Economics of buy-to-let (investment) flats
Surely the yield should be Yield = (Rent - Costs) / Downpayment ? As you want the yield relative to your capital not to the property value. As for the opportunity cost part you could look at the risk free rate of return you could obtain, either through government bonds or bank accounts with some sort of government guarantee (not sure what practical terms are for this in Finland). The management fee is almost 30% of your rent, what does this cover? Is it possible to manage the property yourself, as this would give you a much larger cushion between rent and expenses. Lucky you - here where I live that does not  work, you put money on the table year 1. Anyhow... You HAVE to account for inflation. THat is where the gain comes from. Not investment increase (value of item), but the rent goes higher, while your mortgage does not (you dont own more moeny in 3 years if you keep paying, but likely you take more rent). Over 5 or 10 years the difference may be significant. Also you pay back the mortgage - that is not free cash flow, but it is a growth in your capital base. Still, 1 flat does not make a lot ;) You need 10+, so go on earning more down payments. Seems like a bad deal to me. But before I get to that, a couple of points on your expenses: Onward. You value a property by calculating its CAP rate. This is what you're calculating, except it does NOT include interest like you did -- that's a loan to you, and has no bearing on whether the unit itself is a good investment. It also includes estimations of variable expenses like maintenance and lack of income from vacancies. People argue vociferously on exactly how much to calculate for those. Maintenance will vary by age of the building and how damaging your tenets are. Vacancies vary based on how desirable the location is, how well you've done the maintenance, and how low the rent is. Doing the math based on your numbers, with just the fixed expenses: 8400 rent - 2400 management fee - 100 insurance = 5900/year income. 5900/150000 = 0.0393 = 3.9% CAP rate. And that's not even counting the variable expenses yet! So, what's a good CAP rate? Generally, 10% CAP rate is a good deal, and higher is a great deal. Below that you have to start to get cautious. Some places are worth a lower rate, for instance when the property is new and in a good location. You can do 8% on these. Below 6% CAP rate is usually a really bad investment.  So, unless you're confident you can at least double the rent right off the bat, this is a terrible deal. Another way to think about it You're looking to buy with your finances in just about the best position possible -- a huge down payment and really low interest. Plus you haven't accounted for maintenance, taxes (if any), and vacancies. And still you'd make only a measly 1.2% profit? Would you buy a bond that only pays out 1.2%? No? What about a bond that only pays 1.2%, but also from time to time can force YOU to pay into IT a much larger amount every month? but the flat would be occupied all the time. Famous last words. Are you prepared to have a tenant move in, and stop paying rent? In the US, it can take 6 months to get a tenant out of the apartment and little chance of collecting back rent. I don't know how your laws work, but here, they do not favor the landlord.  The tiny sub 1% profit you make while funding principal payments is a risky proposition. It seems to me that even normal repairs (heater, appliances, etc) will put you to the negative.  On the other hand, if this property has bottomed in terms of price and it rises in value, you may have a nice profit. But if you are just renting it out, it feels like it's too close to call.  By the way, if you can go with a 30yr fixed, I'd suggest that. This would get you to a better cash flow sooner. A shorter mortgage simply means more money to principal each month.  EDIT - as far as equity goes, at the beginning it seems the equity build up is really from your pocket, definitely so by switching from the 30 to the 15. What is your goal? The assumption I may have made is you wish to be a real estate investor with multiple properties. Doing so means saving up for the next down payment. Given the payoff time even if the property ran a high profit, I imagine you'd want to focus on cash flow, minimize the monthly expense, maximize what you can take each month to save for the next down payment. It's your choice, years from now to have one paid property, or 3 properties each with that 30% down payment, and let time be your friend.
