In 1969, when Margalit was eight years old, the family was sent on a mission to Detroit, Michigan where his father was head of a local Hebrew school. While in high school in Michigan, Erel became a point-guard on a local basketball team. After returning to Israel in 1971, the family settled in Karmiel before moving to Jerusalem. He attended Rene Cassin High School and continued to play basketball there. Recognition of his talent led to an offer to join the Israeli youth team, but he declined in favor of serving in an IDF combat unit. He served in the Golani Brigade's "Orev" unit as an operations officer, reaching the rank of sergeant major. As a reservist in 1982, he fought in the First Lebanon War with the IDF's airborne anti-tank division.