4 Trends in Israeli Real Estate Investment
By Debbie Rosen-Solow, Adv
Israel has become a trendy venue for residential real estate investments. Aside from the personal connection that draws Jews from all over the world to want to own a home in the Jewish Land, it is also viewed by many as a safe and profitable investment. Israel is a small country, with a limited amount of land available for building, and demand is on a rise with a growing population. These conditions offer the potential for a profitable return on investment.
Israeli housing prices have been predominantly on the rise for the last 50 years, with major grown over the last 10 years. Israel, at its creation, was essentially no more than sand and swamps. Throughout the years, the country has developed into the world’s technological hub, has amassed the largest number of scientists and engineers per capita, has flourished into a melting pot rich with cultures, art, cuisine, and architecture, and has brought visitors from all over the world to tour its beauty — all of which have raised and continue to bolster the cost of real estate.
As a boutique bilingual real estate law firm specializing in representing foreigners and new Olim in the process of purchasing a home, we see several trends in purchasers over the past few years.
Playing It Safe
Some investors prefer to “play it safe” and are only interested in buying a home in an area they may see themselves living some day. These investors don’t necessarily have a concrete plan of when they will make Aliyah, if at all, but they usually know that only a place they can picture themselves living in is where they want to buy. If it is one of the well established cities, such as-Jerusalem, Tel Aviv or Raanana that you can see yourself calling “home”, It is a fair bet that your investment will keep its value. As prices in the more sought after cities, typically are higher, your return on your investment may be more moderate, while your level of risk is likely to be low.
Some investors may prefer to buy in a place they can picture themselves vacationing or spending some of the time in like Tel-Aviv, Herzelia or Netanya.
Once the transaction is completed, homes can be cared for by a management company that can take care of regular operating and maintenance while the owner is away. Homes can also be rented out with a tax exemption on rental income up to ~5000 NIS per month.
The Airbnb market is rapidly developing in Israel. There are thousands of apartments in the Jerusalem and Tel-Aviv areas offered on Airbnb.com. Renting out your home for a short term will allow you to block off the dates you want to spend in the apartment in advance, yet have the income on the dates you plan on being away.
When searching for a home, if you are interested in a place you can rent out short term, make sure the building bylaws allows this. There are buildings in which the neighbors are trying to ban the right to allow any owners to rent out their apartments as short term/daily rentals such as Airbnb because of the noise and “extra” wear and tear that is caused to the common areas in their buildings. A recent court ruling of the Inspector of Registration of Land in Tel Aviv prohibited the use of an apartment for short term rentals because in this specific building the regulation orders of the building did not allow for any use other than “living”. Ruling established that short term rentals can not be categorized as regular living.
At the other end of the spectrum are investors willing to take a greater risk in search of greater reward, and tend to evaluate a home based on its potential, not whether they can see themselves living there one day. Such investors may prefer to invest in the periphery. A newly built train line and road expansions allow easy access from new developments such as Harish and Kiriat Gat to the center of the country. With huge government investment in infrastructure, and thousands of brand new low-priced apartments being offered, many investors see these areas as the next thriving communities that will prove to be a wonderful investment.
What You Need to Know
As a foreign investor, there are several key areas to be aware of. Aside from the obvious challenges of language and mentality, the purchase process tends to be somewhat more complex than you may be used to. At the risk of sounding biased, it’s imperative that you have someone experienced to be your eyes and ears throughout the process, so that nothing falls between the cracks. Even things that appear to be simple, such as conducting payments, may not be as simple as one would expect. Banks today have very strict and confining regulations regarding transfer of sums. Money laundering regulations together with FACTA limitations require foreign investors to prepare for any money transfers with proper expertise. This can affect how quickly you can expect your money to be available for payment and what is needed ahead of time.
When you purchase as a foreign citizen you will have to pay purchase tax as an investor, unless you can prove that you do not own a residence in your country of residency. This means that on a purchase of up to about 5 million NIS you will be taxed at 8% and above this amount you will be taxed at 10%. If you are considering moving to Israel you could avoid paying such a hefty tax by making Aliyah and become an Israeli resident within two years and you will get a substantial reimbursement on your purchase tax.
If you decide to sell your property purchased recently, as a foreign investor you will have to pay a one time capital gains tax called MAS SHEVACH of 25% of the profits. It’s worth noting that many house related expenses can be deducted from the profit, and your lawyer may be able to help minimize this tax.
Going Over the Line
When investing in a home that is situated over the green line in places like Maale Adumim, Elkana and Efrat there is an exemption from Purchase Tax and Mas Shevach, as the Israeli property tax law (חוק מיסוי מקרקעין) does not apply to foreign purchasers who do not have Israeli citizenship or residency in these territories. We represented several foreign buyer who purchased homes in Hashmonaim and Efrat recently who were happy to discover that they did not have to pay purchase tax.
Buying a Shell
Another trend, particularly relevant for more upscale developments, is the purchase of shell apartments. An increasing number of our clients have purchased an unfinished apartment that consists of external walls only and piping that reaches only the exterior of the apartment. These apartments have no internal wall divisions, no kitchen, no bathrooms, no flooring. Buyers of such shell apartments, after purchasing the shell, hire their own designer and contractor to complete the apartment according to their style, budgets and needs. In addition to allowing investors to design the apartment as they please, buying a shell apartment can offer significant tax savings for investors. If filed correctly, instead of paying 8-10% purchase tax, the tax authorities have classified our deals of shell apartments as “land transactions” instead of “home transactions” thus enabling purchasers to pay a lower tax scale of only 6% (and in some cases 5%).
An investor we represented recently purchased a shell apartment in the Jerusalem Mamilla area. It was in a very upscale new building that offers the latest amenities- swimming pool, gym, social hall, doorman services and a beautiful lobby but the apartment itself looked like an unfinished building site. We filed the purchase as a land transaction and after reviewing the status, the tax authorities accepted our claims. This savings amounted to hundreds of thousands of NIS for our client.
Whether you’re looking for high-risk high reward, or a place you could spend time in with the grandkids one day, make sure you’re making informed decisions you’re comfortable with at every step of the process. Owning property in Israel can be rewarding in many senses of the word, so when you’re ready, do your homework, get the right team, and get to it.
Disclaimer: The information presented above is general information and should not be regarded as legal advice. For any specific advice, one should consult with an Attorney, as there may be particular considerations that are not mentioned here.