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Is getting rental default insurance worth it for landlords in Spain?

One situation that many landlords worry about is what if my tenants can’t pay the rent because of some extenuating circumstance. One way of putting your mind at ease is to get rental default insurance – but is it worth it?

Is getting rental default insurance worth it for landlords in Spain?
Is rental default insurance worth it in Spain? Photo: JOSE JORDAN / STR / AFP

If your tenants are no longer able to pay rent because they lose their job, fall ill or have to quit their work because they need to look after a family member, it can cause a difficult situation.

As a landlord, you want to be understanding, but renting out your property may also be your business and most likely you rely on the income to pay your monthly bills.

So, what can you do?

You can protect yourself by getting rental default insurance, which does exactly what sounds like – it allows homeowners to protect themselves against possible non-payment.  

What is it and how does it work? 

The insurance policy guarantees that homeowners can continue collecting the rental income, even if the tenant stops paying. It offers an alternative to requesting hefty deposits from renters, that they often can’t afford.  

Many insurance companies also offer an additional service, which is a study of a tenant’s financial situation, as a way of preventing these types of situations.

These policies also offer a lot more than just covering unpaid rent though, they also include lawyers’ fees, legal advice, payment for a locksmith in case of eviction, and compensation for vandalism. They can also act as a mediator between the landlord and the tenant.

Is it necessary?

According to the latest data available, luckily this claim is not made often. It accounts for around six percent of insurance claims, while the other 94 percent are other claims due to property damage for example.

The low rate of claims is partly thanks to the types of financial studies being carried out.

However, these incidents have been increasing according to the Rental Home Owners Association and the Delinquent Tenant File, particularly due to the Covid-19 pandemic, and now inflation is making it more difficult for tenants to keep up with rental payments too.  

The latest data from the Spanish Rental Insurance Observatory (OESA) revealed that the number of landlords who took out this insurance in 2020, almost doubled.

They predict that around 30 percent of rental contracts signed in 2021 included this type of insurance and in the big cities of Madrid and Barcelona, it’s estimated to be around 40 percent.

Cost

One factor to keep in mind is the price. Rental default insurance is far more expensive than other types of insurance for landlords.

In general, the cost of the insurance is equivalent to 3-5 percent of the rental value. A report published by Unespa, employers of insurance companies in Spain, each case generates an average loss of €3,179, while damages generate a loss of €336.

Opinions  

Last year, the Organisation of Consumers and Users (OCU) analysed the services offered by agencies that guarantee the collection of rental income. In conclusion, the agency recommended avoiding hiring these companies, given that “a well-informed owner can manage the rental satisfactorily and cover the risk of non-payment through a good insurance policy, at a lower cost”. 

However, they were mostly saying that you could save money if you manage all the rental services yourself without hiring an agency at all.

José Ramón Zurdo, general director of the firm Negotiating Rental Agency denied these claims saying that “a large part of the rental problems originate from poor management”.

What do I need to look out for when getting this insurance? 

According to the Spanish Rental Insurance Observatory (OESA), there are several points you need to look at when buying this insurance.

  • You need to confirm that the product offered is really insurance. Many private companies offer rental guarantees under the guise of insurance when they really are not.
  • You can check if the company is legit and what its financial situation is like by looking at the General Directorate of Insurance, Funds and Pensions (DGSFP).
  • Hire the rental policy through an insurance brokerage, which helps you find the best type of insurance for you. 
  • Find out what other coverage the policy includes in addition to non-payment such as lawyer and solicitor expenses if you to go to court.
  • Hire a specialised policy, not linked to regular home insurance. 
  • Opt for insurance for at least one year. This is because, due to the usual in the case of non-payment of rent, a contract for a period of fewer than twelve months would be insufficient to cover all the money not received during the unpaid months.
  • Renew the insurance every year. According to the OESA, “it is usual to pay the first year and then decide not to renew because the tenants are trusted.” But as the situations change, there is still a risk. 

What do I need to contract this insurance? 

