Buying an apartment for investment in Israel in Israel

What do you need to do when buying an apartment for investment in Israel? It is important to choose the right apartment, to examine its condition, location and possible problems, and also to know how to calculate in advance the expected profit on the investment– how long it will take to return the investment and when you will start receiving a profit. In this article we will explain everything you need to know when purchasing real estate for investment purposes.

Investing in real estate has always been the preferred investment option for most Israelis. The stability of the sector, along with the steadily increasing apartment prices over decades, has encouraged those with wealth to put their money in the safest possible investment channel, with the understanding that in the most extreme scenario, they will earn only a little, but in no situation will they lose – not even a small part of the investment.

Of course, this assumption is not the gospel truth, and crises may occur in the real estate market, such as the sub-prime crisis in the US that caused apartment prices to plummet and lead to a deep recession in the world’s financial capital. But in general, the Israeli real estate market has demonstrated solid stability alongside a constant increase in housing prices.

The widespread phenomenon of buying apartments for investment has raised various legal questions regarding the process and how to choose the right property. That is why it is important to choose an expert real estate attorney who will accompany you throughout the entire procedure, ensure that your actions are legally valid and reduce your risk in this type of transaction.

In this article we will list the important points that require attention in the phase of searching for a suitable apartment for investment.

How do you choose an apartment for investment?

As a general rule, purchasing an apartment for investment is the same as purchasing a residential property as far as the inspections required on the property are concerned. The fact that you do not intend to live in the apartment does not mean that you can compromise on a quality location, an apartment in good condition or a preferred area. What might have been good for you as a residence will be good for potential tenants or for future buyers when you decide to sell it.

The choice of the property involves many details such as the choice of location: on the periphery or in a high-demand area; students or families. Or choosing the condition of the property: new from a contractor or an old one that you will renovate; an area with potential for Tama 38 (Seismic retrofitting) or an area with a stable yield from the moment of purchase. There are many details that you must check, so it is important to consult with experts in the field from the very first step.

What are the important things in a real estate investment procedure?

It is important that you carry out the list of actions required before purchasing an apartment, or contact an expert attorney to accompany you in the transaction. It is also important at this stage to conduct preliminary inspections of the property that rule out the existence of construction violations and physical problems in the apartment you wish to purchase.

Note that physical problems in the apartment may cause many repair expenses during the rental period, which will reduce the profit percentages and may drive away potential tenants. So these tests are not merely for your convenience; they are essential to guarantee the investment and the maximum return on it.

Calculation of expenses:

You are making the transaction of purchasing the apartment for investment for financial reasons. That is, you want to earn as much as possible for your money. Sometimes you find an apartment at a bargain price, and it may be the deal of a lifetime that will give you a high return, but at the initial stage you don’t know how to calculate the expenses, and obviously not the return either.

For instance: if the price of the apartment is one million NIS, and the rent is 5,000 NIS per month, then the return is 6% and is definitely considered a high return, but you are not taking into account the ancillary costs which increase the amount of investment required.

Main costs:

Renovation: In apartments for investment, maximizing profits is sometimes achieved by purchasing an old apartment, thoroughly renovating it and renting it to tenants who will pay more for a renovated apartment. Even before the purchase, it is important to get price quotes from contractors, and even add another ten percent to their price, because in our experience, a renovation usually does not end at the price given to you in the first step.
Taxes: When buying an apartment for investment, as opposed to buying an apartment for living, there is a purchase tax, the amount of which usually changes from year to year. There are several types of exemptions from purchase tax (listed in the linked article), but they mainly apply to first-time real-estate buyers and not to investment real-estate buyers. That is why it is important to calculate the tax and include it in the total expenses for the property. An attorney who specializes in real estate taxation will know how to offer a solution to reduce the tax in your specific case.
Brokerage: A large portion of the transactions are done through a real estate broker who charges a commission of 1-2% of the value of the apartment. This is a considerable expense that must be included in the investment amount.
Furniture: Apartments for rent are often offered furnished. In certain areas, especially in student residential areas, furnished apartments are rented quickly and at a higher price than unfurnished apartments, so if you purchased an apartment in such an area and have decided to furnish it, it is important to take this into account.
An attorney: As in any real estate transaction, there is the cost of an attorney who accompanies the transaction and makes sure that you do not make a mistake during the negotiations that may cost you dearly in the future.
A mortgage broker: If a mortgage broker is essential when purchasing a residential apartment, all the more so for an investment apartment. The mortgage you take out to purchase an investment property will greatly affect the yield and the viability of the transaction.

How do you calculate the return on an investment property?

After reading the article so far, you have understood that for an investment apartment, what is important to you is the annual return and nothing else. The apartment can be beautiful and in a prime location, but if the investment does not yield a decent percentage, you will not want to purchase it.

Yield calculation is done with a simple formula – the amount of the investment compared to the annual income from renting the apartment. Note that we wrote the investment amount and not the price of the apartment, since the investment amount consists of the apartment price, mandatory taxes, ancillary costs such as brokers, an attorney and even the renovation of the apartment if necessary.

For example: if the apartment cost 900,000 NIS and the ancillary costs totaled 100,000 NIS, the investment amount is one million NIS. If the monthly rent is 4,000 NIS, then the annual rent is 48,000 NIS, and so the annual yield is 4.8% of the price of the apartment.

You can check rental rates in the area of the apartment you want to purchase on various websites such as Madlan, and thus get an indication of the amount you will receive for your apartment.

In old apartments, it is customary to offset 5-10% of the rent to finance repair expenses in the apartment throughout the year, expenses which you will have to cover since you own the property.

What is the preferred yield?

This is undoubtedly the million-dollar question. The yield in Israel ranges from 3 to 6 percent of the apartment’s value. This depends on the location of the apartment, its condition and the customary rent in the selected area.

Note that the yield is usually calculated based on the income compared to the value of the apartment. If you are debating between investing in real estate and investing in the stock market, you will calculate the return on real estate in a different way, because you are probably taking out a mortgage, and then the calculation of the return is done against the equity you invested in the apartment.

Explanation: If the equity you invested in the purchase of the apartment and the associated costs is 500,000 NIS, and the rest is taken from the mortgaging bank, then the return is calculated by calculating the net income against the investment plus interest expenses on the mortgage. Then you will reach a higher return than the percentages mentioned earlier, and you can compare this return against the return in the stock market and the risks involved.

Summary:

Unlike buying a residential apartment, buying an apartment for investment requires more in-depth examinations and calculations of return and risks that you must carefully check from the very first step.

If you would like advice on this issue, as well as other matters in the field of real estate, contact our law office today, Decker, Pex, Levi, with branches in Jerusalem and Tel Aviv, specializing in Israeli civil law. If you have any further questions, my colleagues and I will be glad to help.