Written and professionally reviewed by the Ailon Financing Solutions team
What is different about financing an investment apartment?
An investment apartment is not financed like a single apartment. According to the limits of the Bank of Israel, the maximum financing rate for the purchase of an investment apartment is up to 50% of the value of the property sold to the bank. The ceiling is not a guarantee of receiving a loan. The bank also examines disposable income, existing liabilities, credit data, asset quality and risk policy.
The practical meaning is that the capital required does not amount to half of the price of the apartment. You need to add purchase tax, a lawyer, brokerage if any, appraisals, renovation, financing costs and a reserve for periods when the income is lower than expected.
The four layers of equity
- Capital for the price of the property: The difference between the purchase price and the mortgage that was actually approved.
- Tax and transaction expenses: Purchase tax, professional services, registration, brokerage and appraisals.
- Preparing the property: Renovation, furniture, repairs and infrastructure connections according to the condition of the apartment.
- reserve: Liquid money for months without a tenant, an unusual repair or a temporary increase in repayment.
Check the tax bPurchase tax calculator and the total budget bPurchase cost calculator. Then enter the finance and rent bThe real estate investment calculator.
The transaction price against the value recognized by the bank
The bank is not required to calculate the financing according to the contract price only. If the appraisal is lower than the price, the financing rate may be derived from the lower value. Such a situation increases the equity that is required near the execution of the transaction.
That is why you should not be satisfied with the calculation of 50% of the advertising price. Before making a commitment, check the contract price, the reasonable value, the terms of the appraisals and the ability to fill in a gap if it arises.
Whether to use an existing property as a source of financing
A lien on an existing property may provide an additional source of credit, but does not create capital at no cost. It increases the return, exposes another asset to risk and may reduce future financing capacity. The decision is evaluated according to the credit cost, the repayment ratio, the existing mortgage balance, the value of the property and the reserve after the transaction.
It is correct to compare at least three alternatives: use of liquid capital, a mortgage on the purchased property, and credit against an existing property. The comparison is made for the same amount and the same period, and includes total cost and not just initial interest.
Conservative flow before deal approval
Basic flow calculated from the rent minus expenses and financing returns. A conservative scenario reduces the rent, adds a period without a tenant, increases maintenance and checks for a change in interest. If the deal is reasonable only when all the assumptions are optimistic, this is a sign that the margin is small.
An increase in value is not a flow. It may or may not occur, and it does not fund the monthly repayment. That is why it is presented separately and is not used to justify a permanent gap between income and expenditure.
The order of tests before signing
- Classify the purchase for financing and tax purposes.
- Calculates full cost and available equity after reserve.
- You get an initial financing picture based on documents.
- Check appraisals and risks in the property.
- A base scenario and an aggravated scenario are run.
- Coordinate the payment schedule with the sources of money.
- Transfer tax and contract questions to the appropriate professionals.
You can start withThe investor readiness test and continue toFinancial support for real estate investors.
