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."
well yes but you should also begin to understand the sectoral component of real estate as a market too in that there can be commercial property;  industrial property and retail property; each of which is capable of having slightly (tho usually similar of course) different returns, yields, and risks.  Whereas you are saving to buy and enter into the residential property market which is different again and valuation principles are often out of kilter here because Buying a home although exposing your asset base to real estate risk isnt usually considered an investment as it is often made on emotional grounds not strict investment criteria. "VNQ only holds ~16% residential REITs. The rest are industrial, office, retail (e.g. shopping malls), specialized (hotels perhaps?) etc.  Thus, VNQ isn't as correlated towards housing as you might have assumed just based on it being about ""real estate."" Second of all, if by ""housing"" you mean that actual houses have gone up appreciably, then you ought to realize that residential REITs seldom hold actual houses. The residential units held tend primarily to be rental apartments. There is a relationship in prices, but not direct." The Motley Fool suggested a good rule of thumb in one of their articles that may be able to help you determine if the market is overheating. Determine the entire cost of rent for a piece of property. So if rent is $300/month, total cost over a year is $3600. Compare that to the cost of buying a similar piece of property by dividing the property price by the rent per year. So if a similar property is $90,000, the ratio would be $90,000/$3600 = 25. If the ratio is < 20, you should consider buying a place. If its > 20, there's a good chance that the market is overheated.  This method is clearly not foolproof, but it helps quantify the irrationality of some individuals who think that buying a place is always better than renting.  P.S. if anyone can find this article for me I'd greatly appreciate it, I've tried to use my google-fu with googling terms with site:fool.com but haven't found the article I remember. The market can only bear so many high-priced mini-mansions. It's like a car dealership trying to sell Lexus and BMWs in a neighborhood where everybody can only afford a base model Honda.  There is plenty of housing, but not enough housing that is affordable. People purchase homes and rent them instead of putting their money into other investment vehicles. This drives up property values and makes it more expensive to buy, which pushes more people into the rental market, making it more expensive to rent.  If you lower the returns people make on their rental homes via increased property taxes, some percentage of those individuals would sell their extra homes and put their money into more lucrative investments. That would increase the number of homes on the market, lower those homes' price, and take people out of the rental market as well. Even after the real estate crash, there are banks that lend money outside of the rules I'll share.  A fully qualified mortgage is typically run at debt to income ratios of 28/36, where 28% of your gross monthly income can apply to the mortgage, property tax, and insurance, and the 36% is the total monthly debt (including the mortgage, etc) plus car loan student loan, etc. It's less about the total loan on the potential than about these ratios. The bank may allow for 75% of monthly rent so until rentals are running at a profit, they may seem a loss, even while just breaking even.  This is just an overview, each bank may vary a bit. "I do not believe there is a strong correlation between CPI (Consumer Price Index) and housing value appreciation. Take, for example, New York City which has the highest CPI in the US.  A great deal of the CPI number is skewed by Manhattan.  One can live in Brooklyn or Queens and avoid some of NYC's high CPI.  I would say that housing appreciation occurs because of the human activity in the area.  That same human activity is what drives the CPI.  There are other contributing factors, like limits on economies of scale.  You simply cannot set down a Super Walmart in much of NYC, so goods are distributed over a larger number of stores.  (Sure, NYC is a port city, but the goods are distributed within the city by trucks.) The San Francisco Bay Area is another high CPI area in the US.  Here, as well, it is the location that draws people.  While NYC is mostly about economic activity, the SF Bay Area is a mix of the draw of a great location and the economic activity that occurs due to the large number of people living there.  I know of a house in Oakland that sold for approximately $350k, in 2004/05.  It was located not too far from the ""Killing Fields,"" as they were known locally.  It was not the worst neighborhood in Oakland, but it was not very far from it.  This was for a shabby, single-story unit which I believe had 5 (maybe 6) rooms.  That is a lot of money for a house that required a lot of attention and was in a bad neighborhood.  I have no idea how the housing market is after the housing bubble, but the higher value areas had the most room to fall and many of them fell hard. Ultimately, it is supply and demand that determines the CPI and housing values.  This supply and demand is determined by the human activity in the area and some practical considerations regarding the area. A final note: If we are talking about a primary residence, it should not necessarily be looked at as an investment.  First and foremost, it is a necessity.  Second, if you need to hire people for the maintenance and/or upgrades, that will eat into your gains.  Contractors are not cheap, especially where they are in high demand.  Finally, the tax incentive is actually not that great.  Sure, you take what you can get, but its impact is relatively marginal." Be very careful about buying property because it has been going up quickly in recent years.  There are some fundamental factors that limit the amount real-estate can appreciate over time.  In a nutshell, the general real-estate market growth is supported by the entry-level property market.  That is, when values are appreciating, people can sell and use the capital gains to buy more valuable property.  This drives up the prices in higher value properties whose owners can use that to purchase more expensive properties and so on and so forth. At some point in a rising market, the entry-level properties start to become hard for entry-level buyers to afford.  The machine of rising prices throughout the market starts grinding to a halt.  This price-level can be calculated by looking at average incomes in an area.  At some percentage of income, people cannot buy into the market without crazy loans and if those become popular, watch out because things can get really ugly.  If you want an example, just look back to the US in 2007-2009 and the nearly apocalyptic financial crisis that ensued. As with most investing, you want to buy low and sell high.  Buying into a hot market is generally not very profitable.  