“How much money do I need to buy an apartment?” is a question often asked by clients trying to determine their budget.
There are a number of pieces of the financial puzzle to consider. The first piece is the price of the property. The second piece is financing. An overseas buyer can borrow up to 50% of the purchase price, and an Israeli citizen can borrow up to 75% of the purchase price for their primary residence (and 50% for additional properties).
The third piece of the puzzle is closing costs, which can add up to 13.5% above the purchase price and are paid soon after contract signing. Let’s break down these costs:
- Acquisition tax for overseas buyers (and Israelis buying an investment property) is 8% for the first 5.35m NIS, and then 10% above. For Israeli residents buying a primary residence, the tax starts at 0% for the first 1.8m NIS, and rises.
- Attorney: around 1% plus 17% value added tax (VAT), bringing the total cost to 1.17%.
- Real estate agent: 2%+VAT.
- If you obtain an Israeli mortgage, mortgage brokers charge around 1%+VAT, depending on the mortgage size. In addition, banks usually charge a .25% application fee.
- Cost to convert foreign currency to shekels: reputable forex companies charge .5%.
- In a new project, there is often a 5,000 NIS+VAT registration fee paid to the developer’s attorney.
In addition, when buying on paper, the unpaid portion of the purchase price will be subject to the building construction index, an inflation index which has increased approximately 1.7% per annum for the past decade. However, over the past year, the index has jumped by over 5% due to rising costs for materials. One can limit this risk by front-loading the payments.
Finally, the developer of the project does not provide light fixtures, appliances, furniture or bedroom closets. If you plan to rent out the apartment, you needn’t worry about these costs, as your tenant will bring their own appliances, closets and furniture.
Let’s translate this information into real numbers by studying a recent transaction. My client had up to $550,000 in equity to buy an apartment in a new upscale project in Ramat Beit Shemesh. He is not planning to make aliyah immediately, so the acquisition tax rate starts at 8%.
The client’s question was simply: how many bedrooms can I afford?
In this project, prices for 2-bedroom units start at around 1.8m NIS = $560k, 3-bedroom units start at 2.05m NIS = $640k and 4-bedroom units start at 2.5m NIS = $775,000. For this exercise, we will talk in dollars.
Let’s start with the 4-bedroom unit and, to be conservative, round up the price to $800,000. A 50% mortgage will be $400,000 and the closing costs will total $108,000 (this does not include the building construction index, as we cannot predict the coming years’ rates due to the current volatility), so the buyer will need $508,000 before paying for furniture, bedroom closets, and appliances. One should expect to add another $50,000 to cover these costs, plus another $10k to upgrade the kitchen (although the developer gives nice finishes, our Anglo clients usually upgrade their kitchens). The cash outlay totals almost $570k, which is above our clients’ $550k budget. (In comparison, if the buyer was making aliyah, the cash requirement would be almost halved, as they can borrow 75% and the acquisition tax would be significantly lower.)
We then focused on 3-bedroom apartments. Prices start at $658,000 and our client liked a nicer unit for $700,000. The mortgage will be $350,000 and the closing costs will be $95,000. Adding $60k for the upgraded kitchen, appliances, closets and furniture, the total cash outlay is $505,000. Bingo – we had a good fit!
Once we put together all the pieces of the puzzle, our client understood the transaction’s real numbers, and they moved forward and closed on the purchase of a 3-bedroom apartment.