To Rent or to Buy
Most people are invariably faced with the question of whether to keep renting or to buy a property.
Many emotional points have been made about buying real estate in general, and in Eretz Yisrael in particular. These sentiments are usually accompanied by sayings such as: “You have to get into the property market at some point,” and “Renting is pouring money down a bottomless pit – with the same money you could be funding a mortgage”.
Buying real estate in Israel is different from purchasing property in many other countries. Here there is a more intensive bureaucratic process than you might be familiar with in chutz la’aretz, due to relatively heavy state involvement, but it is manageable.
In the main, real estate is a less liquid and longer term investment. Since investors do not view a daily price/value of their property, they tend to hold property longer term and not be swayed by emotional decisions that sometimes influence more liquid investors in stocks, bonds or other liquid investments.
When deciding whether or not to buy, affordability should not be your only criteria. The common denominator for all real estate transactions is, of course, that people want their investment to appreciate in value.
The main real estate investment strategies are:
• Investing for the income stream from the rent, and the hope of capital growth.
• Investing purely for capital growth where any income stream (rent) services the mortgage or financing costs, and,
• Owning a home to live in which you hope will appreciate as the needs of your family evolve.
Assuming you have the equal choice of whether to buy or rent, you should take the following into consideration:
1. The amount of rent you would pay vs. how you could apply that same amount of money to other investments if you were not renting. This consideration can be called the opportunity cost of renting. Income investors will often compare the rental income return to assets like cash deposits and bonds returns.
2. Appreciation potential on the house: This is an uncertain figure. The accurate outcome of your initial assessment for many can be attributed more to luck than skill. In practice though, the age-old variables of successful investment in real estate have not changed much.
3. The amount of money you would need to put into the mortgage vs. renting is also an important consideration (or the opportunity cost of buying).
Financing your Purchase
Typically, mortgage banks like to see that you can put down thirty percent or more of the required capital or hon atzmi. Less than this amount would classify you as a higher risk mortgage. Mortgages higher than seventy percent can be arranged from the banks by taking out additional insurance cover from companies like EMI, but this adds significant additional costs, so be aware.
Zakaut, or ‘state benefit’, to olim chadashim still exists, but the terms have changed over the years and differ from case to case. Usually, however, there is a low interest loan component plus a loan component which becomes a grant after a certain period of time. You usually need to start drawing your zakaut within a year of signing the contract or lose the benefit. The details of these zakaut are beyond the scope of this article, but you should get all the information directly from the bank or mortgage broker before setting out.
For a general idea of mortgage repayments, see the abbreviated mortgage table below*. The table illustrates monthly payments (principle & interest) per 10,000 borrowed. The table can be applied to any currency. However, please note, these numbers do not include any index linkage, insurance or other associated costs, and are for illustration purposes only – so don’t rely on it for making any decisions – instead seek more information directly from the mortgage banks or mortgage brokers.
*(sources: http://www.banksite.com/calc/flap )
In which currency should you finance your mortgage?
Despite the shekel being Israel’s base currency, most housing purchases are still quoted in US dollars. There has been some pressure to list the price in shekels recently, given the dollar’s recent weakness. Mortgage banks commonly recommend to clients to take more than one type of loan in more than one currency, in order to try and diversify some of this currency risk.
(i) Your own base income currency-- try as much as possible to match your mashkanta currency to your own income currency, it lowers the risk of adverse currency movements on your payments
(ii) Interest rate differential between multiple currency loans i.e. currently the US$ federal funds (interest) rate is 5.25%, with the local NIS base rate at 3.5%. This will flow through to the mortgage market.
(iii) You should obtain in writing all the relevant factors from the bank such as length of loan, index linkage or not, penalties for repayment, fixed or variable rates, legal costs and other.
The buoyant real estate prices in RBS over the last years seem mainly to have been driven by foreign buyers. This has led to a flourishing local market. There are many licensed professionals and sales people to talk to in this area and it is worth seeking their advice.
Doron Green is a Senior Financial Planner with Pioneer Global Funds (92) Ltd (“Pioneer”). Doron and Pioneer are licensed by the Israel Securities Authority to conduct business as Investment Marketing Agents. Doron is based in Pioneer’s Jerusalem office. He can be contacted at 02-6249451 ext. 208; or email@example.com
NOTE: The details set out in this article are for information purposes only and should not be considered to be a proposal or advice to purchase and/or sell and/or hold securities and/or financial products. The details are given on the basis of information in the public domain. The analysis above does not represent in any way whatsoever an alternative to formal advice based on the details and specific needs of each individual.
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