You have 500,000 shekels: an investment apartment or a stock portfolio?
An investment apartment can provide rent and appreciation, but requires high capital, maintenance, and taxation. Investing in a stock portfolio provides liquidity and good returns over time, but taxation on profits is higher.
One of the questions when having equity for investment is what is more worthwhile — to purchase a property or to invest in stocks. An investment apartment can provide rent and appreciation, but requires high capital, maintenance, and taxation. A stock portfolio is more liquid and diversified, and it also has taxation on profits.
Let's take as an example an apartment that costs 1.5 million shekels with a monthly rent of 4,500 shekels. The gross yield is about 3.6%, but after expenses, it is lower. A stock portfolio may yield a higher return over time of about 6.5%-7.5% per year, but the volatility is high and there is a 25% tax. In an investment in an additional apartment, there is a tax on rent, but up to an amount of about 5,600 shekels there is an exemption. The tax on rent above the exemption is particularly low, because one can choose a 10% tax track on income. The state encourages income from renting out an apartment and punishes investment in the capital market.
The choice between the two alternatives depends on risk preference, the ability to manage a property, and the expected appreciation of the asset. If the apartment appreciates by about 2%-3% in a year, below the long-term average of about 4% per year, then one reaches a yield of about 6% before expenses and tax. This is a gross yield, and what remains in practice depends on the expenses that detract from it. There is a betterment tax upon sale if it is a second apartment, but usually with proper tax planning, an exemption can be obtained. If the investment is leveraged with a mortgage, then the return on equity is higher.
In the capital market, yields in recent years have been much higher, but looking at decades, yields reach an average of about 7.5% and after tax less than 6% remains. These investments are very close in yield, but very different in nature. The example of 1.5 million shekels is far from the average apartment price in Israel, which stands at 2.435 million, so the gap requires more equity or leverage. In the last year, the apartment price index fell 1.5% and rent rose 3.2%, meaning the gross yield improved from both directions precisely when the asset value was eroded.
500,000 shekels do not buy the apartment in the example, so the calculation includes a mortgage of one million shekels. At an average non-linked interest rate of 4.56% for 25 years, the monthly repayment is about 5,593 shekels, against rent of 4,500 shekels, meaning an addition of about 1,100 shekels per month out of pocket, about 13,000 shekels per year. Leverage increases the movement relative to equity. A rise of 1.5% on an asset of 1.5 million shekels is 22,500 shekels, and it is added entirely to the 500,000 shekels of capital, meaning 4.5% of it. This is a great appreciation potential when leverage also increases the return on equity.
These expenses are what separate the gross from the net. One empty month a year detracts about 8% from rental income, and on top of it sit the house committee, municipal tax (arnona) during empty periods, insurance, repairs and wear and tear, and sometimes management fees. A tenant who pays late or leaves the apartment in a condition that requires renovation moves the result more than a difference of half a percent in the mortgage interest. A stock portfolio with the same 500,000 shekels does not carry a monthly repayment, the tax on it is deferred until realization and 25% is collected on the real profit, and its exposure can be reduced in parts.