In order to take out the rental default insurance, a study of the tenant’s solvency must be approved and they will not be able to spend more than 40 percent of their income on rent.

If the tenants are salaried employees you’ll need their last two pay slips, an employment contract, ID and an application form signed by the tenants.

If the tenants are self-employed they will need to show their last income tax return, the last two social security payments, ID and a signed application.

And if the tenants are pensioners, they will need to show a pension certificate issued by Social Security, ID and a signed application.

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PROPERTY

How to contest the cadastral value of your Spanish property

The cadastral value and cadastral reference of a property in Spain affect various factors including how much yearly property tax and inheritance tax you'll pay. Here's how to change the valuation Spanish authorities give your home.

How to contest the cadastral value of your Spanish property

When it comes to taxes, everyone wants to know if there are ways to pay less. While it’s not always possible, there are certain factors that affect particularly taxes associated with your Spanish property – namely the cadastral value and the cadastral reference. But, can they be changed or rectified?

What is the cadastral value?

The cadastral value is applied to all properties in Spain. It’s the value applied to your property by the Ministry of Finance or Hacienda and serves as a tax base to determine how much IBI tax or Impuesto sobre Bienes Inmuebles you pay for example. This is a yearly tax for all those who own property in Spain.

READ ALSO: What is Spain’s IBI tax and how do I pay it?

The value will depend on the size of your property, the condition it’s in, the year it was built and the cost of construction, among other factors.

It differs from the cadastral reference, which is an estimate of the market value of a property and is used as a reference for the real estate market. It is also used as a tax base for inheritance and property transfer tax.  

How is it determined?

At the beginning of each year, the cadastral value of homes is reviewed, and as a result, it can increase or decrease. This is why your IBI bill can increase or decrease too. As a general rule, the cadastral value is usually much lower than the market price, but this is not always the case.

How do I find out the cadastral value? 

To know the cadastral value of a property, you must first know the cadastral reference. Then you can find the value in the corresponding public records online. You can find this reference on your IBI bills, as well as on your property deeds.

Once you have this you can go to the electronic headquarters of the Cadastre, and click on ‘reference value’. There you will find all the information about the cadastral reference and the corresponding cadastral value.

Even if you’re not the owner of a property, but want to find out the cadastral value of a property you’re considering buying, you can find it out here.

Can I change the cadastral value of my home?

Yes, it is in fact possible to change the value. If you believe that the cadastral value of your property is too high with respect to the market price of your home, you can request that it be reduced.

You may want to do this in order to lower your IBI bill or if you want to sell your property at a lower price than the market value.

How do I lower the value?

If you believe that you have a case for changing it, you can make a claim to the General Directorate of Cadastre, overseen by the Ministry of Finance. There are two different claims you can make:

  • The procedure for correcting discrepancies
  • The procedure for rectification of material and arithmetic errors.

Procedure for correcting discrepancies

This option is typically used when there is a large difference between the market price and the cadastral value of a property, as well as when there are errors or false data about the characteristics of your home.

To do this, you must go to the Cadastre office in your municipality or apply online at the Cadastre Electronic Headquarters.

Procedure for rectification of material and arithmetic errors

The second option is used when there are errors or incorrect urban planning information, which affects your home. Again you can do this in person or online. In this case, it will have a retroactive effect. If you have paid too much IBI in the past, then it should be returned to you if the application goes in your favour.

Can I change the cadastral reference of my home?

If the reference value of your home is higher than the market value, then you may be wondering if you can change the reference in order to lower your tax base.

Unfortunately, you cannot request changing this in the same way as you can with the cadastral value. But, the good news is that there is a way to challenge it indirectly.

To do this you will need to request an appraisal from a company approved by the Bank of Spain. If the result of this turns out to be lower than the reference, you can try to rectify your self-assessment tax return, providing the appraisal as evidence that you should be on a lower tax base. As mentioned above, this will only affect certain taxes like inheritance or property transfer. 

In order to approve this, the tax office will need a report from the General Directorate of the Cadastre who may be able to rectify the reference and provide a report to settle the matter.

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