Buying when the market is abnormally low tends to be a more effective strategy. The assumption that house value appreciates 5% per year is unrealistic. Over the very long term, real house prices has stayed approximately constant. A house that is 10 years old today is 11 years old a year after, so this phenomenon of real house prices staying constant applies only to the market as a whole and not to an individual house, unless the individual house is maintained well. One house is an extremely poorly diversified investment. What if the house you buy turns out to have a mold problem? You can lose your investment almost overnight. In contrast to this, it is extremely unlikely that the same could happen on a well-diversified stock portfolio (although it can happen on an individual stock). Thus, if non-leveraged stock portfolio has a nominal return of 8% over the long term, I would demand higher return, say 10%, from a non-leveraged investment to an individual house because of the greater risks. If you have the ability to diversify your real estate investments, a portfolio of diversified real estate investments is safer than a diversified stock portfolio, so I would demand a nominal return of 6% over the long term from such a diversified portfolio. To decide if it's better to buy a house or to live in rental property, you need to gather all of the costs of both options (including the opportunity cost of the capital which you could otherwise invest elsewhere). The real return of buying a house instead of renting it comes from the fact that you do not need to pay rent, not from the fact that house prices tend to appreciate (which they won't do more than inflation over a very long term). For my case, I live in Finland in a special case of near-rental property where you pay 15% of the building cost when moving in (and get the 15% payment back when moving out) and then pay a monthly rent that is lower than the market rent. The property is subsidized by government-provided loans. I have calculated that for my case, living in this property makes more sense than purchasing a market-priced house, but your situation may be different. When purchasing a condo in a university town, it is almost guaranteed that the prices will be inflated as a result.  This is because you are competing not only with single-home, primary residence homeowners, but also with a multitude of investment buyers and landlords who want to purchase a rental property.  Universities are popular rental markets due to their stability (there will always be students looking for a place to live), and as a result the areas attract investors more than other markets. This can work in your favor, however.  If you don't mind sharing your residence with other students, and you don't mind the part time work that being a landlord requires, you can live much cheaper and even make money over the next few years as your roommates pay your bills.  Owning a primary residence rental property also brings a lot of tax benefits because you can claim expenses and depreciation against your income.  This could benefit your father who could be a co-owner and would certainly benefit from the write-offs against his higher tax bracket. The real trick that makes or breaks the experience is finding mature, responsible roommates who will cause the minimum amount of headache.  If this part of the equation is missing, it can lead to distractions from school and even legal worries when you have to think about things like unpaid rent and/or evictions. The idea you present is not uncommon, many have tried it before.  It would be a great step to find landlords in your area and talk to them about lessons learned.  It might cost you a lunch or cup of coffee but it could be the best investment you make. rent it out for a small profit (hopefully make around 3 - 5k a year in profit) Given the median price of a home is ~220K, and you are investing 44K, you are looking to make between a 6 and 11% profit.  I would not classify this as small in the current interest rate environment. One aspect you are overlooking is risk.  What happens if a furnace breaks, or someone does not pay their rent?  While some may advocate borrowing money to buy rental real estate all reasonable advisers advocate having sufficient reserves to cover emergencies.   Keep in mind that 33% of homes in the US do not have a mortgage and some investment experts advocate only buying rentals with cash. Currently owning rental property is a really good deal for the owners for a variety of reasons.  Markets are cyclical and I bet things will not be as attractive in 10 years or so.   Keep in mind you are borrowing ~220K or whatever you intend to pay.  You are on the hook for that.  A bank may not lend you the money, and even if they do a couple of false steps could leave you in a deep hole.  That should at least give you pause. All that being said, I really like your gumption.  I like your desire and perhaps you should set a goal of owning your first rental property for 5 years from now.  In the mean time study and become educated in the business.  Perhaps get your real estate license.  Perhaps go to work for a property management company to learn the ins and outs of their business.  I would do this even if I had a better paying full time job. Based on what you've said I think buying a rental is risky for you. It looks like you heard that renting a house is profitable and Zillow supported that idea. Vague advice + a website designed for selling + large amounts of money = risky at the very least. That doesn't mean that rental property is super risky it just means that you haven't invested any time into learning the risks and how you can manage them. Once you learn that your risk reduces dramatically. In general though I feel that rental property has a good risk/reward ratio. If you're willing to put in the time and energy to learn the business then I'd encourage you to buy property. If you're not willing to do that then rentals will always be a crap shoot. One thing about investing in rental property is you have the ability to have more impact on your investment than you do dropping money in the stock market which is good and bad. Typically in a developed / developing economy if there is high overall inflation, then it means everything will rise including property/real estate. The cost of funds is low [too much money chasing too few goods causes inflation] which means more companies borrow money cheaply and more business florish and hence the stock market should also go up.   So if you are looking at a situation where industry is doing badly and the inflation is high, then it means there are larger issues. The best bet would be Gold and parking the funds into other currency. "There has been almost no inflation during 2014-2015. do you mean rental price inflation or overall inflation? Housing price and by extension rental price inflation is usually much higher than the ""basket of goods"" CPI or RPI numbers. The low levels of these two indicators are mostly caused by technology, oil and food price deflation (at least in the US, UK, and Europe) outweighing other inflation. My slightly biased (I've just moved to a new rental property) and entirely London-centric empirical evidence suggests that 5% is quite a low figure for house price inflation and therefore also rental inflation. Your landlord will also try to get as much for the property as he can so look around for similar properties and work out what a market rate might be (within tolerances of course) and negotiate based on that. For the new asked price I could get a similar apartment in similar condos with gym and pool (this one doesn't have anything) or in a way better area (closer to supermarkets, restaurants, etc). suggests that you have already started on this and that the landlord is trying to artificially inflate rents. If you can afford the extra 5% and these similar but better appointed places are at that price why not move? It sounds like the reason that you are looking to stay on in this apartment is either familiarity or loyalty to the landlord so it may be time to benefit from a move." 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.