The funds donated to Hovevei Zion by Haim Cohen were transferred to the Jewish National Fund, which purchased 120 dunams of land on the southern fringes of Jerusalem. Mekor Chaim was established in 1926 by the religious Zionist Mizrahi movement. It was planned as a village of 20 small farmsteads, and was built along one main street which developed parallel to the railway line. Each family received a two-dunam plot for a house, garden and orchard. In the early days, the families had cow sheds and chicken coops. The building contractor, Mar Haim, was head of the first neighborhood committee. He arranged for the Hamekasher bus company to open a regular route between Mekor Chaim and the city center. Initially, there was one central water tap in the south of the neighborhood. The committee purchased the water from the municipality and placed a watchman at the tap to count how many buckets each family drew. Later, raised water cisterns were built in the garden of each home. During the Arab riots of 1929, the residents took shelter in the synagogue, which was built like a fortress.