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If you buy a property with cash, its fairly easy to make a calculation by totaling your profits over the lifetime of your investment against investing the same amount into an index fund. But how does one make a similar calculation for a property purchased with a mortgage? Let's say I'm buying a house for 1 million and I'm putting down 100k as my initial payment, with 4% interest for the remaining years. What would be the total profitability of the investment presuming a $4000 monthly rental payment and a yearly increase of 3% in property prices?

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    You're ignoring taxes, repair (which can get really expensive), unoccupied time, and the time and expense to evict renters who stop paying and trash the place. – RonJohn Sep 29 at 16:21
  • Anyway, "buying a house for 1 million and I'm putting down 100k as my initial payment, with 4% interest for the remaining years" means that there's an N year mortgage at 4%. Any mortgage calculator will tell you the total interest paid. – RonJohn Sep 29 at 16:22
  • @RonJohn what if I'm living in the property instead? I'm mainly interested in how to factor in the fact that the bank loans me money. Ignore the issue with renters for the sake of this question :) – JonathanReez Supports Monica Sep 29 at 16:29
  • @RonJohn sure, but the bank loans me 900k initially, which is a 10x leverage. How do I take this into account when calculating my profitability? – JonathanReez Supports Monica Sep 29 at 16:30
  • Your question confuses me, since you don't have that $900K in your pocket. It (along with your $100K downpayment) went straight to the previous owner. Or am I grossly misunderstanding you? – RonJohn Sep 29 at 16:35
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A decent rule of thumb for this is to take 50% of the rent proceeds and compare that against the obvious costs of ownership of the home P&I, taxes, insurance, and HOA for a person that has experience as a landlord.

With the numbers you describe, you will have a mortgage of 4,300 and have 2K in revenue. You don't cite the other obvious costs, but if an experienced real estate investor bought this hypothetical property, they should plan to lose 27,600 plus the cost of taxes, insurance, and HOA the first year.

If you're inexperienced a decent rule of thumb is to plan on far less, and maybe zero revenue. With such a plan it is easy for things to go better than expected.

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The only solution I came up with is to create a spreadsheet detailing one's total mortgage expenses and comparing them to investing into index funds instead. From my calculations real estate investment is profitable if you have a 30-year mortgage with a low downpayment, presuming that real estate prices grow at at least 1/3 of index funds growth rates.

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