In this article, I will try to help foreign investors (who live outside Israel) to recognize the array of considerations within the purchase of a rental apartment in Israel.
I divided the considerations into three key topics: location, tax and mortgage.
Location
The investment’s risk and its ROI (return on investment) are affected by the apartment’s location.
For example, the purchase of an apartment in Tel Aviv is at a low level of risk (because the demand is high), but the return on investment will be lower as well.
On the other hand, when purchasing an apartment in the distant periphery, the risk would be higher, but the return on the investment will be higher as well.
The second consideration concerns the purpose of the purchase. Is the purpose of the purchase only financial or is there also an intention to use the property for residence on the part of the investor or his family members?
If there is an intention to use the apartment for residential use in the future, it should be taken into account. Sometimes the investor plans that he or his children will live in the apartment and then it is advisable to think about a location that suits the individuals’ needs and requirements.
Tax
For investors intending to purchase more than one apartment, due to the Ownership Taxation Law (the law which is called: “the Law of Third Apartment Taxation”); it is better to buy a few expensive apartments than a lot of cheaper apartments.
Another advantage of investing in an expensive apartment (rather than a cheaper one) is related to the tenants – a cheaper apartment will lead to lower rent and in many cases, it will attract less financially stable tenants, which might lead to much more hands on management with higher levels of risk.
More information on aspects of taxation can be read in other articles that we have published online: purchase of an apartment by a foreign resident and sale of an apartment by a foreign resident.
In Israel there is taxation both on rent and on the ownership of several apartments.
As part of the asset management service in Israel, we help clients who are property owners with the reporting and the payment of the tax.
Mortgage, Interest Rates and Purchase Affordability
In Israel, for many years, interest rates were very low and, in many cases, lower than the revenue which could be obtained from rental property. That made this transaction into a very rewarding one. Recently, the interest rates have increased and in addition, the willingness of the banks to offer mortgage loans has diminished. One should take this into account and prepare accordingly.
Despite the rise in the interest rate in Israel, a foreign resident can get a loan in foreign currency, and therefore in many cases the interest rate will still be attractive (even compared to a loan that he could get in his state of residency).
The real estate prices in Israel have steadily increased for many years. If one anticipates that the prices of apartments will continue rising, then the possibility for increased profitability of the purchase exists (even if the interest rates of the mortgage are not as attractive as in the past).
It is important to keep track of the interest rates once in every several months and to refinance the mortgage when the interest rates decrease.
Due to the strengthening of the Shekel in the recent years, the foreign currencies are less valued today and the scope of purchase options for foreign residents (whose equity and income are in foreign-currency) has been reduced.
The investor must take into account that there are complexities associated with the management of the property from abroad and to prepare accordingly.
Are you interested in consulting or in additional guidance? Please contact us.
Note:
This article provides general and preliminary information only and should not be construed in any event as legal counseling and/or as a substitute for legal counseling in respect of any case and its circumstances.
The above should not be relied upon without consulting with an Israeli lawyer before taking any action or making any decision. The above is true as of the date of its composition, and its veracity may change from time to time.
Distribution and/or duplication and/or photocopying of this document and/or part thereof without permission are prohibited.
