Whether you are making Aliyah, buying a vacation or investment apartment, or just want to fulfill a lifelong dream of owning a home here; this is what you need to consider:
- What are my additional costs aside from the price of the apartment?
- What is the right type of property for me?
- How much will a bank lend me?
- How great is my risk regarding resale value and investment potential?
- There are obviously other considerations as well, but asking yourself these questions is an excellent start.
Buying an apartment in Israel is not just about the price of the apartment itself; as there are considerable costs surrounding the purchase. The costs are: purchase tax, agents fee, lawyers fee, transferring fees and potentially other miscellaneous costs.
1) Purchase tax – The most substantial cost surrounding the purchase of a home especially for a foreign buyer or investor. Owning more than one property will increase this tax significantly.
Tax scale for Israeli residents purchasing their first home:
(Note: If you are an Israeli resident purchasing a second property and intend to sell your first home within a year and a half of your purchase this applies to you as well)
- Up to NIS 1.623.320 there is no purchase tax,
- From NIS 1.623.320 to NIS 1.974.335 the purchase tax is 3.5% on the difference,
- From NIS 1.974.335 to NIS 5.093.535 the purchase tax goes up to 5% on that difference
- From NIS 4.967.445 to NIS 16.978.450 the purchase tax goes up to 8%
- Above NIS 16.978.450 its 10% on the difference.
Tax scale for investors and foreign buyers
(Anyone that already owns a property and is purchasing an additional property)
- Up to NIS 5.095.570 – 8%
- From NIS 5.095.570 – 10% on the difference
2) Agent’s fee – In Israel, buyers and sellers customarily pay an agents fee of 2% plus VAT. Most professional agents in Jerusalem cooperate with other agents, leading to a separate buyers and sellers agent, with each agent representing their parties interests. However, at times an agent can represent both buyer and seller, receiving commission from both parties.
3) Attorney’s fee -An attorney fee structure in Israel is typically commission based. There is no title insurance, so a competent attorney must inspect the property’s registration and legal status. Attorney’s typically charge 1% plus VAT.
4) Conversion and other closing costs – Such costs include the money lost on bank fees, conversion rates, registration fees, etc. This can add up to approximately 1% of the purchase price. On first hand apartments purchased from developers / contractors; other fees such as interest rates based on the building index, and a fee for the attorney registering the property will apply.
In other words, your costs on a second-hand apartment purchase price of $1,000,000, as a foreign buyer, will be another $120,000 or approximately 12% above the price of your property.
What is the right property for me?
The where and the what must coincide. For example, if you are interested in purchasing a property in Mamilla that can fit your family of 10 comfortably; it simply won’t happen with a budget of $500,000. Depending on what is more important i.e. location or having a place large enough for your family to use at the same time, will determine where you can begin your search. Many buyers reduce their expectations, change their preferred location, or increase their budget in order to find the right property. For example, we had a client that wanted a property that would comfortably fit their children and grandchildren for when they visit. They realized that in order to do that in Rechavia, they would need to spend more than double their budget. They decided that they prefer purchasing a two bedroom that fit their needs year-round. When their children would visit they would simply rent one of many short-term rental apartments in the area. By doing so they would not compromise on location and instead compromised on space.
The purpose of your purchase is very important in defining your search as well. For example, if you are observant and plan on only using the apartment 3 times a year, and 1 of those times is Sukkoth, then having a Sukkah porch or garden is essential. This becomes less significant to someone who will be living in the property full time.
Some buyers are looking to rent out the apartment on a long or short-term basis as a source of income. Others are buying a primary residence for their married daughter and son in law. All of these factors are obviously important.
Location, location, location. This goes without saying and should be the most significant parameter when choosing your next home. This is true for both proximity to places and areas you want to walk or have accessible transportation to, as well as the physical location of the building (on a Main Street, near a school, across from the park).
How much will a bank lend me?
A foreign buyer may receive up to 50% financing from an Israeli bank. An Israeli resident can take up to 70% financing. Borrowing money from a foreign bank against an asset in Israel is virtually impossible. While new banking regulations have made the process quite tedious, taking out a mortgage from an Israeli bank has become quite common for foreign buyers. ***One must keep in mind that banks will not necessarily appraise the property you are purchasing for the full amount, so make sure to get a realistic appraisal estimate before signing a sales contract. Your mortgage will not cover you purchase fees (purchase tax, agents and lawyer’s fees) so this too must be taken into account. I always recommend working with a reputable mortgage broker to help you navigate through this process.
How great is my risk regarding resale value and investment potential?
As risky as any real estate investment in a major city with consistently high demand. Obviously, there are fears unique to Jerusalem, such as security. Since the last intifada, even during periods of war and terrorism, Jerusalem has enjoyed a steady increase in prices.
Some say this price increase is a sign of a bubble about to burst. Even with the increase in building, high per meter prices in comparison to other cities, and other factors – Jerusalem is Jerusalem with limited space to build, certainly within close proximity to the Old City.
On the investment side if you are looking for a 10% (or even a 5%) return on investment you will be hard pressed to find anything in the central Jerusalem neighborhoods. Simply put, the amount that you receive for rent per month on a typical Central Jerusalem apartment comes out to less than 3% of the property value per year. This is not an exciting return. Some foreign buyers want to buy an apartment and rent it on a short-term basis (per night, week, month etc.) in order to also be able to enjoy it when they come to Israel. In many cases this can actually be more lucrative that renting out long-term (on an annual basis). Of course, this requires more work and overhead such as utilities, municipality tax etc. What has been more impressive than the annual ROI on both a long and short-term basis has been the resale value. Prices in Israel over the last 10 years have increased by over 100%. So aside from fulfilling the longtime dream of owning a piece of Jerusalem, buying a property here has proven to be a financially rewarding endeavor