Unusual real estate market with seemingly huge rental returns
I would not claim to be a personal expert in rental property. I do have friends and family and acquaintances who run rental units for additional income and/or make a full time living at the rental business.  As JoeTaxpayer points out, rentals are a cash-eating business. You need to have enough liquid funds to endure uncertainty with maintenance and vacancy costs. Often a leveraged rental will show high ROI or CAGR, but that must be balanced by your overall risk and liquidity position. I have been told that a good rule-of-thumb is to buy in cash with a target ROI of 10%. Of course, YMMV and might not be realistic for your market. It may require you to do some serious bargain hunting, which seems reasonable based on the stagnant market you described. Some examples: The main point here is assessing the risk associated with financing real estate. The ROI (or CAGR) of a financed property looks great, but consider the Net Income. A few expensive maintenance events or vacancies will quickly get you to a negative cash flow. Multiply this by a few rentals and your risk exposure is multiplied too!  Note that i did not factor in appreciation based on OP information. Cash Purchase with some very rough estimates based on OP example Net Income = (RENT - TAX - MAINT) = $17200 per year Finance Purchase rough estimate with 20% down Net Income = (RENT - MORT - TAX - MAINT) = $7500 per year "You are suggesting that a 1% return per month is huge. There are those who suggest that one should assume (a rule of thumb here) that you should assume expenses of half the rent. 6% per year in this case. With a mortgage cost of 4.5% on a rental, you have a forecast profit of 1.5%/yr. that's $4500 on a $300K house. If you buy 20 of these, you'll have a decent income, and a frequently ringing phone. There's no free lunch, rental property can be a full time business. And very lucrative, but it's rarely a slam dunk.  In response to OP's comment - First, while I do claim to know finance fairly well, I don't consider myself at 'expert' level when it comes to real estate.  In the US, the ratio varies quite a bit from area to area. The 1% (rent) you observe may turn out to be great. Actual repair costs low, long term tenants, rising home prices, etc. Improve the 1.5%/yr to 2% on the 20% down, and you have a 10% return, ignoring appreciation and principal paydown. And this example of leverage is how investors seem to get such high returns. The flip side is bad luck with tenants. An eviction can mean no rent for a few months, and damage that needs fixing. A house has a number of long term replacement costs that good numbers often ignore. Roof, exterior painting, all appliances, heat, AC, etc. That's how that ""50% of rent to costs"" rule comes into play." "The way to resolve your dilemma is to consult the price-to-rent ratio of the property. According to smartasset.com: The price-to-rent ratio is a measure of the relative affordability of renting and buying in a given housing market. It is calculated as the ratio of home prices to annual rental rates. So, for example, in a real estate market where, on average, a home worth $200,000 could rent for $1000 a month, the price-rent ratio is 16.67. That’s determined using the formula: $200,000 ÷ (12 x $1,000). Smartasset.com also goes on to give a table comparing different cities' price-to-rent ratio and then claim that the average price-to-rent ratio is currently 19.21. If your price-to-rent ratio is lower than 19.21, then, yes, your rents are more expensive than the average house. Smartasset.com claims that a high price-to-rent ratio is an argument in favor of tenants ""renting"" properties while a low price-to-rent ratio favors people ""buying"" (either to live in the property or to just rent it out to other people). So let's apply the price-to-rent ratio formula towards the properties you just quoted. There's a specific house I could buy for 190 (perhaps even less) that rents for exactly 2000 / month. 190K/(2000 * 12) = 7.92 There's a house for sale asking 400 (been on the market 2 yrs! could probably get for 350) which rents for 2800 /month.  (400K)/(2800*12) = 11.90 (350K)/(2800*12) = 10.42 One can quite easily today buy a house for 180k-270k that would rent out for 1700-2100 / month.  Lower Bound: (180K)/(1700*12) = 8.82 Upper Bound: (270K)/(2100*12) = 10.71 Even so, the rental returns here seem ""ridiculously high"" to me based on other markets I've noticed. Considering how the average price-to-rent ratio is 19.21, and your price-to-rent ratio ranges from 7.92 to 11.90, you are indeed correct. They are indeed ""ridiculously high"". Qualification: I was involved in real estate, and used the price-to-rent ratio to determine how long it would take to ""recover"" a person's investment in the property. Keep in mind that it's not the only thing I care about, and obviously the price-to-rent ratio tends to downplay expenses involved in actually owning properties and trying to deal with periods of vacancy. There's also the problem of taking into account demand as well. According to smartasset.com, Detroit, MI has the lowest price-to-rent ratio (with 6.27), which should suggest that people should buy properties immediately in this city. But that's probably more of a sign of people not wanting to move to Detroit and bid up the prices of properties. EDIT: I should also say that just because the properties are ""ridiculously expensive"" right now doesn't mean you should expect your rents to decrease. Rather, if rents keep staying at their current level, I'd predict that the property values will slowly increase in the future, thereby raising the price-to-rent ratio to 'non-ridiculous' mode."
