Author: Shaun Isaacson

How does Israel’s buy to rent market compare with other real estate markets around the world? What profit can investors expect to make from buying and renting out apartments? 

As with many things in Israel, the real estate market is complex and hard to predict. Israeli property prices rose by 5.9% during 2016, while rental prices rose by just 1.4% over the same period – the lowest annual increase since 2008. The shortage of housing stock and the rise in mortgage interest rates is boosting demand for rental housing but not driving up rental prices, so yield rates for investors are not increasing in parallel with housing prices.

Potential property investors look for a number of different factors when assessing their likely return on investment – purchase price, anticipated increase in property value, rental returns and renting costs. They also look for economic stability and predictable regulations, both of which are difficult to find in this region of the world. For example, fluctuations in the value of the shekel, which has risen 12% against the dollar over the past 5 years, make it difficult for overseas investors to calculate their ROI.

Legislative uncertainty has made Israeli real estate investments more unpredictable in recent years. The purchase tax on housing for investment was increased in 2015, and there is legislation on the books to tax the owners of three or more properties (currently held up by Israel’s Supreme Court). There have been multiple attempts to regulate the rental market in Israel but none have resulted in legislation.

Various bills have been introduced in order to try to stabilize rental prices, by either prohibiting landlords from raising prices or incentivizing them not to do so. They have tried to specify what conditions a rental property must meet, what repairs landlords are liable to make, and the maximum value of the collateral that they can demand from tenants. However, these bills have not passed into law because the government does not see it as an urgent priority, leaving the market largely unregulated.

One of the consequences of this regulatory vacuum is that Israel offers the lowest landlord costs in the world. According to the Global Property Guide (www.globalpropertyguide.com), Israel has one of the lowest “round trip costs” for property investors of any country, ranking 102 out of the 123 countries that they have surveyed. They look at the total cost of buying and then re-selling a residential property of comparable value, including all the rental costs (except the sale price itself), and this figure is expressed as percentage of the property value. In Israel, this total transaction cost is 6.74% of the property value, compared with 8.03% in the UK, 10.65% in Hungary and 18.45% in France. This means that the price of buying and selling investment properties, in terms of registration costs, real estate agent and lawyers’ fees and sales and transfer taxes, is relatively low in Israel compared with most other countries.

The same Global Property Guide shows Israel as levying 7.75% tax on rental income, which ranks us 89^th out of 130 countries measured. In Switzerland the tax is 48% but in the Bahamas and many other countries there is no such tax, so Israel sits somewhere in the middle of the table. (Their calculations assume that the property owner is a non-resident foreigner with no other local income.)

Indices like this are not totally reliable, because situations change and certain assumptions have been made in the collation of comparable figures. For example, the agents’ and lawyers’ costs paid by buyers and sellers vary widely, with buyers of more expensive properties often paying proportionately lower agents fees.

However, it is clear from the Global Property Guide and other international indices that Israeli properties do not give the best return on investment compared with other countries around the world. The Guide website shows the return on investment in Israel as 2.57%, less than the average yield for the United States at 2.75%, and close to the bottom of their international table as the 76^th of the 80 countries for which gross rental yields are measured. Investors could probably make much higher profits by investing in Eastern Europe or Asia, and yet the property investment market in Israel remains strong.

At Creative Estates, we understand that return on investment is not the only driving force in the Israeli buy-to-let market. In our experience, people who buy properties to rent in Israel are usually looking not only for a good long-term return on their investment, but also to own properties that they and their family may live in one day. They recognise that Israel’s strong economy, rising birth rate and steady flow of immigrants are keeping property prices high. Politicians and economists may talk optimistically about increasing the supply of properties and taking the heat out of the market, but most investors recognize that real estate is holding its value.

At Creative Estates, we don’t believe that the Israeli property bubble is going to burst – it may deflate slightly as the supply of new housing increases, but we are seeing solid property prices and steady rental income. Jews from around the world continue to buy real estate in Israel as their security against increasing anti-Semitism and to fulfil their dream of retiring to the Holy Land. As long as the rental income remains high enough to offset the costs of their investment, they will be happy to buy to let the real estate that they hope will one day become their home.

