A question many people ask is, why should one invest in real estate, there are many other investments on offer? Let us examine some of the main reasons. Please note I am coming from the point of view of investments in Israel, there may be variations of these factors in different countries.
The Upwards trend.
The most compelling argument is that in Israel, and generally the world over, the primary long run trend in real estate prices is upwards. In Israel, the main driving factor is the high level of demand as well as a severe shortage of apartments. Each year, approximately 30,000 units enter the market, whilst there is an increase in demand for around 40,000 units. Each year, think how many people get married, each needing a place to live. Especially in religious communities with larger families, the demand is even greater. In addition, each year hundreds of people make aliyah, and also require suitable units. The world is becoming more unstable, many countries are becoming more hostile towards their Jewish population, and the natural destination is Israel. Add to this is foreign investors, looking for their share of the Holy Land, and it’s quite a recipe for high prices. The government tries to come up with solutions and promote building. Yet the pace of construction cannot keep up with the growth of the population. It should also be pointed out that it is highly questionable whether the government really wants to lower prices. A high percentage of tax revenues come from real estate transactions, and despite the talk, they either do not desire to, or lack the ability to make a real impact. Essentially real estate prices in this country are a result of the low supply and high demand.
High Capital gains, and have someone pay off your mortgage.
Let’s say you brought an apartment for 500,000nis, and put down 200,000 of your own money. You borrowed the remaining 300,000 and tenants paid you rent which more than covered your mortgage. After 20 years let’s say the apartment is worth 1,200,000. That means your 200,000 after 20 years rose by 600% (please adjust for inflation). No bank offers such rates of returns. Essentially, when the apartment is rented out, this is financing your ability to make the vast capital gain. Incidentally, this particular aspect is actually unique to real estate.
Rental income.
This usually varies from 3% and can be as much as 10% with certain investments. Some of this income may go to pay a mortgage, and of course some must be left over for a rainy day. Yet whilst these rates may not sound high, compared to what the banks have been offering for the last few years, the smart money should hold some real estate. Other investments may promise higher rates, but are not necessarily as reliable. With real estate, the rent is essentially the short term gain. One should look at property as a long term gain, with the main feature being the increase in value of the property.
Real estate tends to keep ahead of inflation.
Other investments often lose value with inflation. Real estate has a proven track record of outdoing inflation over a certain time period.
One owns a physical asset, and not a paper asset.
This has major advantages in times of trouble. Be aware that generally the higher perceived rate of return, the more risky the investment. With real estate, you physical asset is secure, and you can make something from 3% to even 10% with a split unit in the short term, but the long term gain should far surpass that.
Financing is more readily available.
Real estate is a more secure asset, and thus the banks give better lending rates, than for other borrowing needs. In addition, when ones first property has increased in value, one can borrow from the bank against the equity one holds in the first property, and use it to partially finance a second property.
Less hassle.
Being a long term investment, one is not checking the prices on an hourly basis. One goes into real estate with a long term view. Also, once things are set up and a tenant found, there may be certain hassles every so often, but one is in for a quieter time than with other investments.
Disclaimer: The information provided is intended as informational only, and not as practical advice for any particular transaction. This information may not be reproduced on any website or other published material without the consent of the author.
