Chapter 9: Taking a mortgage
When taking a mortgage, always remember that money has a price. Because banks receive interest from the Central Bank of Israel to keep cash in the safe, if a bank gives you cash in the form of a mortgage, the bank will necessarily forfeit and try to recoup the Central Bank’s interest rate and also try to make a profit. If the interest rate of the Central Bank is lower than normal, banks tend to lend more money, thereby growing the crash flow on the consumer market and causing the price of goods to increase. An increase in prices like this is called inflation, and represents a risk both for you and for the bank.To mitigate it, banks have created a variety of methodologies, configurations and packages of mortgages for you to choose from, all of them consisting in some capacity of loan + interest. For example, a fixed rate, shekel-denominated, CPI-linked mortgage is a NIS-denominated loan in which the interest rate you pay the bank typically increases along with the loan term, but is fixed from the day you take the loan, whereas the bank will adjust the remaining outstanding amount based on the official levels of inflation reported by the Bank of Israel.In general, a fixed mortgage is usually repaid at a rate which is known and agreed upon by you and the bank in advance, whereas a floating mortgage repayment rates are calculated by the bank on an ongoing basis during the mortgage period. Typically, Israeli mortgage banks fund up to 75% of an apartment value. But with certain types of floating mortgage, it is sometime possible for a loan’s value to be 100%, or even greater than the apartment value, because it’s easier to consolidate expensive debt into floating rates by borrowing more.
Note that for a foreign mortgage taker, it is in theory possible to link repayment to the inflation rate of a foreign currency; it practice, though, it may often be cheaper to hedge your assets in favour of a more liquid currency such as the US Dollar.
Situations to be Prepared for: In our experience, the more complicated the real estate transaction, the more conditions the bank will likely impose before underwriting a mortgage. Moreover, sometimes, the initial loan authorization is not enough, and you may have to obtain additional funds from other sources in parallel. Situations may also exist in which a transaction is relatively simple, but due to a low appraisal value of the property, the bank will underwrite a lesser loan than was initially approved. For example: your potential apartment is large and attractive, but a large part of it has been built without a proper permit. In such a case, the appraiser will probably ignore the section of the apartment which has been built without a license, or at least devalue it.Many banks offer mortgage baskets which combine floating and fixed loans, so when considering taking a mortgage, it is advised to speak in depth with a mortgage bank representative and decide on a mortgage package that most appropriately represents feasibility in your financial picture, bearing in mind that it is often possible to refinance or renegotiate a mortgage in the future.
Chapter 10: Buying an apartment as an investment
When buying, purpose is important. If you are planning to use your apartment only three times per year for example, and one of those times is during Sukkot, it will necessarily become important to choose an apartment with a Sukkah balcony. The same kind of purpose-based reasoning is applicable to investment, when your primary purpose in purchasing the apartment will be profitability.It should be noted that apartments have always been considered a smart financial investment historically, because in contrast with other commercial real estate investments, apartments are often much more tied to residential and demographic trends like urban planning and zoning, which can make their investment returns more easy to predict accurately than other forms of property investment. Moreover recent reforms in the Israeli real estate market such as mekhir lemishtaken and others, have according to many analysts injected supply elasticity into the Israeli real estate market, increasing its attractiveness and creating favorable conditions for the investor.When purchasing an apartment as an investment opportunity, it is advised to carefully consider the affect of the apartment relative to it resale value and investment potential. Besides the condition of the apartment, the building, and its environment, consider things like whether the area is up-and-coming, and whether there is strong demand within a certain investment demographic the apartment. It is recommended to look at zoning and urban plans as well, to research if new transportation, commercial, or development projects are planned closeby, and if so, to doscover if and how they might affect the property value. Be aware that if new zoning regulations are slated to come into effect, you may need to pay additional taxes.
In general, if considering an apartment as an investment, we recommend upholding the following:
• Unless in a very special case, never invest with money you don’t have. If possible, we recommend buying the apartment with cash. If you can’t afford to pay in cash, at the very least, you should be able to afford all mortgage payments without including future income to be generated by the apartment itself (i.e. rents).
• Conservatively underwrite all of your anticipated expenses. Consider the cost of taxes, utilities, upkeep, and repairs. Be honest, and carefully analyze all of the income and expense related to the investment. Produce a cumulative, accurate estimation of all charges anticipated.
If it’s your first time investing, consider starting small
Some real estate investors begin small by purchasing a duplex or a house with a separate apartment unit, for example, and living in one unit while renting out the other. Although this can be a good way to get your feet wet, keep in mind that if choosing this route, you will be living in the same building as your tenant.
As you become more comfortable, you may consider buying a larger property with more income potential. Once you own several apartments, it will become easier to purchase and manage property and earn a greater return on your investments.