Suppose I have a property with a certain amount of equity, with the rest on a mortgage, and I want to know if I should sell it or rent it out.
I can think of three scenarios. I'm not considering valuation, devaluation, taxes or fixed costs (closing, etc.) for simplicity.
Scenario 1: I sell the property, pay off the mortgage, and invest the rest (the equity I had built) in a diversified portfolio. I can generally know what my expected long term return is. Of course, the less equity I have, the smaller the investment will grow.
Scenario 2: Fast forward time a few years. I paid off the mortgage, and I'm renting out the property. I can calculate the growth percentage very easily, and compare it to investing in my general portfolio to see if it makes more or less sense to sell or rent out.
Scenario 3: I start renting before having paid off the mortgage. Supposing I can get rent for more than the monthly payment of the mortgage, the renter is basically paying out my mortgage, building equity for me, and I have some money left. This difference is fixed every month, so every month it's a smaller percentage of the equity I have, which is growing every month.
And that's basically it. It doesn't matter how I look at the numbers, I see that the less equity I have, the greater the percentage on my investment I get!
If I could theoretically convince my bank to give me a 100% loan with no upfront payment, and let me pay only the interest, I could get an infinity% return on my investment, since I'm getting a non-zero return on a zero investment.
Of course, this is impossible, but the numbers suggest that the lower the initial payment, the lower the monthly payment, and the less of the rent money that goes to equity, the greater the return on my investment is.
Is this right, What's the flaw in my analysis? Even though the numbers paint a story, I find it a bit counterintuitive that the less money (equity) I have, the larger the return.