Buying in Israel can be a great investment, whether or not in the long term you think you will live there. Over the last 20 years, property prices in Israel have increased steadily in every part of the country and any slowdowns have been short-lived and reversed.
There are those who believe continuing price inflation is unsustainable, because of the growing gap between housing costs and wages – but the fundamentals of the property market point to its underlying strengths for investment purposes. Israel’s population continues to increase year on year – both in terms of raw numbers and the number of households – and there is limited land on which to build. Add to that a bureaucratic planning system which means that new projects generally have a long lead time, and there is a shortage of housing which acts to push up both capital and rental values.
The main investment potential lies in the increasing value of the property over time. When sold, capital gains tax becomes due which sits at 25% of the real increase in the value of the apartment, i.e. the change in value between when it was bought and sold, linked to the inflation index. This assumes that you do not become an Israeli citizen and start to live in the property before selling it, in which case there are more generous provisions.
Assuming that you plan to rent out the property, you need to consider the potential rental demand in determining what and where to buy. Short-term or holiday rentals may earn more, but they require a lot of management which may mitigate any gains, and they are unlikely to fill 52 weeks of the year. If buying purely for investment purposes, a regular long-term let is likely to be the best proposition– leases are typically for a year with the option to extend.
In large and expensive cities such as Tel Aviv and Jerusalem, there is huge demand for rental apartments of all sizes for everyone from singles to larger families. This is because plenty of families cannot afford the upfront payments required to buy a property and therefore become lifelong renters. This demand for rented property at an affordable level extends out to the areas from which people commute into these big cities, so effectively the whole of Central Israel, and the areas surrounding Jerusalem, particularly inside the 1967 borders.
For a one to two bedroom apartment it also makes sense also to look at Israel’s university cities – areas such as North Tel Aviv/ Ramat Aviv, Givat Shmuel, Jerusalem around the various university campuses, Haifa, Beersheba and Ariel as students from singles through to young families often choose to live near to a place of study.
A typical lease will include a clause for inflation-linked rental increases each year, or a fixed percentage increase, and rental values do tend to move up steadily. But capital values are relatively high, and inflation in house prices can exceed general cost of living increases, yields on Israeli property (the relationship of rent to capital value) are lower than in some other property markets. This means that a cheaper apartment in a good area, or an apartment in a slightly cheaper part of the country may deliver a better yield.
Make sure that you manage your investment property appropriately – issues generally arise over the maintenance of the apartment, the state in which it is left at the end of a tenancy, and the process of finding new tenants. You will almost certainly need to work with a realtor to find tenants, and to have a property manager on hand to deal with issues that arise. Make sure that you use a lawyer to draw up and to review any proposed contract, but bear in mind municipalities such as Tel Aviv do offer a free fair rental agreement on their website which can certainly serve as a starting point.
Finally, consider from the outset for how long you plan to hold your investment. Although prices tend not to fall, or not to fall for long, the volume of transactions can change dramatically. In times of recession, the number of buyers can fall away steeply although the demand for rentals may remain high. It takes time to sell in Israel and there is a limited pool of buyers because of the high prices relative to income.
You will want to work with realtors and lawyers whom you can trust, and to think carefully about the timing of any sale, avoiding pressure to sell at any cost. You also need to consider how to manage foreign currency issues, assuming that you plan to take the money out of Israel once the property is sold, which is an issue that IsraTransfer can help with.
IsraTransfer can act as your trusted partner to move your money into and out of Israel, offering better exchange rates than banks and a much smoother process. Find out more about us online at www.isratransfer.com