"BEFORE you invest in a house, make sure you account for all the returns, risks and costs, and compare them to returns, risks and costs of other investments. If you invest 20% of a house's value in another investment, you would also expect a return. You also probably will not have the cost interest for the balance (80% of ???). I have heard people say ""If I have a rental property, I'm just throwing away money - I'll have nothing at the end"" - if you get an interest-only loan, the same will apply, if you pay off your mortgage, you're paying a lot more - you could save/invest the extra, and then you WILL have something at the end (+interest). If you want to compare renting and owning, count the interest against the rental incoming against lost revenue (for however much actual money you've invested so far) + interest.  I've done the sums here (renting vs. owning, which IS slightly different - e.g. my house will never be empty, I pay extra if I want a different house/location). Not counting for the up-front costs (real estate, mortgage establishment etc), and not accounting for house price fluctuations, I get about the same ""return"" on buying as investing at the bank. Houses do, of course, fluctuate, both up and down (risk!), usually up in the long term. On the other hand, many people do lose out big time - some friends of mine invested when the market was high (everyone was investing in houses), they paid off as much as they could, then the price dropped, and they panicked and sold for even less than they bought for. The same applies if, in your example, house prices drop too much, so you owe more than the house is worth - the bank may force you to sell (or offer your own house as collateral). Don't forget about the hidden costs - lawn mowing and snow shoveling were mentioned, insurance, maintenance, etc - and risks like fluctuating rental prices, bad tenants, tenants moving on (loss of incoming, cleaning expenses, tidying up the place etc)...." It actually depends on the services provided. If you're renting through AirBnB, you're likely to provide much more services to the tenants than a traditional rental. It may raise it to a level when it is no longer a passive activity. See here, for starters: Providing substantial services.   If you provide substantial services   that are primarily for your tenant's convenience, such as regular   cleaning, changing linen, or maid service, you report your rental   income and expenses on Schedule C (Form 1040), Profit or Loss From   Business, or Schedule C-EZ (Form 1040), Net Profit From Business. Use   Form 1065, U.S. Return of Partnership Income, if your rental activity   is a partnership (including a partnership with your spouse unless it   is a qualified joint venture). Substantial services do not include the   furnishing of heat and light, cleaning of public areas, trash   collection, etc. For information, see Publication 334, Tax Guide for   Small Business. Also, you may have to pay self-employment tax on your   rental income using Schedule SE (Form 1040), Self-Employment Tax. For   a discussion of “substantial services,” see Real Estate Rents in   Publication 334, chapter 5 REO stand for real estate-owned homes or pre-owned homes that are for sale. Banks and other financial institutions have huge numbers of foreclosures homes that they are offering at very affordable prices. Many people buy investment homes and either keep them as equity or re-sell them with a mark-up and turn a profit. Cheap houses are a good way to invest and earn a return on your money. When on this topic, you'll often hear general rules of thumb. And, similar to the 'only buy stocks if you plan to hold more than X years' there are going to be periods where if you buy at a bottom right before the market turns up, you might be ahead just months after you buy. I'd say that if you buy right, below market, you're ahead the day you close.  Edit - I maintain, and have Schiller providing supporting data) that real estate goes up with inflation in the long term, no more, no less. If the rise were perfectly smooth, correlated 100% month to month, you'd find it would take X years to break even to the costs of buying, commission and closing costs. If we call that cost about 8%, and inflation averages 3, it points to a 3 year holding period to break even. But, since real estate rises and falls in the short term, there are periods longer than 4 years where real estate lags, and very short periods where it rises faster than the costs involved.  The buy vs rent is a layer right on top of this. If you happen upon a time when the rental market is tight, you may buy, see the house decline 10% in value, and when the math is done, actually be ahead of the guy that rented. Your reasoning is backwards. As others have pointed out, you cannot just decide how much you charge irrespective of the market. Let me paraphrase a little economics 101 to underline why you also should not think like this: You can see a rental property like your house (the same reasoning is usually explained with the example of hotel rooms) as a series of perishable goods. Your house represents the potential sale of the January rent (which perishes once January is over), plus the February rent etc. Your approach was to compute the total costs (all fixed and variable costs of owning that house as well as costs associated to renting specifically) and average them over the time period so that you know how much to ask at least. Assuming that you are only looking to rent it out, not sell it or let a family member live there, you can't think like this. Most of those costs that you averaged are what economists call sunk costs. You have already incurred the mortgage costs and they are not affected by your decision to rent or not to rent. These costs are irrelevant to your decision making process. You only need to think about marginal costs: those additional costs that you have when you rent but not when you don't. Look at the market prices for renting similar properties in that region and compare them with your marginal costs. As long as they are higher than your marginal costs, rent it out. This does not mean that you are sure to make profits, but it means that you are sure to make less losses than in your only alternative of not renting. Narratively from the POV of the landlord, the hip retailer ABC offered me a 10 year lease at $1000/month for an empty store front on an empty block.  I agreed.  ABC attracted a large youth market, so other stores filled in the rest of the block in the intervening decade, which I leased for 1200, 1500, 2000, and finally 4000 per month since the foot traffic and demographic is so strong. It's now year 9.  Next year, the lease will likely jump up to the comparable 4000 per square foot.  Their margin in this location probably looks great today.  