Do you have 120,000 NIS? You too can own investment property!
The last few months have proven more than ever that dependence on one employer as a source of income can greatly undermine the economic situation and the stability of many families in Israel. On the other hand, the Corona period raised the understanding that an additional source of income or passive income can lead to peace of mind and increased economic security. Following the situation, we interviewed Lior Hass, who recently founded THINK REAL, a company that specializes in providing services in the field of investment properties, to ask about the state of investment real estate, and the relationship between the Corona situation and real estate prices.
Is now the time to embark on an adventure, and purchase an investment property?
Recent tests have shown that the number of transactions made in the real estate sector since the start of the Corona crisis (March-April 2020) has decreased by 30% compared to the previous year. The apartment sellers also understand very well that potential buyers keep the money close to their chest and will not rush to spend it until things get better. As a result, apartment owners who must sell will have to compromise. I breath the market daily, and see lots of opportunities for exceptional trades, at prices that are very lower than market prices. So, I know that in the current situation there is an outstanding opportunity, to purchase an investment property at a very attractive price from apartment owners who need to sell their apartments.
How to start investing in real estate? What do you need to know?
A good and successful investment in real estate requires market research, knowledge of taxation, an understanding of financing, and a lot of experience. There are two ways to start investing in real estate, the long way, and the short way. The long way means starting to study the market on your own, doing market research, figuring out which areas to invest in, what the price levels are in those areas, and reading material on real estate taxation to understand what you are required to pay when you buy and sell. It is also required to understand how to finance the transaction, what are the benefits of leverage, and beyond that, a skill in negotiating and understanding the costs involved in each transaction is required. After we have done all this we have to go down to the field, see apartments, sweat, talk to brokers, and walk around. The short way is to get the help of someone who has already gained enough knowledge and experience in the field and has already made dozens of transactions in the field and will do everything for you.
So how much equity is required to purchase an investment property?
The answer to this question is divided into several parts, firstly I highly recommend to those who purchase their first property, to invest the minimum required equity. The assets I am looking for investment, at THINK REAL, range around the prices of between NIS 400,000 and NIS 500,000. So for transactions in this price range, those who do not have a property registered in their name can buy an investment property with equity of 25% of the property (i.e. between NIS 100,000 and NIS 125,000), and those who already have an asset in their name, need equity of 50 % of the value of their property. By the way, it is also possible to purchase an investment property with no equity at all, you do not need to have money in deposit, if you have a pension fund or study fund you can take a loan against these funds at an excellent interest rate.
Why do you need leverage? Why not pay the entire transaction from equity?
Leveraging in the real estate transaction is the main thing, a real estate transaction without leverage is like skating with just one skate. The idea in leverage is to make an investment with money that is not yours, or in other words, you enjoy the revenue through someone else’s money. Leverage maximizes the return on your equity. If we take a simple example, the return on equity in an apartment costs NIS 400,000, in case you bring all the money from home, and the rent you receive is NIS 1,800 per month (the numbers are real and not invented), it’s 5.4% compared to a return of 10.8%, if you bring in only NIS 200,000 and complete the rest with a mortgage.
So, in what format do you recommend the potential investor to work?
The way I recommend it is to buy a property for up to NIS 500,000 with minimal equity, the rest of the money to complete with a mortgage, for a period of between 25 and 30 years, this way, the rent will cover the mortgage, and even a few hundred NIS will remain in your pocket each month as passive income. Over time, the value of the property will increase, allowing the leverage to increase it or to realize the profit and buy other properties in its place.
Why, for example, invest in real estate and not in the capital market?
I am not an expert in the capital market, but I have a lot of experience in real estate investments, the first transaction I made in 2010, since then I have made dozens of transactions from which I earned hundreds of thousands of NIS. Investing in real estate is a long-term investment, I see it as a pension savings plan (I do not count on the insurance companies that there will be money left for my pension, if there will be, then it’s a bonus). The investment in real estate in Israel has always proven itself. Prices have been steadily rising over the years, and beyond that, people will always need a roof to sleep under.
What is recommended, to invest in real estate in Israel or abroad?
As an investor who has performed dozens of real estate transactions, and has properties both in Israel and abroad, I would recommend a beginning investor to buy the first property in Israel, if it is necessary to conduct market research, extensive knowledge, and experience for investing in Israel, then it is much more necessary when purchasing abroad. Investing abroad requires a much deeper understanding, it requires an understanding of the laws in the country, which differ from country to country, in which country the laws benefit the tenant and where they are in favor of the landlord, what taxes are imposed on the landlord and which on the tenant, understand how to find a property, how to find out the market prices, find a management company that will manage the property and more, and all in a foreign language. After gaining experience in some transactions in Israel, you can try and dare to invest in real estate abroad, and even then use a reliable company with recommendations from reliable sources.
Finally, maybe a tip for potential investors?
If I have a sum of 450 or 500 thousand NIS, it is better to buy two properties for investment and not one. What is good for one apartment is probably good for two and even ten (the law of reduced marginal productivity does not apply here). This way, not only you increase the number of properties you own, but you also spread risks, because if for a certain period one apartment remains vacant, you can pay the mortgage of the empty apartment from the rent of the inhabited apartment (if not all then at least some).
