The #1 Thing You Should Know About Real Estate Investing in Israel
Latest update: June 18th, 2012
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If you buy a property as an investment, there are two ways you can profit – either you sell it for more than you paid, and/or you collect rent. Let’s look at each of these and see why they often don’t work out:
Selling for a profit
If you buy a property for an investment, hoping to sell years down the line at a profit, remember, that it’s not always easy to sell an apartment. Though people talk about the dearth of housing in Israel, there are “For Sale” signs all over, even in Jerusalem. The best way to ensure a quick sale of property is to sell it at a low price, often at a loss. But even if you don’t need the money and can afford to hold onto the property, remember you have the “friction” of buying and selling in the form of taxes, lawyers’ fees, real estate agents, assessors, mortgage costs, and more.
Collecting rent
In some parts of Israel, rental income represents 2% of the value of the property. So if you’re looking at a rental apartment to provide cash flow, you haven’t found the best return. Moreover, there’s no guarantee that you’ll have renters for 12 months a year. If you presume that, on average, you’ll only be full 10 or 11 months a year, account for the fact that your income would be around 8% lower than if you were full all year round. And if you can’t rent the property out at all, then your money is tied up in a non-performing asset.
So if you are considering investing in real estate in Israel, the #1 thing that you need to know is that buying physical real estate could be a bad investment. That’s why for real estate investing, I prefer using REITs (real estate investment trusts), which trade on a stock exchange, pay dividends, are easy to buy and sell with low cost, and can be bought in the form of a mutual fund.
There are many reasons to buy property in Israel, not only financial. Some Zionists want to solidify their connection to Israel, or hope to one day retire there. Before you buy real estate (or any investment vehicle), make sure you understand your motivation and the pros and cons.
If you want to know about practical investing in Israel, sign up for my company’s investment newsletter and get a free investment ebook as a gift.
tell a friendAbout the Author: Douglas Goldstein, CFP®, is the director of Profile Investment Services, Ltd, a financial planning firm located in Jerusalem. He specializes in working with clients in New York, Florida, and Israel and is a licensed financial professional both in the U.S. and Israel. Securities are offered through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, SIFMA. Accounts carried by Pershing LLC., Member NYSE/SIPC, a subsidiary of The Bank of New York Mellon Corporation. Neither Profile nor PRG gives tax or legal advice. Before immigrating to Israel, it is advisable to consult with a tax attorney who is knowledgeable about Israeli law. Doug’s newest book The Expatriates’ Guide to Handling Money and Taxes is available at www.expatguidetomoney.com. He hosts a weekly finance show, Goldstein on Gelt, on internet radio. Listen live or download podcasts. Toll-free from U.S. 1-888-327-6179, Jerusalem: (02) 624-2788. Follow on Twitter: @DougGoldstein or contact at doug@profile-financial.com.
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2 Responses to “The #1 Thing You Should Know About Real Estate Investing in Israel”
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Doug,
I have some questions/issues with 3 of your points, if you could address them.
1) You begin the section on Rent by saying that rental income represents 2% of the value of the property – “in _some_ places in Israel”. While that statement is true, it is also true that rental income can represents 4%-5% of the value of the property – in _other_ places in Israel. It comes down to initial neighborhood research, watching your market,( and as with any investment, past performance is no guarantee… ).
2) You say that if you don’t collect rent for 1 or 2 months out of the year, your income could be 8% lower.
True, but if we compare revenue based on the value of the investment in the property, then the difference in annual yield would typically be less than 1% of the value of the property.
As far as I understand the math, wouldn’t a 1% drop in the annual yield of any investment would also reduce your income to a similar extent?
And of course, signing long term contracts with your renters could help reduce the risk of an empty apartment.
3) There is no question that buying real estate makes your position less liquid, and there are additional costs related to the investment, but the advantage is that you own a property that is more secure, and for that matter can even provide you basis for collateral for additional real estate investments.
If you’re looking for the latest in real estate marketing in NY, be sure to check out http://www.NYREMarketing.com
Stephen,
Thanks for your excellent comments. Let me address them one by one:
1. It is true that depending on the location of the property that you buy and rent out, you will receive different levels of rent. As with most investments, no matter whether they are traded securities or property, buyers must beware that there are no free lunches. If you are receiving above average income, you need to understand what risks are involved.
2. I think that you can do the math in several ways. I was looking at it from the point of view of someone who buys a property in order to live on the income. If investors expect to make $12,000 per year, but only end up with $10,000, that could be a material risk for some folks. However, I understand your calculation that if we look at that difference in terms of percentage of purchase price, then the lower income would not seem as problematic.
3. I have found that people value liquidity much more when they don’t have it. This is why I often caution people about sacrificing access to their money. Also, I am hesitant to use the word “secure” related to almost any investment; however, if you own your own home, unencumbered by a mortgage, then you can feel secure that you will always have a place to hang your hat. And that is a value in and of itself.
Doug