgages, I'm curious about the workaround you've discovered to address the situation where the released equity remains with the bank until you purchase another property. In other words, how are you transferring that capital back to the development entity for the property acquisition?
I'm planning to venture into Spanish real estate next year, but it seems like I'll need to get creative in my approach.The process is a little more straightforward in the UK and UAE, where I'm currently located, but our plan is to relocate to Spain so let the research commence!
Yes so if you are used to refinancing in the UK then see it like this: how banks in the UK are willing to lend up to 75% of the newly taxated value in the same entity that you are using, this in Spain is different. In Spain, they will only lend you up to 70% of the purchase price. And there the whole model doesn't play out anymore.
However, this is only when you keep it in the same entity.
As previously explained, if you create a second entity (even if this is yours again) you can buy the property against a 70% LTV on the newly taxated value and the money that you are paying as a purchase on one side is being received as a sale by the other side. And this means that your development entity can reinvest it again in new projects while at the same time, you are building a rental portfolio in your management entity.
Hope this helps
@Erwin Groenendijk are there any tax implications worth to mention? Any capital gains hit?
Also, since you are buying it from one entity to another do you need to pay again closing costs, correct?
Here in the US, if you have enough equity in the property, you can use the equity to pay for the closing costs. Just wondering if that’s a possibility in Spain.
Thanks a lot for all the knowledge.
@Joaquin Camarasa, we wish we would have the same cash out refinances here in Spain. However, now with the interest rates that are rising and people are buying less, they were saying that the BRRRR method also became a bit more difficult there right?
Yes, you are right regarding the closing costs. In theory, you would need to pay the closing costs 2 times. When purchasing the property in the beginning and then after selling it again to your other entity.
The thing is that with a company you can do some creative things. As we are buying with an entity commercial real estate from (most of the times) other companies, the purchase tax changes from transfer tax (ITP, 10% in Spain) to value-add tax VAT (21% IVA in Spain).
Why this is important is because as a company purchasing in this way in Spain, you can receive and pay the VAT at the same time, meaning buying the property and ending at 0% and effectively not having to pay purchase tax.
Now, once done with the development of the property, when selling it to your other entity, the same is happening because we are usually investing more than 50% in structurally improving the property. And when you do this, the property is seen as a newly developed unit, and newly developed units can be sold with VAT again. And the same story as before applies. Two times you could be at 0%.
The only downfall would be if you would transfer the property to yourself as an individual because then you would need to pay the 21% VAT (which is kind off the transfer tax).
@Erwin Groenendijk First, I just want to congratulate you for all the research you have done and the systems you’ve developed. This is really impressive.
I remember two years ago we were exchanging ideas about how to the BRRR in Spain. Good stuff!
Yes, the numbers are tough with high interest rates in the US. We can only adapt and make the best of it.
I’ll be checking your future posts, always very informative!
Keep it going!
Hopefully the lending landscape will change here at some time as well so that we can apply the BRRRR method as how you guys are doing it.
Then we wouldn't need any entities etc which can sound scary at times to investors.
Good to hear from you 👋
I like the creative thinking here. The only hurdle I see here is that the current owner would need to live in a ****hole for multiple months before selling it to you. This is especially the case if you want to increase the value from 100.000 to 178.000 euros, or in any kind of serious renovation.
By the way, we have been talking with some mortgage brokers and it seems that the BRRRR method is becoming more possible to do in Spain. Banks are more willing to give a mortgage on a property that you already own and force you at the same moment to finance another property from the received money. Now, the good thing now is that this financing can be used for the purchase of a property and also the renovation etc.
A cash-out refinancing mortgage is still not possible however this is already good enough of what we as investors are normally searching for.