# Studios are more profitable than flats

Two weeks ago I was having some drinks with a good friend of mine. Talking about books we were reading we ended up talking about investments.

He had the idea of buying a small studio in order to rent it, because the margin you could get in a small studio compared to its price was larger than if you did the same with a larger apartment.

I wanted to test the argument with idealista.com, the leading real state website in Spain. Apart from the many ways in which you can screen and sort out houses, the site has a very handy piece of information which is the average price per square meter of your selection either for rental or sale.

I restricted my searches to the district “Centro” in Madrid. I then looked for average prices of “studios” of “less than 60m2” and “flats” of “more than 80m2”, both for rental and for sale. The minimum sample of houses was 175 and the maximum over 700, so I believe they can be considered a good sample for this little study. I then looked for the averages:

• Studio of less than 60m2:
• Rental: ~17 €/m2 per month.
• Sale:  ~4,287 €/m2.
• Flat of more than 80m2:
• Rental: ~13 €/m2 per month.
• Sale:  ~4,295 €/m2.

As you can already see, the price per square meter is very slightly higher in the case of flats (~0.2%) while the price of rental is much higher in small studios (~31%).

What is the profitability of the case?

We can make the calculation with these per square prices. If you buy the small studio and put it for rent, you would earn from it 12 times 17€ per year (204€), this is 4.8% return on the asset, which in this case is a square meter valued at 4,287€. For the larger flat the earnings would be 3.6%. Thus, as my friend said renting small studios is a whole 31% more profitable than renting larger flats.

Paid by itself? My friend also mentioned that you could even get a mortgage that it was cheaper than the monthly rent and thus really not needing to dedicate ~100k€ to the purchase of the prize, but paying the flat simply with the monthly rent incomes.

That case also holds true with current low interest rates. I checked the case for a small studio of 25m2 and you could charge about 425 euros while the mortgage would be around 322 (25 years). This case would not be true anymore if you want to pay the studio in a shorter time, or interest rates rise.

This  case also excludes the extra costs that house ownership has (repairs, improvements in the building, idle time between renters…). So we should see the figure 4.8% as a ceiling.

I still would prefer investing in stocks, where returns have been higher throughout history and avoids you the hassle of dealing with the problems involved with real state…

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