If you call up an Israeli contractor for a price, hearing your accented Hebrew will probably add 20% to his regular fee!  As an experienced Israeli property manager and qualified lawyer, Shaun Isaacson has a clear advantage in hiring and supervising Israeli contractors.

When organizing and overseeing renovations and repairs in the properties that he manages, Shaun knows that he gets a better deal than his clients would have gotten for themselves. “I have seen how the price of a project can vary depending on the nationality of the client and the neighbourhood in which they live. Contractors will often take advantage of your accent and your address, thinking that you are a wealthy foreigner who can afford to pay more. Also, because I manage multiple properties, I can negotiate better prices than a homeowner, because companies want repeat business. This also motivates them to work faster and do a better job, because they know I will not hire them again if I am dissatisfied.”

In addition to Hebrew fluency and native negotiation skills, Shaun has the advantage of extensive experience in working with Israeli buildings, which are often built differently from his overseas clients’ home properties.

“Most Israeli buildings are made from poured concrete and they are often susceptible to cracks and water damage. The problem with leaks in concrete is that the water can enter at one location and seep through a crack somewhere else. Finding the source of the problem can be a game of trial and error, causing extensive damage to walls or ceilings in the search for the source of the leak. We have often brought in a company that uses an x-ray machine to find the crack in the pipe or the concrete and diagnose the problem. This service is costly but it cuts out the expensive guessing games and helps to minimize the repair costs.”

In one property managed by Creative Estates, it became clear that they had an electrical problem throughout the house. An old water leak had caused corrosion in the wires, and the fuses kept short-circuiting, which suggested that the wattage was too low for their electricity usage. Shaun’s team of electricians surveyed the property and recommended changing the spot lights (over 50 of them) in the ceilings throughout the house to LED lights, in order to reduce electricity consumption. They identified several problems and fixed them, without the unnecessary expense and disruption of rewiring the entire house.

In another example of how creative thinking can save Shaun’s clients money, the owners of a different home called in a swimming pool company who advised them to dig up the garden and install a cement pool, which would require building permits. Instead, Shaun and his team recommended installing a deck with an integral plastic pool which did not require permits. “The pool company had a standard way of working but, by looking at the problem from a different angle and thinking outside of the box, we saved our client 40% of the installation cost.”

Shaun understands that his job as a property manager includes managing construction and renovation projects, so he does not charge an additional management fee for this work. He supervises the contractors himself, which saves his client the cost of bringing in a site manager. “I have built up a team of highly skilled plumbers and electricians, builders and painters, who work on the properties that I manage. Not only can I rely on their honesty and professionalism, but if anything goes wrong, they know what to fix and they don’t quibble about putting it right. Our clients know that we will manage the entire project from start to finish, saving them money and stress.”

For more information about Creative Estates property management service in Israel, contact Shaun Isaacson at shaun@ceisrael.com or on +972 52-652-1096. We will give you a price quote in complete confidence and without obligation.

Stories in the media about falling Israeli property prices look like good news for buyers and bad news for investors, but do these statistics tell the true story?

To paraphrase Mark Twain, reports of the demise of the Israel property market have been greatly exaggerated!

While the Ministry of Finance reports that real estate deals dropped 15% in the last quarter of 2016, demonstrating a cooling down of the Israeli property market, and the Central Bureau of Statistics’ report showed a 1.2% decline in the housing prices index at the end of 2016, but another report by the Appraisers Association shows that average apartment prices rose 1.7% during the fourth quarter.

So who and what should investors believe?

Israel’s Finance Minister Moshe Kahlon is under pressure to show that his policies have helped to reduce housing prices, but a closer look at the figures shows that the facts do not support this claim. The cabinet decided several months ago that they would only publish house price data from the Central Bureau of Statistics (CBS) and not from Israel’s Real Estate Appraisers Association.

