ROE of 10% in Kever Benjamin

I have been offered a mashkanta (mortgage) to buy an apt. here. The interest rate is about 3%. The price is about 1500000 sheqel = 450000 dollars. The rent could be around 4000 sheqel/month, that is, a ROIC of 3% on he total capital invested. It is rather unattractive. How much is the ROE? If the loan is for 20 years, the monthly payment roughly pays off the mortgage payment. So for the next 20 years the investment would yield zero for me. Only headaches of collecting the rent, paying taxes, maintenance, etc.  In 2040 the value of my 1000000 investment would be 1500000, that is, roughly, 500000/20 =  profit of  25000 p.a. That is, the ROE is grossly 5%. But the real attraction is the steady increase in the value of the property. If I could sell the 20 y.o. apartment in 2040 for 2000000, that is a profit of 1,000,000 in 20 years = 50000 p.a.  then ROE would be 10% p.a. which is not sensational, but not bad. I shall be able to celebrate my 100th birthday on my own yacht.

If real estate suddenly appreciates in the Sharon, I could sell the apt. and take my chips before the investment matures. The speculation is based in the appreciation of apartments in the Sharon, and that is not assured at all.

Real estate prices are sure to rise in this part of the country. Most building activity in my city is TAMA 38 that is reinforcement of an old building against earthquakes, including renovation and addition of two or three floors. The Major has declared that no more permits will be granted, since the infrastructure is inadequate and the traffic is terrible as it is. In the last four years there were 1333 new building starts in Kever Benjamin, that is 333 per year, about 1000 new inhabitants each year, a population growth of 1%. There is a strong public opinion for stopping the growth and save the eucalyptus trees (I am not kidding) so prices will go up and up.

The ROE Return of Equity, which the only important parameter in this leveraged investment, varies form 5 to 10% per annum according the rate of increase of the prices. Generally, real estate is considered safe and stable, but it is not so. In New York they have capped rents, and in Israel, last year, they had a law to tax third apartments. Ten years ago it was debated in the Knesset that rents should be considered as business income, pay 17% VAT and taxed like profits in the stock exchange (25%). To people that has no place to live in, the whole rental business appears as unjust and exploitative, and while they have the vote, no one's property is safe. The risk is too large.

I must be believing I'll live forever, since I am busy calculating long-term profits.