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.
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.
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