In July 2020 the Knesset (Israeli parliament) passed a correction to the regulation regarding purchase tax on a second apartment, which since 2015 was standing at 8% and was dropped back to 5%. Does this mean a good opportunity for investors, and where is the cheapest real estate in Israel – or the one that gives the most return on investment? In today’s post we will try and clarify.
The increase in the purchase tax in 2015 was supposed to address the increasing housing prices in the country, which fueled a large protest in 2011. The then Minister of Finance, Moshe Kahlon, hoped that increasing the tax will reduce the viability of investing in real estate in Israel for those who do not have their first apartment. But due to the Covid situation (and the fact that this tax did not create the desired effect), it was adjusted back in a bid to bring investors back to the market.
Is it worth buying an apartment in Israel now?
Anyone who has seen his stock portfolio drop during the first wave of the corona (and then rise again) may now be looking for an alternative investment channel, one that will not put his nerves to the test. Such a person may turn to the real estate market – and this is exactly what the Ministry of Finance is counting on.
Investing in real estate is considered a solid investment (relative to investing in the stock market, for example). The real estate market is less volatile, and is better for those planning to invest for longer periods. It is less affected by current events, and in Israel – where there is a real and dramatic shortage of new apartments – it is easy to believe that real estate prices will only continue to climb.
What to check before buying an apartment for investment in Israel?
Buying an apartment for investment is different in many ways from buying a residential apartment. Many criteria that worry buyers of residential apartments – such as the quality of the schools in the area, the socio-economic rating of the neighbors and so on – worry investors much less. In fact, when investing in real estate there are two criteria that determine whether the deal is good or not: the rental yield, which is derived from the rent that can be obtained, and the return on capital, which results from the future increase in the value of the apartment.
The rental yield is calculated by dividing the total annual income created from the apartment by the total expenses for it (which are basically the price of the apartment, but if there are additional expenses – such as interest on a mortgage or renovation expenses, they must also be taken into account).
Thus, investors generally like relatively small and inexpensive apartments where the rents for which are reasonable, so that in the end the return will be relatively high. Such apartments can be found mainly in the periphery, so in terms of investment – a second-hand three-room apartment in Nahariya will usually give a better return than a new three-room apartment in North Tel Aviv, unless it was purchased at a particularly low price.
and this brings us to the main question of the day.
Where is the Cheapest Real Estate in Israel?
Looking for good investment opportunities, you should aim for a cheap real estate price which gives a decent rent. The israeli website MADLAN, which is an online marketplace for real estate, released a list of the best neighborhoods to invest in.
According to Tal Kopel, Deputy CEO, “An important parameter we took into account is the demand for apartments in the neighborhood. There are neighborhoods in Israel where due to the low apartment prices rental rates can reach as high as 6%, but the low prices usually have a reason – people just do not want to live in these areas”.
That means that we should look not only at the cheapest real estate in Israel, but rather for a combination of a low price and an environment that people can and want to live in. In their analysis, MADLAN chose neighborhoods with future plans that can significantly increase the value of apartments.
Old Motzkin, Kiryat Motzkin
The old neighborhood in Kiryat Motzkin mainly includes low-rise or ground-level buildings. It is close to commercial centers, has a lot of parks, and within walking distance of it there is a rail station which can take you to the employment centers in Haifa. Most of the buildings in the neighborhood are old, but some have already passed or are in the process of reconstruction, which will increase the value of it.
- Price of a second-hand 3-room apartment: NIS 800,000
- Rental yield: 3.75%
Kiryat Eliezer, Haifa
Kiryat Eliezer is located in northern Haifa, near the Bat Galim neighborhood and the beach. The neighborhood currently has low level construction, mainly of old and slightly neglected buildings – but the municipality plans to upgrade the entire neighborhood through a variety of urban renewal projects.
- Price of a second-hand 3-room apartment: NIS 780,000
- Rental yield: 3.7%
Western Kiryat Haim, Haifa
Western Kiryat Haim consists of a variety of relatively neglected houses and plots, only with a twist: it is located directly on the seashore. The downsize: it is also adjacent to the oil tanks farm, a polluting plant whose impact on the environment is extremely negative, and not far from the refineries. If those will be evacuated – as many local politicians promise – it is likely that there will be massive new construction in the neighborhood as part of urban renewal, and its prices will skyrocket.