The chairman of the Appraisers Association, Ohad Danos, is quoted as saying that the CBS index showing a fall in house prices in December 2016 is misleading. The Association’s own survey shows continued price rises among new and second-hand four-room apartments in 16 cities. They say that prices rose during the fourth quarter of 2016, averaging 1.7% higher than the previous quarter. They also compared this period with the corresponding period in 2015 and found an average 8.3% increase in housing prices since last year, with the highest rise being 13% in Tel Aviv and the lowest 2% in Haifa.

It is important to note that the Appraisers Association survey looks at the average price of four-room apartments in specific cities, but prices can vary between different neighbourhoods. They reported on the standard deviation for each city, showing that prices varied by 30% between different areas of Tel Aviv, and by 20% in Netanya and Jerusalem.

Analysts say that while the CBS survey is more comprehensive than the 16-city survey by the Appraisers Association, it is skewed by the inclusion of buyer fixed price deals. This is a system of housing project tenders that was introduced by the government to encourage contractors to build cheaper housing. They compete to submit bids for new housing projects that are lower than the maximum price set by the government. In one new Ramat Beit Shemesh project, for example, the tender achieved a 17% discount on local market prices.

Comparing the CBS and Appraisers Association figures for a specific city, Danos points out that fixed price tender sales accounted for 25% of all deals in the city of Rishon Lezion during the last quarter of 2016. Such deals are clearly skewing the picture, and Danos claims that without these housing project tenders, the Rishon Lezion real estate market would have shown a 1% rise in prices instead of a 6% decline. It is clear that including these government tender projects in CBS house price statistics gives a misleading picture of an overall fall in market prices, which is what the government wants its voters to see.

The CBS survey also points to a sharp fall in the purchase of new homes by first time buyers, but admits that many young couples are holding out for buyers fixed price tender projects. Building low-price housing is clearly good news for young Israeli couples, but it should not disturb overseas investors unduly. The overall housing market in Israel remains strong, with core demographics for marriage rates and expected Aliyah from Western countries continuing to drive demand for residential property.

According to government statistics, home purchases for investment fell 27% in the fourth quarter of 2016 and made up only 17% of all residential apartments sold. These figures compare purchase data with the previous summer quarter, which was a stronger season for the real estate market, and not the last quarter of 2015, which was similarly weak.

Those realtors who are talking about Israeli property prices starting to drop may be trying to drum up business in a slow winter market. They point to an increase in mortgage interest rates, an increase in purchase tax to 8% in July 2015, and a new tax on owning a third housing unit, due to come into effect on April 1, but most believe that that the overall trend is not changing. Some realtors talk anecdotally about sellers having to reduce prices to sell their properties, but admit that sellers may have unrealistic expectations and their asking prices may have been over-inflated.

The Appraisers Association survey of 16 Israeli cities shows that in the last quarter of 2016, average apartment prices increased by 4% in Holon and Ashkelon, 3% in Netanya and Kfar Saba, and 2% in Ashdod, Modi’in, Ramle, and Tel Aviv. Average increases in prices were recorded as 1% in Beer Sheva, Jerusalem, Petah Tikva, Rishon Lezion, and Rehovot, and there was no change in average housing prices in Haifa, Herzliya, and Eilat compared with the preceding quarter.

To quote Mark Twain again: “There are lies, damned lies, and statistics

If your house was unoccupied and a pipe burst, how much damage would be caused? It hardly bears thinking about! A good property management company will make sure that you suffer minimum damage and receive the maximum insurance payout. Shaun Isaacson, CEO of Creative Estates Property Management, explains how.

Among its portfolio, Creative Estates Israel manages a number of high-end properties in Herzliya Pituach that are empty for most of the year. Shaun Isaacson and his team make sure that they are cleaned and maintained in their owners’ absence. In accordance with the requirements of the insurance company, the water supply, gas and electricity in most of these homes is turned off while they stand empty.

