In this day and age, many people are wary of investing in the unstable stock market which requires a lot of time and expertise. Unfortunately, leaving excess money in the bank is hardly an attractive option given the current rock bottom interest rates. One avenue of investment which hasn’t lost its charm is real estate. But real estate investment in Israel can be tricky: you need good counsel.
Real estate investments in Israel create both a passive and active income for the investor. If the investor chooses to rent out his or her property, they may collect rent money, as well as reap the benefits of the steadily rising value of their property. Given the nature of the real estate market in Israel, this kind of investment provides both stability and relatively high capital gains.
Many people fear making an investment while the market is down, but low prices shouldn’t deter. The right investment will be profitable at any time. Of course, an economic crisis holds greater risks, but it also holds greater opportunities for profit than other times. In Israel, recent years have brought about many changes: new railways, roads, infrastructure, schools and many military headquarters moving to the southern part of the country mean many great opportunities for wise investors. A small property in the periphery of Israel will usually mean higher yields from rent, while at the same time, investment in real estate in one of the major cities is still a good, reliable and more secure option.
So how does one choose where to invest? In what? And whether to do so in Israel or some other country altogether? The most important advice is to research and thoroughly check all the options. Independently investing in real estate requires knowledge, understanding and information. Many people opt out of investing in this field although they have the required capital, just because they lack the necessary knowledge; they know they are missing out on golden opportunities. This article aims to highlight a few of the important things one must consider regarding real estate investments in Israel.
Before beginning the search for the perfect investment, it’s important to plan and define the details of the investment, including the following subjects:
- The purpose of the investment: if you are aiming for maximum returns, you might consider investing in housing units in the Tel Aviv central bus station area, where the rent potential from the foreign workers who inhabit the area will probably be higher than other alternatives. However, you should ask yourself whether you are prepared to deal with the inevitable day to day maintenance that accompany such a choice: collecting rent on a weekly basis, working with different populations. You should also take into account future needs: will you want to live in the apartment or to make it available for family at some point? In that case the character of the neighborhood, and vicinity to the center should also be taken into consideration.
- Partners: Will you be investing alone or with a partner? A partner may be a family member, friend or business acquaintance. There are many advantages to investing with a partner: risk dispersing (for instance, you could invest in two halves of two apartments in different locations), shared planning and research etc. But shared investments are not for everyone, and come with the dangers any joint venture naturally encapsulates.
- Level of risk: How “risk averse” are you? Someone who is “risk averse” will prefer a solid investment in an established location such as central Tel Aviv or Jerusalem, whilst a “risk taker” may prefer to invest in less “conventional” areas with less predictable prices but more potential for profit, such as Sderot, Ariel and more peripheral areas of Israel.
- Correct financial planning of the investment:
- Is your investment based on private equity? Or will you be taking on a mortgage? The level of equity you have will impact the amount of leveraging and the quality of the loan you get. These factors should be considered before searching for the right property, as they will determine the optimal amount for your investment.
- Risk management: what are the potential risks associated with the investment, and how would you deal with them should they be realized? Although Israel has enjoyed financial stability compared to other countries across the globe, and has escaped the last global economic crisis more or less unscathed, there are inherent risks to investing in any market. A few examples include sudden inflation, an abrupt change in the dollar-shekel exchange rates, a deceleration of the renting market. You should leave a margin of equity that will enable you to return any debts and loans you have taken on, bearing in mind such scenarios and others.
- Defining the nature of the property: this is one of the most challenging aspects of the investment process. For maximum gains, this stage must be carried out with due care and thought. Some of the most important aspects influencing the potential revenue from a property are:
- Location of the property (central areas are the most popular, but are also the most expensive. A small property on the outskirts of a major city may yield higher returns)
- Size of property (most renters live alone or with a partner. 1-2 bedroom apartments are popular amongst renters, while larger apartments usually incur bigger utility costs and municipal taxes)
- Accessibility (vicinity to public transport routes, availability of parking etc.)
Apart from these issues to consider, it is important not to fall into the following “traps”. What NOT to do:
- Investing in a property in your “comfort zone”: Israel holds many opportunities for the wise investor. But it is important not to choose an investment based on your fondness for a certain “comfort area”, be it because it is a favorite holiday location, close to family members, a job etc. One should choose an area to invest based on cold hard and objective returns potential, unless the investment will be a place of residence.
- Full reliance on personal capital: It is better to consider leveraging your investment, even if you could afford it on your own. This decreases the risk and allows you to make further investments.
- Not leaving an emergency “cushion”: Do not acquire a property for a total cost that leaves no room for unexpected payments and costs. Take into account additional costs such as purchase tax, payments to a realtor, an attorney, renovation funds etc, as well as additional unforeseen costs.
Once you have properly outlined the nature of your investment, its purpose and scope, you are ready to invest. But there are still many more questions to consider: whether to buy a new apartment from a contractor, or an existing apartment (and what to look out for in each type of deal), the crucial tax implications of investing in different kinds of properties (which may affect the entire profitability of the investment), and once you have decided upon a property – what are the necessary legal precautions you should be taking. In order to protect your interests at all times whilst making the best investment, it is always recommended to consult an attorney who specializes in the field.
We represent international clients from the United States, Canada, the UK, Europe and Israel. Please contact us from the US or Canada at 1.888.923.0022 or in Israel at (972) 3.9055478 or (972) 50.7322688 to schedule a discussion regarding your case.