Be'er Sheva: Hot spot of the Negev

Be'er Sheva, the capital of the Negev, is also becoming Israel's real estate investment capital. After a period of stagnation, Be'er Sheva has in recent years attracted more and more investors from the center of the country, who are capitalizing on the city's advantages - particularly Ben-Gurion University of the Negev, many of whose students rent apartments that yield their owners handsome returns.

So is Be'er Sheva still an attractive location for small investors?

First, it is important to remember that every high yield comes with risks. From the beginning of this decade until last year, apartment prices in Be'er Sheva declined steadily, cutting ruthlessly into the yields produced by rental properties. The city's distance from Tel Aviv also makes it difficult for owners from the central region to manage and oversee their properties, such that yields from Be'er Sheva properties have to be even higher in order to attract investments.

The busiest rental market is near the university, around the northern section of Reger Boulevard. Students are considered good tenants, as they tend to rent apartments for relatively short periods and they usually pay their rent and move out on time. The university also serves as a kind of insurance policy for apartment owners, as it provides a steady stream of potential tenants.

In addition, many local families live in rental housing, as they cannot afford to buy. This market is busiest in the summer, but even if a landlord is stuck in the middle of the year without a tenant, he can usually find a replacement quite easily.

As an investor, there is an advantage to entering the market in the middle of the year: Purchase prices are lower than in the summer, and most apartments come with a tenant with a rental contract, which saves the buyer the bother of finding a new tenant.

Another advantage of Be'er Sheva is that prices are low compared to the Tel Aviv region. The capital of the Negev offers attractive properties, located near the university and with high demand, for up to NIS 300,000. If you have NIS 500,000, the sky's the limit - but you need to be choosier before spending so much money on an apartment in this city.

Another important advantage is the high gross yield, which is the real cherry on the whipped cream. In order to calculate gross yield from rent, multiply the monthly rent by 12 and divide the result into the apartment's purchase price. Be'er Sheva has many apartments that produce an annual yield of 7% with very little effort. Buyers who invest a lot of effort in their search can achieve yields of 10% or more.

High potential yields, however, also have their risks. Investors must remember that real estate prices in Be'er Sheva in general, and near the university in particular, are currently at their peak. A decline in the value of an apartment in the medium-to-long term is definitely possible. It would thus be wise to check how low prices sank three years ago in order to take the worst-case scenario into consideration. It is also worth calculating several in-between scenarios, to determine how moderate declines in a property's value would affect the viability of the investment.

In addition to the risk of fluctuations in the real estate market, another major risk is maintenance costs. An apartment with a yield that looks attractive on paper could be much less so in practice if the landlord has to make frequent trips to Be'er Sheva at the expense of his own work hours, or has to shell out for expensive repairs. Thus investors must check the property's condition before buying it.

There are also a number of general guidelines, particularly near the university, that could quickly rule out a potential property as being too risky.

Most buildings in Be'er Sheva, especially in neighborhoods near the university, were built in the 1950s. These are long buildings, usually with four stories, including the ground floor. Unlike in other regions in Israel, in Be'er Sheva it is easy to rent a fourth-floor apartment with no elevator to students. When the time comes to sell the apartment, however, finding a buyer might be more difficult.

Apartments on the ground floor have their own set of problems, including plumbing and sewer pipes from the apartments above: The drainage pipes for the whole building run through the walls of the ground-floor apartment.

Once you find an apartment that seems to fit your criteria, look closely at its physical condition. In addition to the standard items, such as the kitchen and bathroom, remember that in these areas of the city, there are two main types of apartment owners: people like yourself, who purchased an apartment as an investment and therefore have minimal motivation to spend much on renovations; and the original owners - usually older couples with little money to invest in their homes.

This factor can be particularly problematic if you discover structural defects whose repair requires the cooperation of other people in the building - such as a leak from an upper floor or extreme neglect in the upkeep of the stairwell. Do not buy an apartment in a building that is in bad shape.

After you locate an apartment that meets all the guidelines, and before you hire a company to examine the apartment for you, check the apartment's status in the Land Registry (Tabu). Ask the buyer for the apartment's block and parcel numbers. If he refuses to give them to you, you have good reason to be suspicious.

Once you have the numbers, hire a real estate lawyer who can check that the apartment's registration is in order. Most apartments in the vicinity of the university are registered with the Israel Lands Administration, and the buildings are not built on ILA land.

A good lawyer will be able to give you information that should not be taken for granted, such as when the current owners purchased the apartment - an important factor in the investment market. Sometimes, especially in the newer buildings, apartments are still registered in the contractor's name, and the transfer of ownership is listed as a caveat only. Sometimes that fact is enough to rule out an apartment you are considering buying, and sometimes this type of registration is of no significance - your lawyer will decide.

The next thing to do is determine the rental potential of the apartment you have found. The easiest way to do this is to go the nearest real estate agency and ask. If you are in the right age bracket, you can even pose as a student, to get a more authentic answer.

You can also advertise the apartment for rent via the Internet even before you buy it, to test the waters for potential tenants. Be sure to include the apartment's address in the ad, which is free, as prospective tenants will decide whether to phone you based on the apartment's exact location. Start with the highest possible price that is still reasonable, and gradually lower the price in the ad, day after day, until the phone never stops ringing. That is the price you should use as a basis for calculating the yield.

All the agents we spoke with while researching this article, without exception, tried to convince buyers that the real bargains were nowhere near the university, but rather in older neighborhoods further away. The target audience for those apartments is not students, but local families.

From an economic perspective, there is some logic in this suggestion: Apartments prices are lower, while rents are similar, which means yields are higher. Still, there are at least two reasons not to listen to the agents and to insist on an apartment near the university.

First, in those older parts of the city where apartment prices are similar to those near the university, the tenants are usually low-income families who are more likely to cause problems that will force the landlord to come to Be'er Sheva far more often than he planned - and in the worst-case scenario, to spend money on hiring a lawyer.

Second, if you want to rent an apartment to a family, you don't have to go all the way to Be'er Sheva. Similarly priced apartments with similar rental markets are available in Kiryat Gat and Kiryat Malakhi, as well as in Tirat Hacarmel and the Krayot suburbs of Haifa. If you are going to forgo the advantages of renting to students, you can do so much closer to Tel Aviv.

The realtors will likely tell you that distance from the university is insignificant, as these days students get around easily on scooters. This may be true, but it has no effect on the profitability of a deal: Students make calculations of their own, and figure it is worth buying a scooter only if the cost is offset by lower rent in an area farther from the university. Moreover, the fact of the matter is that students prefer to live near the university, even if they have a scooter.