Is an Investment Property the Most Suitable Investment Vehicle for Us?
This article is for anyone thinking about buying a property as an investment. We want to lay out the full range of arguments for and against buying real estate as an investment vehicle. We do this because we believe that investing in real estate, like any other vehicle, has its pros and cons — and that it isn't necessarily the right investment for every household, common as it is.
Real estate's reputation as an investment vehicle is rock solid: we're all familiar with the dramatic rise in housing prices since the early 2000s, and most of us believe it's a good way to grow our capital significantly. On top of that, given the current pace of population growth and density, a property is seen as a product with high, inelastic demand — meaning it'll be easy to rent out.
That said, every coin has two sides. Extra costs and expenses can wipe out the return and even turn it into a loss. Like any investment, real estate isn't free of risks and problems. And because the investment options out there are so many and so varied, it's only fair to ask why we'd invest in real estate over other products.
How do you decide whether an investment belongs in your portfolio?
Buying real estate, provident funds for investment, savings policies, shares and ETFs (exchange-traded funds), real estate abroad, and so on are all different investment vehicles. Each has its pros and cons, and we need to figure out whether it makes sense to include them in our portfolio.
Usually the arguments for and against each type of investment focus on its return or its risk — but those aren't the only factors. There are others you have to weigh when sizing up whether an investment is worth it.
- Return — the profit the investment generates relative to the amount invested, including current income (rent, dividends, interest) and capital appreciation.
- Risk — the chance of loss or swings in the investment's value, driven by market conditions, economic factors, and the asset's own characteristics.
- Marketability — the ability to swap one asset for another of the same type — that is, to sell what you hold and buy an alternative easily and quickly.
- Liquidity — how fast the asset can be turned into cash without moving its price much.
- Transaction setup costs and entry barriers — the costs and resources needed to get into the investment, including commissions, a minimum down payment, and professional services.
- Operational complexity — the effort, time, and ongoing management it takes to maintain the investment after you buy.
- Taxation — the tax burden on investment gains, including capital gains tax, income tax, and transaction-related taxes.
- Capital (growth) vs income (cash-flow) investment — whether the profit comes mainly from capital appreciation (growth) or from ongoing income (cash flow).
- Knowledge Required to identify an asset — the expertise and information it takes to spot and pick a successful investment.
- Leverage capacity — whether you can finance the investment with a loan or credit, boosting your exposure and potential return relative to the down payment.
Comparison table of common investment products
As an example, we've put together a comparison table of common investment products. It lays out the various parameters for each type of investment, to help you decide whether a given one is a fit for your portfolio.
| Parameter | Real estate in Israel | Real estate abroad | Shares | Bonds | Provident fund for investment |
|---|---|---|---|---|---|
| Return | Low-medium (low rental yield and medium capital appreciation) | High (high rental yields in certain countries) | High (potential for significant capital gains) | Low-medium (fixed interest rate) | Ranges from low to high - depending on the investment track. High management fees charged by managing institutions hurt the return |
| Risk | Medium (relative stability, dependence on a single tenant) | Very high (currency risk, foreign regulation, distance, lack of experience in a foreign market, investing through intermediaries) | High (high volatility) | Low (especially government bonds) | Medium (track-dependent, regulated) |
| Marketability | Not marketable | Not marketable | High (can buy, sell, and exchange assets easily) | High (can buy, sell, and exchange assets easily) | Very high (switching between investment tracks is not a taxable event) |
| Liquidity | Very low (months to sale) | Very low (months to sale, plus additional complexity in remote selling) | Very high (immediate sale) | Very high (immediate sale) | High (withdrawal within a few days) |
| Setup costs and entry barriers | Very high (down payment, purchase tax, attorney, real estate valuer) | Very high (+ travel, local advisors, foreign bank account) | Low (small commissions, low amounts) | Low (similar to shares) | Very low (no minimum, simple opening) |
| Operational complexity | High (tenants, maintenance, bureaucracy) | Very high (remote management, dependence on a management company) | Low (completely passive) | Low (completely passive) | Very low (professional management, no involvement) |
| Taxation | Complex (purchase tax, betterment tax, rental income tax) | Very complex (double taxation, tax treaties, reporting in two countries) | 25% on capital gains and dividends | 15%-25% on gains | Tax deferral is possible; switching investment tracks is not a taxable event |
| Investment character | Combined (rental = income, sale = capital growth) | Combined (usually emphasis on income) | Mainly capital growth (dividends = income) | Mainly income (fixed coupons) | Capital growth (long-term accumulation) |
| Knowledge Required | Medium-high (familiarity with neighborhoods, trends, property inspection) | Very high (foreign market, regulation, reliable partners) | Medium (financial statement analysis, sector understanding) | Low-medium (credit ratings and duration) | Low (choosing a risk track only) |
| Leverage capacity | Very high (mortgage up to 75%, low interest rates) | Usually not. But depends on country/residency | Low-medium (limited margin, high risk) | Low (not customary for private investors) | Yes, it is possible to take a loan against the provident fund. |
Table: Comparison of common investment vehicles by key parameters. The data is general and may vary according to market conditions and personal circumstances.