The regular cleaner for each property is instructed to turn on the water so that they can clean, but on one visit the cleaner realized that there was water pouring down from an upstairs bathroom. She quickly turned off the water supply after calling Creative Estates. Shaun sent a contractor to assess the damage, and called the insurance company to invite them to send an assessor to do the same.

In a very short amount of time, a large quantity of water pouring from a pin-sized hole in a bathroom pipe on the second floor had flooded the bathroom and the kitchen beneath it. The water damaged carpets, walls and flooring, as well as multiple kitchen and bathroom cabinets.

The Creative Estates property management team estimated that the cost of fixing the damage would be 50,000 NIS, but the insurance company offered only 30,000 NIS. Shaun was able to show them estimates for the price of the work, emphasizing the quality of the furnishings that needed replacement, and insisting that the wet sand under the bathroom floor and the damaged plaster in the walls should all be carefully removed and replaced.

After some extended haggling, the insurers agreed to pay the full amount requested, and Shaun ensured that all the work was carried out to the high standards that the owners are entitled to expect.

Shaun explains: “I have no doubt that my professional experience, my persistence and my company’s bargaining power enabled us to get the full payout for my client. The insurance company hopes that we will continue to insure our portfolio of properties through them, which gives us more leverage than any private home owner in Israel would have had in a similar negotiation.”

During the entire saga, Shaun sent full updates to the owners of the property, who were relieved to know that Creative Estates was taking care of everything and there was no need for them to fly to Israel to check on the repairs. The house was fully renovated and as good as new in time for their next visit.

If you are thinking about renting out your home to friends or to strangers, whether as a short term vacation rental or for a longer period of time, what steps should you take to prepare your home for rental? Shaun Isaacson, CEO of Creative Estates Israel, is an experienced property manager and offers the following tips.

1. Clear up the clutter – store valuables and personal items off-site if possible, or in securely locked cupboards.

2. Set your red lines – the minimum rent and rental period that you will accept, the maximum number of occupiers, rules concerning pets and smoking, and the security deposit that you will require to cover any possible damage.

3. Fix all leaks and potential plumbing and electricity problems – get everything fixed and designate trusted maintenance people that your tenants should call in an emergency. Under Israeli law, the property owner is responsible for all plumbing and electricity issues.

4. Organize insurance for your property and any contents that you own – tenants must have their own contents insurance. We recommend paying a higher premium to allow you to call your own maintenance people immediately, rather than waiting for the insurers’ team to turn up.

5. Check that you have all the instruction manuals for your appliances and preferably arrange maintenance policies to get them fixed quickly and cheaply if they break down.

6. Draw up a solid and legally enforceable lease agreement to protect yourself and your property, including who is responsible for paying bills, and penalties for late payment of rent.

7. Set up automatic payment for fixed bills such as Arnona (municipal taxes), water, electricity, gas and Va’ad Bayit (building maintenance).

8. Have meter readings taken at the beginning and end of each tenancy to calculate electricity, gas and water bills (particularly important for short-term rentals).

9. Redirect your home phone line and consider disconnecting the phone – today very few tenants require land lines, but they may require internet and cable/satellite tv connections.

10. Organize deep cleaning and painting for your home, and arrange for regular garden and pool maintenance and cleaning of outdoor areas by trusted companies.

11. A home inspection and audit will help to highlight possible maintenance problems and also provide evidence of the state of every part of your property at the start of the rental period, in case of damage caused by tenants.

12. Draw up checklists of furniture and kitchen utensils, for counting and checking at the end of each tenancy.

13. When advertising for and interviewing tenants, insist on references, credit checks and guarantors, as well as the security deposit and payment of rent in advance.

With so many things to take care of, both before and during each rental period, you may want to consider hiring an expert to prepare and manage your property in your absences. Creative Estates Israel is experienced in fixing potential problems before they arise, and we are qualified to manage all the legal and financial aspects of rental arrangements. Talk to us today for a free no-obligation price estimate – curing your property rental headaches may cost less than you think!