At the beginning of my path as a lawyer accompanying developers and investors overseas, I would often try to understand the considerations and rationale behind a purchase. More than once I also expressed my opinion on the matter to clients. “What do you want to do with so much agricultural land?” I once asked a developer who had bought several hundred dunams (a dunam is 1,000 square meters) of agricultural land in an Eastern European country with dreams of building a new town there. More than once I even got into confrontations with developers following questions or doubts I raised about the logic behind the deal or their willingness to pay a price above market for a property or land.
Over time I understood that as long as the deal's data is logical and, from the legal standpoint, the deal before me is good and clean, the developer or investor is welcome to carry out the deal. I stopped trying to educate them.
Not so with the small investors, those who come to invest their savings or their pension in a property they will buy abroad. Here I always make a point of asking the questions, trying to understand exactly what they are looking for, or more precisely what their expectations are (a vacation home/apartment for themselves, or an investment yielding a return, or any other reason). I see myself as accompanying them in the deal beyond its legal aspect. I want them to buy the property that suits their needs and expectations. I want them to succeed.
I was not surprised when Gali and Yossi sat down across from me, a couple in their 50s who had accumulated capital from years of work and had decided to set out on the adventure of buying a property abroad. The children have already grown up, they explained, and they are looking for new challenges for themselves. They do not intend to live in the apartment they buy, and they simply want to start generating a monthly return for themselves, intending afterwards to buy additional apartments/houses, perhaps in the same country and perhaps in several countries, so that in the future, when they retire, they will have a monthly rental income worth several thousand euros. Along the way, they explained, they will also be able to enjoy the appreciation in value of the apartments/houses they bought.
The couple gave the impression of people who know what they want, who have a plan, and apparently had also “done their homework.”
And then they began telling me about the property they had seen, a luxury villa under construction in a villa complex in a small town north of the capital. A villa with a pool, luxurious design and a price - extremely luxurious.
“I know the price sounds high, certainly compared with the prices of the properties we see being marketed here to Israelis in the country,” Yossi tried to explain, “but this is a unique, luxurious complex, and a house with fittings that radiate luxury. Exactly as we like.”
“Excellent,” I said, “but how does it work out in terms of the numbers? Have you checked what the return will be?”
“From what I checked with marketers and acquaintances who bought properties in the country, the return should be 6-7% a year,” he replied.
“That may be true for an apartment in the city, but have you checked what the rent is for similar villas in the area?”
“There is no such thing in the area,” Gali replied immediately. “The project sits entirely on a lake shore. The finishes are at the highest level.”
And I insist: “Precisely because of that you need to understand what the level of rent in the area is. I understand that the house looks like a million dollars and radiates luxury, and I also understand that you would like to live in a house like that, certainly at such a price. The question is whether it pays off and meets the goals you set for yourselves.”
At the end of the meeting Yossi and Gali promised to ‘sleep on it’ and come back to me with a final answer within a few days on whether we move forward to examining the deal, or whether they would look for another property.
This is not the first time I have come across investors who see a dream apartment or villa and get excited (because the price is not comparable to the price in Israel for a similar property), and forget to check the numbers - annual return and rental data in the area. The finishes or the view will not necessarily cause locals to pay higher rent. Finding a tenant for a luxury apartment or villa will always be harder.
Bottom line: stop falling in love with your eyes, start understanding the numbers.
Ah... and before I finish, Yossi and Gali did not buy the luxury villa. They decided to buy a more modest villa in the area at a lower price, affordable for everyone, in a project that, from the check they carried out, could really yield them the return they expect.
Stories are based on real situations, with identifying details changed. Not legal advice.
Translated from the Hebrew original. עברית