"Different stocks balance dividend versus growth differently. Some have relatively flat value but pay a strong dividend -- utility stocks used to be examples of that model, and bonds are in some sense an extreme version of this. Some, especially startups, pay virtually no dividends and aim for growth in the value of the stock. And you can probably find a stock that hits any point between these. This is the ""growth versus income"" spectrum you may have heard mentioned. In the past, investors took more of their return on investment as dividends -- conceptually, a share of the company's net profits for the year reflecting the share's status as partial ownership. If you wanted to do so, you could use the dividend to purchase more shares (via a dividend reinvestment plan or not), but that was up to you. These days, with growth having been strongly hyped, many companies have shifted much more to the growth model and dividends are often relatively wimpy. Essentially, this assumes that everyone wants the money reinvested and will take their profit by having that increase the value of their shares. Of course that's partly because some percentage of stockholders have been demanding growth at all costs, not always realistically.  To address your specific case: No, you probably aren't buying Microsoft because you like its dividend rate; you're buying it in the hope it continues to grow in stock value. But the dividend is a bit of additional return on your investment. And with other companies the tradeoff will be different. That's one of the things, along with how much you believe in the company, that would affect your decision when buying shares in specific companies. (Personally I mostly ignore the whole issue, since I'm in index funds rather than individual stocks. Picking the fund sets my overall preference in terms of growth versus income; after that it's their problem to maintain that balance.)" There are at least three important aspectss missing from your equation. However they come with some uncertainty as one typically cannot tell the future performance. Appreciation of the rental units value. When comparing to the gain of any alternative investment an increasing value of the flat is a gain too. Increase of rent. Rents are typically adjusted either on a regular basis or at least when changing tennants. Calulation with a flat rent over 20 years is therefore way off. Tax deductions due to capital expenditures (i.e. mortgages), expenses for the upkeep and maintenance of the property, conserving and management, and so on. Obviously those are depending on your local legislation. There are multiple other issues to consider of course, e.g. inadvertant vacancy, which would not act in your favour. Let's say that you want to invest in the stock market.  Choosing and investing in only one stock is risky.  You can lower your risk by diversifying, or investing in lots of different stocks.  However, you have some problems with this:  When you buy stocks directly, you have to buy whole shares, and you don't have enough money to buy even one whole share of all the stocks you want to invest in. You aren't even sure which stocks you should buy. A mutual fund solves both of these problems.  You get together with other investors and pool your money together to buy a group of stocks.  That way, your investment is diversified in lots of different stocks without having to have enough money to buy whole shares of each one.  And the mutual fund has a manager that chooses which stocks the fund will invest in, so you don't have to pick. There are lots of mutual funds to choose from, with as many different objectives as you can imagine.  Some invest in large companies, others small; some invest in a certain sector of companies (utilities or health care, for example), some invest in stocks that pay a dividend, others are focused on growth.  Some funds don't invest in stocks at all; they might invest in bonds, real estate, or precious metals.  Some funds are actively managed, where the manager actively buys and sells different stocks in the fund continuously (and takes a fee for his services), and others simply invest in a list of stocks and rarely buy or sell (these are called index funds). To answer your question, yes, the JPMorgan Emerging Markets Equity Fund is a mutual fund.  It is an actively-managed stock mutual fund that attempts to invest in growing companies that do business in countries with rapidly developing economies. "At first, I thought this might be too broad.  There are of course thousands of things that you can do with your money to ""help the economy"".  But I think that there is room to discuss some broad strokes without trying to list a thousand details.   Regular investing (as you are now) helps the economy in that companies obtain money by selling their stock.  They can then use that money to fund expansion, etc.  These things can help the economy permanently.  Of course, they can also use the money to pay executive bonuses, which don't help the economy so much.   Similarly, just spending money does not normally help the economy.  Unless we are in a recession, it is mildly harmful to spend wastefully.  Money that could be going to support long term improvements in production instead is used to buy a luxury that doesn't terribly interest you.  I.e. if you don't want a bigger house or a more luxurious car don't buy it to ""stimulate"" the economy.   Many charitable donations have the same problem.  They help short term consumption somewhere.  And of course the charity starts asking you for more money.  Many charities waste most of a donation trying to get another one from the same person or family.   Sir John Maynard Keynes proposed that the best thing that people could do to help the economy is to invest in things that cause economic activity in turn.  He was mostly talking about things like roads, bridges, and dams that are out of the investing range of most people, so he wanted governments to do it, particularly during a recession.   So we are looking for ways to invest in durable improvements that will support economic activity in the future.  A million dollars is a small amount for many things, but there are some activities that work.  I'm going to list a few examples, but there are certainly others:   Fund microfinance.  Basically loan your million dollars to people who need a small amount of money.  These programs often allow you to determine the initial recipient and then that person determines the next recipient.  A million dollars can finance hundreds if not thousands of these loans.  They may be in the United States or in a developing country.   Set up a scholarship.  My recommendation would be to find an existing scholarship with a few recipients and ask them to add one a year for the million dollars.  A million dollars should typically produce about a scholarship a year in returns after inflation.  Of course, that's just regular inflation.  Education inflation is higher.   Solar prize.  Fund a program that gives out one solar installation every year or five to a family that owns a house, is struggling to pay utilities, and makes a compelling case.  Basically, whenever the investment grows enough to support it, make a new prize.   Buy something that will help other people make money.   This is just six ideas off the top of my head.  The goal here is to create something lasting that will promote economic activity.  So a program that loans money forward.  Or a scholarship or free textbook, particularly in a STEM field.  A small piece of infrastructure that helps people move around to work or spend their money.  Solar is a bit of a stretch here, but it can be justified if you believe that an investment now is an investment in moving towards the future.   The key thing here is to make your money do double duty.  