But the purpose of the quote is to warn you to check the future. "Because the returns are not good. One of the big drivers in Australia is ""negative gearing"": if your investment loses money you can offset losses against your tax on other income. Institutional investors and corporations are in the business of making money: not losing it. Housing market investors are betting that these year to year revenue losses will ultimately be made up in a big capital gain: for which individuals get a huge tax break that is also not available to corporations. Capital gains are not guaranteed. Australia has benefited from 25+ years of economic, employment and wages growth: a result of good government planning, strong corporate governance and a fair slice of luck. If this were to end housing prices would plateau at best and crash at worst. A person who has negative cash flow investments has to sell them urgently if they lose their job. A glut of mortgagee sales and property prices could easily come off 20-30%. Rental yields on residential property in Sydney are about 4% with a capital gain of currently 10% but this has been flat or negative within the last 5 years and no doubt will be again within the next 5. Rental yields for residential property are constrained by mortgage rates: if it significantly cheaper to buy then to rent, why would anyone rent? In contrast, industrial and commercial property gets a yield of about 7% and gets exactly the same capital gain. This is because land is land and if the  price of industrial land doesn't grow at the same rate as the residential land next door eventually one will be converted into the other. Retail rentals are even higher. In addition commercial tenants are responsible for more outgoings and have fewer legal rights than residential tenants. Further, individual residential properties are horribly illiquid and have large transaction costs. While it is possible to bundle them up into property trusts so that units can be sold on the stock exchange it is far more common to do this with office and retail buildings. This is what companies like Westfield and AMP Capital do. Notwithstanding, heavily geared property trusts can get into deep water because of the illiquid nature of property as the failure of Centro  illustrates. That said, there are plenty of companies that develop residential houses and units for sale to owner occupiers or investors because that's where the money is." Will buying a flat which generates $250 rent per month be a good decision? Whether investing in real estate is a good decision or not depends on many things, including the current and future supply/demand for rental units in your particular area. There are many questions on this site about this topic, and another answer to this question which already addresses many risks associated with owning property (though there are also benefits to consider). I just want to focus on this point you raised: I personally think yes, because rent adjusts with inflation and the rise in the price of the property is another benefit. Could this help me become financially independent in the long run since inflation is getting adjusted in it? In my opinion, the fact that rental income general adjusts with 'inflation' is a hedge against some types of economic risk, not an absolute increase in value. First, consider buying a house to live in, instead of to rent:  If you pay off your mortgage before your retire, then you have reduced your cost of accommodations to only utilities, property taxes, and repairs. This gives you a (relatively) known, fixed requirement of cash outflows. If the value of property goes up by the time you retire - it doesn't cost you anything extra, because you already own your house. If the value of property goes down by the time you retire, then you don't save anything, because you already own your house. If you instead rent your whole life, and save money each month (instead of paying off a mortgage), then when you retire, you will have a larger amount of savings which you can use to pay your monthly rental costs each month. By the time you retire, your cost of accommodations will be the market price for rent at that time. If the value of property goes up by the time you retire - you will have to pay more on rent. If the value of property goes down by the time you retire, you will save money on rent. You will have larger savings, but your cash outflow will be a little bit less certain, because you don't know what the market price for rent will be. You can see that, because you need to put a roof over your own head, just by existing you bear risk of the cost of property rising. So, buying your own home can be a hedge against that risk. This is called a 'natural hedge', where two competing risks can mitigate each-other just by existing. This doesn't mean buying a house is always the right thing to do, it is just one piece of the puzzle to comparing the two alternatives [see many other threads on buying vs renting on this site, or on google]. Now, consider buying a house to rent out to other people:  In the extreme scenario, assume that you do everything you can to buy as much property as possible. Maybe by the time you retire, you own a small apartment building with 11 units, where you live in one of them (as an example), and you have no other savings. Before, owning your own home was, among other pros and cons, a natural hedge against the risk of your own personal cost of accommodations going up. But now, the risk of your many rental units is far greater than the risk of your own personal accommodations. That is, if rent goes up by $100 after you retire, your rental income goes up by $1,000, and your personal cost of accommodations only goes up by $100. If rent goes down by $50 after you retire, your rental income goes down by $500, and your personal cost of accommodations only goes down by $50. You can see that only investing in rental properties puts you at great risk of fluctuations in the rental market. This risk is larger than if you simply bought your own home, because at least in that case, you are guaranteeing your cost of accommodations, which you know you will need to pay one way or another. This is why most investment advice suggests that you diversify your investment portfolio. That means buying some stocks, some bonds, etc.. If you invest to heavily in a single thing, then you bear huge risks for that particular market. In the case of property, each investment is so large that you are often 'undiversified' if you invest heavily in it (you can't just buy a house $100 at a time, like you could a stock or bond). Of course, my above examples are very simplified. I am only trying to suggest the underlying principle, not the full complexities of the real estate market. Note also that there are many types of investments which typically adjust with inflation / cost of living; real estate is only one of them.