By Moshe Ehrlich of Ehrlich Capital
I first entered the field of real estate by investing in a few residential properties in Israel. I purchased them, managed them, and then sold them for a nice profit but ultimately, it was a lot of work for a relatively small return. I had wonderful tenants but I still had to manage multiple contracts, stay on top of their electric and water bills as well as property taxes and make sure everyone paid their rent. There were phone calls at least once a week about problems in the properties—no hot water, air conditioner stopped working, etc.—that I had to deal with immediately. So I found that I was working really hard, but not bringing in much of a return for my efforts—and bringing a management company would cut my profits further.
I therefore decided to sell my residential properties, and started exploring other investment options. I examined investing in real estate overseas, such as in the US or England, but found it concerning to have my property so far away; as we say in Birkat Hamazon when blessing a host, “May our assets be successful and close to the city…”
I also looked into stocks and bonds, but found that either the risks were too high, or the returns were too low. Finally, I discovered Israeli commercial real estate.
When you invest in commercial property, you can enjoy around 8% cash on cash return. A good, stable tenant like a kupat cholim or a bank normally signs a closed 10-year contract, so that means you can get a return of more than double what you can make investing in residential property— while dealing with only one tenant with a long-term contract.
Here’s an illustrative example: For each million NIS invested in commercial real estate, the return is 80,000 NIS per year after taxes, or 6,500 NIS per month. By contrast, if you were to invest that million NIS into a 3-room apartment in Ramat Beit Shemesh Gimmel, you would also need to add a 300,000 NIS mortgage—costing about 1,500 NIS per month—plus you’d be receiving only 2,700 NIS per month in rent for the apartment. Overall, you’d receive only 1,200 NIS per month from your million NIS after the mortgage reduction, or about 2% annual return on the whole apartment. The 6,500 NIS per month you could make from investing in a commercial property is a far more attractive investment option.
The only catch is, that commercial properties with high return and good tenants don’t come cheap. The cost starts at about 15 million NIS, so even with bank financing for 50% of the property (which is about the maximum you can get for commercial mortgages), you would need to put down a minimum of 7.5 million NIS to make the purchase, and when I was starting out, I didn’t have quite that much on my own. So I decided to find an honest partner to help me with the initial investment, and together we’d reap the benefits. Since then, we’ve invested together in a number of commercial properties, enjoying the high returns as well as substantial increases in the properties’ value. This is a safe and profitable way to invest if you don’t have enough cash to put down on your own. I’ve since overseen and executed accumulated investments of tens of millions of shekels for customers who wanted to join such deals.
To invest jointly in a commercial property in a safe and legal manner, we open a property organization (iggud m’karke’in), which is a Ltd. company (chevra ba”m), thus founding a firm whose sole objective is to invest in a specific commercial property. Each property should be a completely separate company. All the partners are then listed as owners of a percentage of the company according to the capital they invested. This way, the taxes on income are minimal, and the ownership rights are maximum.
It’s important to make sure that all investments are done in close contact with a lawyer and accountant. Doing this kind of business under the table may cut costs initially, but constitutes a severe financial risk, as it can incur enormous fines and legal problems. Only invest with partners who are committed to keeping everything legal and honest.
The bottom line is, if you’re looking for an investment with a high return, extremely low risk and very few headaches—commercial real estate is the way to go.
Next month, we will give an overview of risky investments being offered in Israel, such as agricultural real estate and illegally split apartments, which may promise high returns, but almost always deliver only heartache and many times, lawsuits and substantial loss of capital.
Moshe Ehrlich, of Ehrlich Capital, is a licensed real estate broker and has been investing and advising clients looking to invest in commercial real estate for the past five years. Born in New York, 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 his clients with 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 (across from Rav Shefa Mall) 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 firstname.lastname@example.org.