Types of real estate investments: where to buy and which property to choose
Real estate investments can involve different properties, regions and countries, and each choice offers a different mix of yield, risk, management and required equity. This page compares real estate in Israel and abroad, homes and investment properties, residential and commercial assets, the center and the periphery, and land investments, to help you understand which option suits your goals.
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So far, we have dealt with the "how" (the process, the money and the mortgageA long-term loan for purchasing a property, with the property serving as collateral for the bank.). Now it is time to deal with the "what" and the "where." Real estate investments may look similar from the outside, but there is a huge difference between buying a shop in Petah Tikva, an apartment in Haifa or a building in Bucharest.
Each option has its own advantages, disadvantages and level of risk. In this chapter, we will analyze the main paths that can help you choose the investment that best matches your goals.
Real estate investments abroad
In recent years, more and more Israelis have turned to investments outside Israel. But before buying an apartment in Athens or Miami, it is important to understand the rules of the game:
- Financing and leverage: In Israel, the bank is your partner through a mortgage. Abroad, it is very difficult, and sometimes impossible, for an Israeli to obtain local financing, which means that more equity is required.
- Yield: This is where investments abroad win. While the average yield in Israel is around 2%–4% a year, figures of 5%–8% are standard abroad.
- Management: In Israel, your property is a drive away. Abroad, you are completely dependent on a local partner or management company. If it is not reliable, the investment is at risk.
- Taxation: Watch out for double taxation and check whether a tax treaty exists between the countries. Remember that Israel offers unique tax benefits, especially for a sole residence, that do not exist abroad.
A home to live in or an investment property?
This is the classic dilemma for young couples. Although the asset type is the same, these are two completely different strategies:
A home to live in versus an investment property
| Criterion | Home to live in | Investment property |
|---|---|---|
| Goal | Stability, emotional securityA general term for a tradable financial asset (such as a share, bond, or unit in a fund) that represents a right to an asset or to profits. and quality of life. | Maximizing profits and cash flow. |
| Considerations | Proximity to work, family and schools. | Potential for value appreciation and rental demand. |
| Taxation | Significant tax benefits for a sole residence. | Exposure to purchase tax on a second home and tax on rental incomeTax on rental income, with an exemption available up to a certain income threshold.. |
| Flexibility | Low, because moving to another city is difficult. | High, because you can live wherever suits you. |
| Profit | Does not generate ongoing income. | Generates cash flow, but requires ongoing management. |
Residential versus commercial real estate
Residential real estate (apartments)
A conservative investment. People will always need a roof over their heads. The yield is relatively low at 2%–4%, but stability is very high.
Commercial real estate (offices, shops and warehouses)
This is where the big money can be found, with yields of 6%–10%, but also the greatest risk. During a recession, businesses close and shops remain empty. Arnona (ארנונה), the municipal property tax, and maintenance costs are high, and you must pay them even when the property is vacant.
The center versus the periphery
- The center (Gush Dan (גוש דן) and the surrounding area)
- Demand is constant and entry prices are extremely high. The property will almost never remain vacant, but the ongoing yield is very low.
- The periphery (north and south)
- Entry prices are more accessible, allowing a purchase with less equity and a higher rental yield. However, the potential for value appreciation depends on infrastructure improvements, such as rail and employment, that do not always materialize on schedule.
Investing in land: waiting for rezoning
This investment has the highest profit potential, but it is also the riskiest.
- The risk: Agricultural land may remain agricultural for another 30 years. In the meantime, your money is "dead" and produces no income.
- Expropriation: The state may expropriate up to 40% of the land for roads and public buildings without compensation.
In summary: what is your path?
Which path suits you?
The right choice combines three factors: your equity, your time horizon (how long you are willing to wait) and how well you sleep at night (how much risk you can absorb).
A starting point for choosing:
- Looking for peace of mind and security? A home to live in at the center.
- Ready for an adventure in exchange for yield? Commercial real estate or property abroad.
- Want to enter the market with limited equity? A small apartment in the periphery.
There is no single path that suits everyone. Your choice should match your goals, financial capacity and preferred level of risk.