By spending your money during a recession or investing during the rest of the business cycle, you can get some value for your money.  But even better is if that spending has a societal return as well.  Microfinance, scholarships, and infrastructure do that.  There is the immediate spending, plus there is the effect of the spending.  A business is established.  A mind is trained and working at a high income job.  People can move, work, and spend their own money." It would be good to know which country you are in? You are basically on the right track with your last point. Usually when you buy your first property you need to come up with a deposit and then borrow the remainder to have enough to purchase the property. In most cases (and most places) the standard percentage of loan to deposit is 80% to 20%. This is expressed as the Loan to Value Ratio (LVR) which in this case would be 80%. (This being the amount of the loan to the value of the property). Some banks and lenders will lend you more than the 80% but this can usually come with extra costs (in Australia the banks charge an extra percentage when you borrow called Loan Mortgage Insurance (LMI) if you borrow over 80% and the LMI gets more expensive the higher LVR you borrow). Also this practice of lending more than 80% LVR has been tightened up since the GFC. So if you are borrowing 80% of the value of the property you will need to come up with the remainder 20% deposit plus the additional closing costs (taxes - in Australia we have to pay Stamp Duty, solicitor or conveyancing fees, loan application fees, building and pest inspection costs, etc.). If you then want to buy a second property you will need to come up with the same deposit and other closing costs again. Most people cannot afford to do this any time soon, especially since the a good majority of the money they used to save before is now going to pay the mortgage and upkeep of your first property (especially if you used to say live with your parents and now live in the property and not rent it out). So what a lot of people do who want to buy more properties is wait until the LVR of the property has dropped to say below 60%. This is achieved by the value of the property going up in value and the mortgage principle being reduced by your mortgage payments. Once you have enough, as you say, collateral or equity in the first property, then you can refinance your mortgage and use this equity in your existing property and the value of the new property you want to buy to basically borrow 100% of the value of the new property plus closing costs. As long as the LVR of the total borrowings versus the value of both properties remains at or below 80% this should be achievable. You can do this in two ways. Firstly you could refinance your first mortgage and borrow up to 80% LVR again and use this additional funds as your deposit and closing costs for the second property, for which you would then get a second mortgage. The second way is to refinance one mortgage over the two properties. The first method is preferred as your mortgages and properties are separated so if something does go wrong you don't have to sell everything up all at once. This process can be quite slow at the start, as you might have to wait a few years to build up equity in one property (especially if you live in it). But as you accumulate more and more properties it becomes easier and quicker to do as your equity will increase quicker with tenants paying a good portion of your costs if not all (if you are positively geared). Of course you do want to be careful if property prices fall (as this may drastically reduce your equity and increase your total LVR or the LVR on individual properties) and have a safety net. For example, I try to keep my LVR to 60% or below, currently they are below 50%. Properties do in fact devaluate every year for several reasons. One of the reasons is that an old property is not the state of the art and cannot therefore compete with the newest properties, e.g. energy efficiency may be outdated. Second reason is that the property becomes older and thus it is more likely that it requires expensive repairs. I have read somewhere that the real value depreciation of properties if left practically unmaintained (i.e. only the repairs that have to absolutely be performed are made) is about 2% per year, but do not remember the source right now. However, Properties (or more accurately, the tenants) do pay you rent, and it is possible in some cases that rent more than pays for the possible depreciation in value. For example, you could ask whether car leasing is a poor business because cars depreciate in value. Obviously it is not, as the leasing payments more than make for the value depreciation. However, I would not recommend properties as an investment if you have only small sums of money. The reasons are manyfold: So, as a summary: for large investors property investments may be a good idea because large investors have the ability to diversify. However, large investors often use debt leverage so it is a very good question why they don't simply invest in stocks with no debt leverage. For small investors, property investments do not often make sense. If you nevertheless do property investments, remember the diversification, also in time. So, purchase different kinds of properties and purchase them in different times. Putting a million USD to properties at one point of time is very risky, because property prices can rise or fall as time goes on. The real estate industry today is highly exploitative, you're right, but there are currently nothing stopping rents from rising. The major controls in place are are primarily supply constraints, which would lower prices if removed by allowing small, entrepreneurial developers and builders to create new housing more easily. There's also nothing to stop institutional investors from buying up all the housing right now, but those investors are generally not looking for high growth, they're looking for stable returns. Apartment buildings are viewed as similar to blue chip stock portfolios in that regard. Low growth, but also low risk.  The reason capitalism wouldn't lead to monopoly is that it takes work both to gain resources, and to retain them, and the most reliable way to retain them is to reinvest them in the economy. Investment permits new businesses to grow, and new industries to form. It's precisely because the economy isn't limited to a fixed size that wealth of one group doesn't require to poverty of others. New value creation is the core of the theory, and nearly every living person has at least some capital (their body and mind) to begin employing toward value creation.  I recommend reading Henry Hazlitt's Economics in One Lesson if you'd like to understand the theory behind why and how free market capitalism is supposed to work. You seem to underestimate the risk of this deal for the inverstors. A person purchasing a residence is happy to pay $70K instead of $150K now, and the only risk they take is that the construction company fails to build the condo. Whatever happens on the estate market in two years, they still saved the price difference between the price of complete apartments and to-be-build apartments (which by the way may be less than $150K-$70K, since that $150K is the price on a hot market in two years). However, an investor aiming to earn money counts on that the property will actually cost $150K in two years, so he's additionally taking the risk that the estate market may drop. Should that happen, their return on investment will be considerably lower, and it's entirely possible they will make a loss instead of a profit. At this point, this becomes yet another high risk investment option, like financing a startup.