Wednesday, June 11, 2014

Real Estate on Purpose

Two weeks ago, I published a groundbreaking blog entitled Real Accidental Estate. In this posting, I proved beyond any doubt that I have no idea why real estate prices are the way they are. My case was so convincing because it used extensive conjecture about how much my apartment in Modiin would rent for.

This blog left us with two unanswered questions.

#1: Are there real estate investments in Israel which do not appear to be over-priced?

To answer this question, I conducted a man-on-the-street interview one day during lunch at work. My conclusion is that the answer to this question is: maybe.

One friend at work told me about beach front property that he bought in Haifa in which the rental yield is 10%. He thinks the reason the properties are undervalued is that the maintenance fees are fantastically high (10 shekel per square meter!) which makes only the smallest apartments affordable. Because they are so small, people tend not to want to buy them for fear that they will outgrow them quickly. However, they are willing to rent them for a few years at a time.

Investment opportunities may very well be out there. If you think you found one, please let me know. I would be happy to provide you an accidental analysis and write about you on my blog. Contact me by posting in the comments or directly by emailing me: donny ‘at’ investingbyaccident ‘dot’ com.

However, more importantly, the blog raised this question:

#2: So what? Shouldn’t I just buy real estate anyway?

This is actually quite an insightful question, and the answer depends on how much money you have and how much you already have invested in real estate.
One of my highly intelligent friends is making aliyah this next summer and astutely observed that his second highest financial risk with aliyah is that he will not be able to afford a home if real estate prices continue to increase at the rates we have seen in recent years (10%+).  

Actually, he is very highly intelligent. I know this because he is the same friend who is hedging his currency risk before aliyah to mitigate his greatest financial risk.

He is looking to buy an apartment in Israel as soon as he sells his house in Canada (“Not America”). However, because prices are so high, he cannot afford to buy an apartment he wants to live in. His highly intelligent solution is to buy an apartment solely as an investment while he rents an apartment to live in.

This approach is highly intelligent and applies to you if you don’t already own property in Israel but want to live here. Had I been highly intelligent when I made aliyah, I would have much more money right now.
Allocation, Allocation, Allocation

If you already own property, it may still be a good idea to invest in real estate even at these prices. Or, it may be a very bad idea. I think it depends on how much money you have and how much you want to allocate to real estate.

We did not address real estate in the Order of Allocation, but the basic principles apply. You do not want to have all of your money in any single type of investment. This may be more obvious when you think about “bonds” and “stocks”, but it is equally true when you think about other types of investments, including real estate.

Although I believe that the real estate market is overvalued, I also believe that I have no idea when (or even if) it will decline. As a result, the best approach is to allocate a portion of your assets to real estate. In the current environment, it would seem prudent to adjust the allocation in consideration of the market appearing to be somewhat overvalued, but I would not drastically alter it.

I think that allocating between 15% and 25% of all of your assets is a highly reasonable target. After writing this last sentence, I computed how much of my assets are allocated in real estate. It came out to about 50%, which could only mean one thing. 

You should do what I say and not what I do.

Or maybe, it means that home prices have become so expensive that many of us are already over-invested in real estate. If that has also happened to you, now would not be the best time to buy more real estate.


  1. Does that mean you are going to rent your house out soon and movie to Haifa to rent out a smaller apartment on the beach near your work?

  2. I get it now.

  3. Good advice. It is scary though. Israel may be facing a real estate bubble that occurred in the US, Spain, Ireland, Iceland...

    1. Indeed... I fear that could be the case. However, you never really know.

  4. Maybe your company can start offering leased housing or apartments to start attracting talent? High tech companies offer leased cars, why not leased housing?

    You are trying hard to recruit talent, why not be creative? Can you influence the execs in Haifa?

    What say you?

    1. An interesting experiment to run. My guess is that it wouldn't be a very big incentive since most people already have places to live.

    2. What about university students or interns?

    3. Large companies generally do that -- also for relocation. They tend also to offer cash in place of the actual place to live so that people can choose which is more convenient.

  5. I think I see good investment properties in the JPost