Why are BNBs so Expensive to Rent?

I am often asked why staying at a BNB in Israel is so expensive. It seems hard to understand when you compare staying at a BNB in other countries to an Israeli apartment.

Israel has very few apartment buildings that are company owned and rented as a commercial business. Most of the rental apartments are owned by individuals and rented out to create an income stream and appreciation. Sometimes tenants can stay for many years or just one year. A lease is almost always for a full year. In some cases, owners will sell the the apartment when funds or needed making long term rentals unstable.

In Israel, where in the past, inflation made putting money in the bank a poor option, the popular trend was to buy property, create an income stream and watch the apartment appreciate in value.

The government encouraged this practice and allow Israelis to rent out their apartment tax free, as long as it is under ~5,500 NIS / month.  For example, an Israeli investing two million NIS in the stock market must pay taxes on the profits, the same Israeli investing in an apartment and renting it out pays no income tax as long as it falls below a certain threshold. There are other details that a lawyer or accountant can explain to you.

Today, buying a property and renting it out will not necessarily produce the same ROI as an apartment purchased 20 years ago. Some owners who expected to cover a mortgage with rental income found that with the rise in interest rates, they were unable to increase rent to cover their mortgage and were forced to sell.

Some owners have opted to rent their apartments as short term rentals (STR). It offered them the flexibility to use the apartment for themselves as a vacation or weekend apartment and to cover their fixed expenses, such as Arnona (municipal taxes), Vaad Bayit (condo fees), internet etc.

The authorities saw the situation a little differently. They see STRs as businesses, which compete with hotels, that might have struggled when tourism dropped. The current regulation is that a STR is considered a business and the apartment owner must charge VAT for users who are Israeli. Owners must pay income tax on the revenue and must pay Bituach Leumi as well on their income.

For an apartment owner, trying to equal or produce more income than an annual lease, has to consider that the occupancy rate will not likely be 100% and that there are expenses that can’t be controlled, such air conditioners that can use very large amounts of expensive electricity. Therefore, the owner will quite often set the daily rate for a BNB at significantly higher than the annual lease divided by 365. In addition, STR tenant is less likely to care for an apartment the same way an annual tenant will, thus increasing the wear and tear that occurs with a STR.

Another factor that can reduce the amount of available BNBs is that many residents of buildings do not like owners renting out their units for STR. Residents can get together and vote to change the Takanon (building regulations) and ban STRs in the building. We are seeing this happening more and more. In addition, a recent court decision supported the closing a STR in a residential building.

Put all of these factors together and you will understand why renting a STR in Israel can be quite expensive and I do not recommend investors buy an apartment in Ashkelon for the purpose of making a STR.