Why talk about real estate at all?
Real estate is not only a place to live but also an investment that can generate rental income, value appreciation and wealth through leverage. This page explains why people choose real estate, its advantages and risks, and how it compares with investing in the capital market.
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For most households in Israel, buying a home is the largest and most significant financial transaction of their lives. Beyond the basic need for housing, however, real estate occupies a strategic place in the world of investment. It is a tangible asset, is perceived as an island of stability and has for decades been considered one of the main tools for building long-term family wealth.
To make informed decisions, it is not enough to rely on the tired mantra that "real estate always goes up." It is important to understand the mechanisms that drive economic viability, identify the risks and see how a physical property fits into your broader financial picture.
1. Why do people invest in real estate?
There are several main reasons why real estate is such a popular investment:
- Tangibility: Unlike an investment in a stock or fund, this is an apartment, office or physical property that you can see, visit and understand more intuitively.
- A sense of stability: The real estate market generally tends to be less volatile than the capital market. Home prices do not change every day, so many people experience it as a calmer investment.
- Cash flow: Real estate can generate an additional "salary" in the form of monthly rent, turning the investment from a number on paper into available money in the account, alongside the potential for value appreciation.
2. The double return: rent and value appreciation
One of the main characteristics of real estate is the possibility of benefiting from two sources of returnThe profit (or loss) from an investment over a certain period, usually expressed as a percentage of the original amount invested. at the same time.
- Income return, rent
- The ongoing income received from the tenant.
- Capital return, capital gain
- The increase in the property's value from purchase to sale.
How is it calculated in practice?
3. Leverage in real estate
One of the most significant advantages of real estate investing is the ability to use leverage.
Leverage means using the bank's money to buy a property worth more than the equity you actually have. Instead of buying only with the money you accumulated, you can provide part of the amount yourself and finance the rest with a mortgageA long-term loan for purchasing a property, with the property serving as collateral for the bank..
Leverage has a substantial effect on the return on equity. When the property's value rises over time, the increase applies to the entire property value, not only the part funded with your own equity. In some situations, an investor who contributes less equity and uses a mortgage can therefore earn a higher return on their money.
Illustrative example: the power of leverage
The following example is somewhat simplified and ignores interestThe "price of money" – the amount paid for the use of someone else’s money, as income to the depositor or as a cost to the borrower. and expenses, but it demonstrates how leverage can affect the return on equity.
Two investors buy an apartment worth ₪1,000,000. After some time, its value rises to ₪1,500,000.
Two investors, the same increase in value
| Characteristic | Investor A, without leverage | Investor B, leveraged |
|---|---|---|
| Equity invested | ₪1,000,000 | ₪500,000 |
| Mortgage financing | No mortgage | ₪500,000 |
| Profit from appreciation | ₪500,000 | ₪500,000 |
| Return calculation | 500,000 / 1,000,000 | 500,000 / 500,000 |
| Return on equity | 50% | 100% |
Leverage is therefore a powerful tool, but it requires caution, planning and the ability to withstand less favorable scenarios.
What is important to consider?
Advantages and disadvantages
| Advantages |
|---|
| Stability: Lower volatility than the capital market. |
| Double return: A combination of cash flow and value appreciation. |
| The power of leverage: The ability to control an expensive asset with less equity. |
| Tangible asset: Relatively easy to understand and analyze. |
| Disadvantages |
|---|
| Low liquidityThe speed and ease with which money can be withdrawn from an investment and converted into cash in a bank account without significant penalties.: Selling a property is a long and expensive process. |
| High entry threshold: Requires substantial equity and additional costs, including a lawyer, appraisal, brokerage, mortgage advice and renovation. |
| Ongoing management: The "headache" of tenants, breakdowns and maintenance. |
| Local risk: The property's value depends on its location, the neighborhood, the local market and demand in that particular area. |
| Advantages | Disadvantages |
|---|---|
| Stability: Lower volatility than the capital market. | Low liquidityThe speed and ease with which money can be withdrawn from an investment and converted into cash in a bank account without significant penalties.: Selling a property is a long and expensive process. |
| Double return: A combination of cash flow and value appreciation. | High entry threshold: Requires substantial equity and additional costs, including a lawyer, appraisal, brokerage, mortgage advice and renovation. |
| The power of leverage: The ability to control an expensive asset with less equity. | Ongoing management: The "headache" of tenants, breakdowns and maintenance. |
| Tangible asset: Relatively easy to understand and analyze. | Local risk: The property's value depends on its location, the neighborhood, the local market and demand in that particular area. |
Head to head: real estate versus the capital market
One of the most common comparisons in investing is between real estate and the capital market.
The choice is not always "which is better," but "which suits me."
Real estate versus the capital market
| Parameter | Capital market | Real estate |
|---|---|---|
| Liquidity | High | Low, because a sale can take months |
| Starting amount | Low, because you can begin with hundreds of shekels | High, at least hundreds of thousands of shekels |
| Volatility | High | Relatively low |
| Management | Almost entirely passive | Active, including managing the property and tenants |
| Leverage | Limited and high-risk | Built in and accessible |
| Taxation | 25% on the real gainThe actual gain remaining from an investment after deducting the rate of inflation. | Complex, including purchase tax, capital gains tax and levies |
In summary
Real estate is a powerful engine for building wealth, but it is not "magic." It requires patience, an understanding of leverage and a willingness to handle operational work. While the capital market wins on flexibility and liquidity, real estate wins on stability and the potential to increase equity through bank financing.
The right choice is the one that fits your financial goals and your ability to sleep peacefully at night.