- Price of a second-hand 3-room apartment: NIS 720,000
- Rental yield: 4.2%
Neighborhood Dalet, Beer Sheva
This neighborhood is not the investor paradise it used to be, but it still gives one of the highest and surest returns in the housing market. The neighborhood is known as the student neighborhood of Ben Gurion University. Although the neighborhood attracts investors and a young population, its buildings are still old and neglected, as is the public space (although the Be’er Sheva municipality is trying to change the situation). It is important to emphasize that the neighborhood is large, and it is worth considering the distance of the apartment from the university when choosing a property.
- Price of a second-hand 3-room apartment: NIS 650,000
- Rental yield: 3.8%
Shikun Vatikim, Bat Yam
An old neighborhood in the heart of the city with low-rises and ground-level construction. The location is central and close to good public transportation (including the red line of the light rail), to malls, cultural institutions, many parks and most importantly – to Tel Aviv. The ground-level area in the north of the neighborhood is expected to maintain its character, but the low-rise construction in the rest of the neighborhood has the potential for urban renewal and value improvement, especially in light of its central location and proximity to the light rail. In the more distant future there may also be a metro station nearby.
- Price of a second-hand 3-room apartment: NIS 1,360,000
- Rental yield: 3.5%
Neve Ofer, Tel Aviv
Years of neglect have brought the Neve Ofer neighborhood in south Tel Aviv to a poor state, but the sharp rise in apartment prices in Tel Aviv has begun to attract more and more young families from a relatively high social class to it. Construction plans around it and within make the neighborhood attractive: the Abu Kabir detention center is to be vacated, evacuation plans for the old buildings are taking shape, a new middle school has started operating in the neighborhood, and recently a bicycle path has been paved which means that a bicycle ride to the city center takes only about 12 minutes.
- Price of a second-hand 3-room apartment: NIS 1,450,000
- Rental yield: 3.5%
Shachmon, Eilat
The Shachmon district is considered the most prestigious district in Eilat. The neighborhood consists of villas with a pool, two-family, luxury buildings and low-rise buildings, with the main tenants being wealthy Eilat residents, who are interested in a spacious and pleasant environment with lots of open green areas. The neighborhood is also an attraction for AirBNB tourists.
- Price of a second-hand 3-room apartment: NIS 1,100,000
- Rental yield: 4%
Downtown, Afula
In the last decade there has been significant new construction in the center of Afula – and not just for housing: construction of a new central bus station and a modern shopping center in place of the old and neglected one, alongside the construction of the new railway park. In addition, in recent years a new urban park, train station and a large new residential neighborhood have been built – and this attracts many young families to the city.
- Price of a second-hand 3-room apartment: NIS 550,000
- Rental yield: 4%
Givat Olga, Hadera
The fact that Givat Olga is expected to undergo a massive facelift in the next decade, in which the old and neglected housing estates and detached houses will be evacuated in favor of new buildings and towers for residences and offices is already a known secret. Although the plan does not cover the entire area of the neighborhood, the trend it marks for the area is clear. Today the rent in the neighborhood is not sky high, but the return on capital may be large.
- Price of a second-hand 3-room apartment: NIS 920,000
- Rental yield: 2.95%
Cheapest (Best) Real Estate in Israel
Israel was listed as the second most expensive country in which to buy a home, according to research performed by Australia-based Compare The Market.
Israel ranked number 2 out of 39 countries listed, where houses tend to cost in the upwards of $9,780 per square meter, which would account for 26.6% of a household’s disposable annual income.
It’s easy to despair about the prospect of ever being able to buy property in Israel. But remember: you don’t need to invest millions of shekels just to get your hands on a small apartment in Tel Aviv or Jerusalem – the opportunity for the cheapest real estate in Israel (and therefore best returns) is not in the center and main cities, but rather in the up and coming periphery.