By Moshe Ehrlich
It is said that if an investment comes with a 100% guarantee of a yearly return of 12% or higher with absolutely no risk— you will probably never see your capital investment again.
In Israel, it’s common to see advertisements for all kinds of investments. They promise high returns with low risks. They use sophisticated financial jargon and pressure you to act now, claiming that tomorrow will be too late. Let’s examine some of the real estate investments being offered in Israel today.
1. Investment in a Split Apartment in North or South Israel
If you see a print ad that promises “8-11% annual returns on your investments in an apartment near Ben Gurion University in Be’er Sheva ”, it is most likely referring to an illegally split apartment. A seller has created two or more housing units from one apartment without the approval of the municipality. Often, these apartments have been split into three or four tiny units aimed at students. This means an increased rent from a single property, but it is also the key to many problems. If the municipality decides to clamp down on illegally split apartments, the investors may need to pay tens of thousands of shekels in penalties and legal fees. Even if this does not happen, four tenants in one property means that you must collect four lots of rent, potentially meaning you have four non-paying tenants. Even if you decide to hire a broker to manage the property, you will have to pay him each month and if the broker is not straight with you, management can become a nightmare. Therefore, my advice would be to stay away from such investments—they may look and sound exciting at first— but when that dies down, what’s left is a big headache.
2. Investment in Agricultural Land
This kind if investment is often advertised aggressively and refers to land that has been zoned for agricultural purposes. The company that is selling the land will say that the zoning is about to change and then the land can be used for residential purposes, persuading buyers with the vision of building residential units which they can sell for a profit.
Where’s the catch? Firstly, the company that is trying to sell you the land probably just bought it themselves for a tenth of the price they are trying to sell it for; often they plan to make 1,000% profit! Secondly, the plots being sold are very small—125 m2. Sounds like a nice amount of space for a built apartment, but in agricultural terms that is almost nothing. Thirdly, you may have to deal with ichud v’chalukah—a law that gives the municipality the right to take away land that is rezoned to use for public purposes. This means that although you may have purchased 125 m2 you may only be left with 70 m2 after the rezoning.
Let’s say the land is approved for residential building. You own part of the land that will be built on— there are 10 people who jointly own one dunam of land. Together, they plan to build a building with 25 apartments. You now have the rights to 2.5 apartments and must pay for the development of those apartments. The rezoning and building process can take four or five years. Since the actual building does not belong to you, you do not have the rights to the entire worth of those 2.5 completed apartments. After eight years and an investment in the land and the development, you may just even out, but you will certainly not make a large profit.
In the worst case, it may take 15-20 years for the land to be rezoned, or the land may be rezoned for a road or parking lot, giving you absolutely no return on your investment at all.
3. Investment in Houses in the U.S.
I recently saw an ad for houses in Michigan and Ohio. $60,000 for a house with a 10% annual return. Sounds attractive—but usually these houses are run down and in bad neighborhoods, empty or divided up between multiple tenants. They may be in need of extensive renovations just to make them habitable. Many have been bought from foreclosure for much less than the price you are being offered. Sometimes, the companies offering the house will commit to pay rent for the first year. If the company bought a house from the bank for $40,000 and sold it to you for $70,000, the first year’s rent is part of the profit they made from selling the house to you and not from rent! Of course, there are real estate companies doing this that are legitimate, but in general, the ones who try to draw in unsuspecting Israelis are counting on the fact that the buyer will live far away and not really understand what they are buying.
How to make a Sound Investment
The bottom line is that finding a good real estate investment is possible, but don’t fall for crazy hype. Find a good lawyer to look into any deal that you are considering. It’s much better to spend a smaller sum on a lawyer to do due diligence than a large sum on a terrible investment. Using a real estate broker with knowledge in Israeli investments can be a good way to find a safe investment with good returns and no risk, close to home.
Moshe Ehrlich, of Ehrlich Capital, is a licensed real estate broker and has been investing and advising clients in commercial real estate for the past five years. Moshe made Aliyah with his family as a child and has the advantage of being in both the Israeli and American worlds. Moshe strives to provide valuable investment advice and superb customer service, and currently has partnerships to offer in properties in Ramat Beit Shemesh, Tel Aviv, Beer Sheva, Lod, and Givat Zeev.
Ehrlich Capital’s main office is at Shamgar 21 Jerusalem, suite 1504 and the Ramat Beit Shemesh branch is located at Nachal Sorek 21. You can contact Moshe at 050- 551-3221 (for whatsapp 055-725-1483) or email@example.com.