The former Malaga man rose above the defence to head in a cross from Marcelo with just four minutes remaining to deliver the three points to Carlo Ancelotti in his first game in charge of Los Blancos.
Before the 21-year-old struck, the game had looked to be heading for a stalemate after Betis took an early lead through Jorge Molina, which was then cancelled out by Karim Benzema.
The visitors gave a bold first-half performance but slowed down in the second half, allowing Madrid a host of chances, none of which they could convert until Isco finally pounced.
The biggest surprise in Ancelotti's starting line-up was the decision to leave out captain Iker Casillas and start with Diego Lopez, who his predecessor Jose Mourinho had preferred for the latter half of last season, causing a rift within the Real Madrid dressing room and with many sections of the press.
Madrid looked to have taken the lead after two minutes when Damien Perquis diverted a cross from Marcelo into his own net, but the flag had already gone up for offside.
Betis then had their first attempt, a header from Molina which Lopez pushed wide of his near post. Molina was put through on goal again not long after, but Lopez came out of his box to block the shot with his body.
Betis took an unexpected if not entirely undeserved lead just before the quarter hour mark. New signing Cedrick Mabwati, who joined from Numancia in the summer, drove through the midfield and past a couple of Madrid defenders before playing a short pass to Molina, who poked home from a few yards out.
Betis could have doubled the lead moments later, Cedrick again causing the Madrid defence problems, but when the ball fell to Joan Verdu he could only shoot wide.
Perquis scored yet another own goal shortly after, but again the flag was already up.
Benzema failed to get on the end of a cross from Cristiano Ronaldo and the Portuguese then missed two chances in quick succession, one going just wide of the far post, the other over the bar.
It was becoming a case of when rather than if Madrid would equalise, and they did so on 26 minutes, Benzema finishing off a fine move involving Marcelo and Isco by shooting into the far corner.
Betis midfielder Nosa Igiebor gave Madrid a scare 10 minutes before the break, heading a corner off the crossbar.
The second half was less action-packed than the first, as Betis' early adventure subsided and they sought to cancel out Madrid instead.
Ronaldo hit the bar moments after the restart, taking advantage of indecision from the Betis defence, while Benzema later skied a cross from Marcelo which had just gone beyond the reach of Ronaldo.
The Portuguese did not have the best of days and later squandered a one-on-one with Betis keeper Stephan Andersen, firing straight at the Dane from about 12 yards out.
It was substitute Angel Di Maria, however, who missed Madrid's best opening, shooting wide of the near post after he was put through on goal by Ronaldo.
Another substitute, Alvero Morata, also came close to getting the winner, but narrowly failed to connect with a cross from Marcelo.
In the end it was down to Isco, who signed for Madrid for 27million euros the day after Ancelotti was appointed, to help his boss avoid some unwanted questions about his first proper game in charge.