You’ve finally invested in real estate in Israel and now you’re ready to earn some money by renting out the property. The following tips can help you protect your investment:
- The rental contract should be drafted by an attorney. It is easy to obtain examples of rental agreements but these standard agreements are often not comprehensive, and generally not specifically written with your own situation in mind.
- In addition to the rent, it is customary for the tenant to pay the municipal taxes, homeowner’s association fees, running expenses of the property, and any expenses connected with the upkeep of the property. The tenant should also pay for insurance for third party liability, fire and theft. Insurance for the structure of the building is paid by the landlord.
- It is to your advantage to collect rent in advance. Contracts can be written to include a clause requiring that rent is paid every three months in advance, every six months, or even a full year in advance. This manner of collecting rent provides more of a protection for you.
- In order to protect your money you should require a security deposit from your tenant to be used in the event that the tenant does not fulfill all his obligations. You can also request a bank guarantee which will cover the cost of the expenses of the apartment during the term of the lease. Additionally, your tenant should obtain two guarantors to guarantee fulfillment of the lease by the tenant. These guarantors should be Israeli residents with means of payment. It is customary to obtain from the tenant a promissory note (“shtar chov”) which can be put into the execution office for collection in the event of breach of contract by the tenant. It is also accepted practice to obtain from the tenant blank checks which can be used to pay any outstanding utility bills after the tenant vacates the apartment.
- The lease should include provisions in the event that the tenant is in breach of the contract and refuses to vacate the apartment. For example, the contract should enable the landlord to shut off the utilities without having to get a court order to do so.
- Utilities should be registered in the name of the tenant for the duration of the lease. That way, if the tenant leaves debts, they are not your debts but rather the debts of the tenant. At the termination of the rental agreement, the utilities can be registered in the name of the new tenant.
- It is important to note in the contract that the purpose of the lease is for residential purposes only and that the property may not be sublet without the consent of the landlord.
- It is the responsibility of the tenant to take care of the apartment and to fix anything that breaks as a result of negligence or a willful act. Anything that breaks as a result of usual wear and tear is the responsibility of the landlord. It is, therefore, important to have a representative in Israel who will take care of anything that needs repair.
- Some of the income earned on rent is exempt from Israeli income tax. The Israeli Income Tax Authorities charges income tax on rent received by a landlord. In residential properties, the first $1000 a month is exempt from income tax. Any amount above $1000 a month is taxable.
A Landlord may choose from several methods of calculating the tax. You should have your accountant crunch the numbers in order to see which method is best in your situation.
Rents on commercial properties are taxed at a rate of 30% of the income (including the first $900 a month), minus recognized deductible expenses.
The above is of course subject to change and an Israeli accountant should be consulted about your liability for income tax as a result of renting out your property.