Buying an Intermediate Property: A Stepping Stone or Stumbling Block?

Many young couples in Israel face a dilemma when their savings fall short of their desired home price. For instance, saving NIS 500,000 might be insufficient for a NIS 2.5 million dream apartment, even with a substantial mortgage. This article explores the options: continuing to rent and save, or purchasing a less expensive 'intermediate' property (e.g., for NIS 1.5 million) to rent out while continuing to save for the ultimate goal.

The strategy of buying an intermediate property hinges on the assumption that property values will rise, covering mortgage payments and potentially increasing equity. However, this is not guaranteed. The intermediate property might not appreciate at the same rate as the desired one, and the gap between the two could widen. Additionally, the costs associated with buying and selling property, mortgage interest, and potential rental income taxes must be factored in. Furthermore, purchasing any property changes one's status from 'homeless' to 'homeowner,' potentially forfeiting benefits like government housing assistance or eligibility for discounted housing lotteries.

Calculating the true financial outcome requires a comprehensive analysis beyond just property appreciation. It involves subtracting mortgage interest, transaction costs, maintenance, and periods of vacancy from the sale price, while adding net rental income. This net result must then be compared to the potential growth of the initial savings if invested in the stock market, considering taxes and ongoing savings. The time horizon is crucial; a short-term goal might make intermediate property purchases impractical due to transaction costs, while a longer horizon allows for greater flexibility and potential benefits.

Ultimately, the decision depends on individual circumstances, market conditions, and a realistic assessment of future property values and investment returns. An intermediate property is only beneficial if it genuinely shortens the path to the desired home, rather than becoming a costly detour. The key is to compare the projected net worth after five or ten years in both scenarios: buying an intermediate property versus continuing to rent and invest savings.