Investment approach
Comparing investment scenarios: ranges instead of false precision
A yield to the hundredth is no more exact than the assumptions behind it. How to build three scenarios on equal rules, find the variable that decides the outcome and allow for changes in rental rules.
Comparing investment scenarios honestly means calculating, for each option, a conservative, a base and an optimistic outcome on equal and disclosed assumptions, and choosing by what survives the bad case. The conservative scenario is not theoretical: INE's housing price index for Catalonia fell from 93.7 in the second quarter of 2007 to 50.0 in the first quarter of 2014, by 46.6% (INE). A calculation without such a scenario shows only hope.
What false precision is
False precision is a calculation that looks more exact than the knowledge it is built on. A yield to the hundredth, with rent over five years and a sale price in ten, both taken "from the head", inspires a confidence that does not exist.
It is dangerous because of how it affects the decision. A half-point difference between two options looks like the superiority of one, although the error in any single assumption is larger than that difference. Which assumptions any calculation should disclose is covered in the article on yield assumptions.
How to build three scenarios on the same rules
A range is set for each variable, and the three scenarios are assembled from the ranges. The order of work:
- Fix the rules. The same holding horizon, a calculation on the full entry cost with taxes, notary, registration and renovation, one logic for vacancy, costs and taxes.
- Set the base on facts. Take rent from contracts and deposit statistics, not from listings; the entry price from transactions.
- Set the conservative scenario. Lower rent, longer vacancy, higher costs, a cheaper and later sale, and several failures at once.
- Set the optimistic one. Everything a little better than expected, without miracles.
- Compare on the conservative one. If it is unacceptable, the option drops out, whatever the optimistic one looks like.
| Variable | Where to take the base | What to put in the conservative scenario |
|---|---|---|
| Entry price | Closed transactions nearby | An overpayment, if the haggling fails |
| Rent | Incasòl deposit statistics, contracts | A rate below the neighbourhood average |
| Vacancy | Experience of the segment | Several months a year of tenant turnover |
| Costs | IBI (annual property tax), comunidad (owners' association), insurance, renovation | A derrama (special levy) for the facade or roof |
| Exit price and timing | Transactions and liquidity of the segment | A sale below plan and later than planned |
| Rental rules | Laws and decrees in force | A change of regime mid-horizon |
Which variable decides the outcome
Not all assumptions matter equally. The main variable is found simply: change them one at a time and see which moves the result most. Usually these are the entry price, the exit price and timing, vacancy and costs, the rental rules and the cost of money.
Rental rules in Catalonia change more often than a typical holding horizon lasts. The Catalan law 11/2020 on rent containment was found by the Constitutional Court in March 2022 to be unconstitutional and void in its main part (STC 37/2022). Since 2023 the national housing law with zonas tensionadas (stressed housing market zones) has applied (Ley 12/2023). Since 8 October 2026 Real Decreto-ley 29/2026 (a government decree-law) limits annual rent indexation: until 31 December 2027, unless the parties agreed otherwise, growth is no more than 2%, and where the rent is above the state index there is no growth (disposición final sexta, the sixth final provision) (BOE). Congress has not yet ratified the decree-law, so before deciding the current wording is checked with a lawyer.
A worked calculation: two properties and three scenarios
Worked example, not a forecast. Flat A costs 400,000 € with taxes and renovation, and the building is in order. Flat B costs 340,000 €, but the neighbours are discussing a facade repair. Annual rent less costs is calculated against the full entry cost.
| Scenario | A: net income per year | A: yield | B: net income per year | B: yield |
|---|---|---|---|---|
| Optimistic | 15,000 € | 3.8% | 14,000 € | 4.1% |
| Base | 13,500 € | 3.4% | 12,500 € | 3.7% |
| Conservative | 11,500 € | 2.9% | 7,500 € | 2.2% |
In the base scenario B looks more profitable. In the conservative one, which includes the derrama for the facade and two months of vacancy during the works, the advantage disappears. This check takes half an hour and changes the decision more than refining to tenths.
What does not fit in the table
Part of what decides the outcome translates poorly into numbers: liquidity at a bad moment, management time, concentration of capital in one property, personal use of a second home. These factors are written down in words next to the table. If two options are almost equal, the one that is easier to sell and easier to maintain is chosen: the difference in numbers is within the margin of error, and the difference in hassle is real. A general map of an investor's risks in Barcelona is in the article on investor risks.
When the scenario method does not work
Three scenarios do not help if the assumptions have been tuned to the desired answer: a conservative scenario that differs from the base by a couple of points is the same base with a discount. The method also does not work for a decision that hangs on a single external event, such as the granting of a licence: then it is more honest to calculate two worlds, "licence granted" and "no licence", and to estimate the probability separately.
How DNPI builds scenarios in its own calculations is described on the methodology page, and an analysis of a specific property can be ordered as part of an investment analysis.
Questions and answers
How do you compare two investment flats?
Calculate three scenarios for each on the same rules: one horizon, the full entry cost, one logic for costs and taxes. Compare the conservative scenarios first, then look at liquidity and management.
How many scenarios are needed to analyse an investment?
Three are usually enough: conservative, base and optimistic. A single scenario almost always misleads, and what matters most is that the conservative one is really conservative.
Why can an exact yield calculation be misleading?
Because the figure is no more exact than the assumptions. If rent and the sale price several years ahead are only guesses, two yields half a point apart are practically the same.
How deep can a price fall be in the conservative scenario?
History gives a guide: INE's housing price index for Catalonia fell by 46.6% from 2007 to 2014. That is not a forecast but a reminder that a bad scenario can be deep.
How do you allow for a change in rental rules in the calculation?
Put into the conservative scenario a change of regime mid-horizon: a limit on indexation or on the rate. In Catalonia the rules changed in 2020, 2022, 2023 and 2026.