Comparing Investment Options
Scale 1–5: higher score = more favorable for the investor
Considerations for choosing investment vehicles
Now that we've gone through the various parameters that define each investment vehicle, the natural question is: how do I choose the right one for me? There's no one-size-fits-all answer — it depends on your personal financial situation, your goals, your investment horizon, and how much risk you're willing to take. Below are several considerations and practical examples to help you match investment vehicles to your own situation.
1. The household's cash flow situation
If your cash flow is positive and stable — you don't need current income from your investments (such as rent, bond coupons, or dividends). In that case, it's worth skipping income investments in favor of capital-growth ones that focus on long-term appreciation, such as growth shares or a provident fund for investment.
If your cash flow is low or unstable — be wary of committing to investment vehicles that could pile on more obligations (such as a mortgage on an investment property with a high monthly payment). In that case, you're better off with investments that carry no ongoing obligations.
2. Expected need for capital
If you'll need significant capital soon (say, to buy a home, pay for a wedding, or cover tuition), choose low-risk, high-liquidity vehicles such as government bonds or deposits. Steer clear of volatile shares or real estate that could be down exactly when you need to sell.
3. Portfolio diversification and liquidity
If you already hold real-estate assets — it's important to balance your portfolio with more liquid vehicles such as shares, bonds, or a provident fund. That way you can get your hands on cash quickly in an emergency, without being forced to sell an asset under time pressure at a low price.
4. Market exposure and geographical diversification
If you're worried about financial instability in a particular market (say, the Israeli real-estate market or the local stock exchange), it's worth balancing your portfolio with assets in other markets. That can include shares abroad, real estate abroad, or index-tracking funds on international indices.
5. Growth and capital-building goals
If you want to grow your capital quickly — consider high-return investments, keeping in mind that they come with higher risk. These include shares, leveraged real estate, and alternative investments. Just make sure you can absorb potential losses in the short term.
6. Quick matching table
The table below sums up the considerations above and suggests how to match your personal situation to the right investment vehicles. Keep in mind that this is a starting point for your thinking, not a blanket recommendation — every investor has unique circumstances worth examining in depth.
| Situation / Need | Recommended vehicles | Vehicles to avoid or reconsider |
|---|---|---|
| Positive and stable cash flow allowing more risk | Shares, real estate abroad | Bonds (lower risk with lower returns) |
| Low / unstable cash flow | Bonds, provident fund | Leveraged real estate with a high mortgage or other illiquid assets |
| Need for capital soon | Government bonds, bank deposits | Shares, real estate |
| Already holding Israeli real estate | Shares, bonds, provident fund | Additional real estate in Israel (due to investment-property purchase tax) |
| Concern about the local market | Assets abroad, foreign currency | Concentration in a single market |
| Desire for rapid growth | Shares, leveraged real estate | Bonds, deposits |
If you're considering taking out a mortgage for an investment property, use our mortgage calculator to compare different financing scenarios.
Good luck!