Renting vs. buying an apartment in Israel

The immense increase in apartment prices over the past decades has brought many to wonder—should they buy an apartment (or even a house) or make do with long-term rental? This article presents the advantages and disadvantages of renting an apartment vs. buying one—from the financial, legal, and practical perspectives.

SO IS IT BETTER TO BUY OR TO RENT?

This is undoubtedly the million dollar question, literally. Some would say that it’s a shame to waste money on rent each month instead of investing the same amount of money in mortgage return payments that will eventually end and gain us our own home.

Well, this thought is not exactly correct, and increasingly more young adults in the market are beginning to understand that permanent rental is not all bad. The governmental planning authorities also understand this trend and are promoting a growing number of supervised rental projects such as “Dira Lehaśkir” (lit. “apartment for rent”).

So let’s first talk about the first stage—owner’s capital. If you don’t have capital, you won’t have any other choice but to rent a home. If you have capital, the question rises as to what option is better.

Think creatively for a moment. Let’s say you have half a million Israeli shekels with which you are able to purchase an apartment based on a 4,000-ILS mortgage, depending on the price of the apartment. Or, let’s say that you are able to invest your capital in the capital market with 10% yield per year and sometimes even more. This means that you would gain 50,000 ILS from your capital, while renting would cost you 48,000 ILS.

This example is not necessarily representative, but it may open up new avenues of thought for you if you have capital that is intended for an apartment and you are able to increase your capital without “burying” it in purchasing an apartment that may not really improve your money flow very much.

CONVENIENCE VS. FINANCIAL CONSIDERATIONS:

Today, most households in Israel own an apartment, but it is important to remember that the vast majority of them have purchased the property when the prices were more affordable.

People purchase a residential apartment not only due to financial considerations. Many prefer to buy a home even at a high price so that they can find stable ground. They don’t want to move every few years, and they prefer the option of investing in a permanent home without doing the math that they had to do when they lived in a rented apartment that was not their own.

So yes, living in a home of your own is a luxury. You may renovate and even expand your home if you have the rights to do so, and you may do whatever you like with your property. To many people it is also important to simply have ownership over their home.

However, it is important to know the financial price of such a move during a period when apartment prices are rising and when purchasing an apartment means laying an unproportionally heavy burden on your monthly money flow, while, instead, your money could have yielded you higher percentages in other investments.

COMPARING YOUR OPTIONS:

So you have reached the moment the that you have been waiting for: comparing between purchasing an apartment and renting one. The data that are presented to you are inconclusive and do not point clearly to one choice as being better than the other, but they do give you a general idea about which option to choose.

Buying an apartment: Imagine that you have purchased an apartment for 2,000,000 ILS and your capital is 800,000 ILS. This means that you would need a mortgage of 1.2 million ILS, to be returned within 25 years and with a monthly return rate of 5,800 ILS. After 25 years you will have paid 1,740,000 ILS. This means that 540,000 ILS would have been paid for the interest on the mortgage (the interest rate being 3.2%). And now let us calculate the yield: assuming that the price of the apartment has risen each year by 1%, you now own an apartment that is worth approximately 2.5 million ILS. Not considering the interest on the mortgage, which is 540,000 ILS, your capital is now 1,960,000 ILS. In summary, when buying an apartment, the capital that you had which was 800,000 ILS will have increased by 1,160,000 ILS.

Renting an apartment: Let’s say that, instead of buying an apartment, you have chosen to invest your capital in a solid plan with a yield of 6% per year. You have also decided to rent an apartment for 25 years at a price of 5,000 ILS per month, and each year the rent increases by 1%.

In this case, the yield is calculated as follows: the money that you have invested in a yield of 6% per year, multiplied by 25 years, will increase to reach 2,000,000 ILS, while, the whole time, the money was liquid and available to you.

In summary, when renting an apartment, your capital, which was 800,000 ILS, will have increased by 1,200,000 ILS.

You should be aware that the data that were presented to you may change significantly if the interest rate increases, and this, in turn, will significantly increase the cost of your mortgage or various expenses related to the apartment purchase. In other words, this example may not be relevant to your case, and you should consult with an expert who will analyze your data and help you decide what your best option is.

IN SUMMARY:

The question with which we began this article has no single answer. When this question arises for you, you must take all the possible data into consideration: the price of the apartment, other related expenses, the interest rate, and even expenses related to maintenance of the property that must be paid by the apartment owner if you are renting or by you if you own the flat.

If you need advice on the matter or on any other matter related to real estate, contact our Decker, Pex, Levi law firm today. We have branches in Jerusalem and Tel Aviv and we specialize in Israeli real-estate and land law. If you have any further questions, I and my colleagues will be happy to help. Contact us: