Why do banks finance shared construction as mortgages instead of financing it directly and selling the apartments in a building?
"Remember that risk should correlate with returns, in an investment. This means that the more risk you take on, the more return you should be receiving, in an efficient marketplace. That's why putting your money in a savings account might earn you <1% interest right now, but putting money in the stock market averages ~7% returns over time. You should be very careful not to use the word 'interest' when you mean 'returns'. In your post, you are calling capital gains (the increase in value of owned property) 'interest'. This may be understating in your head the level of risk associated with property ownership. In the case of the bank, they are not in the business of home construction. Rather than take that risk themselves, they would rather finance many projects being done by construction companies that know the business. The bank has a high degree of certainty of getting its money back, because its mortgages are protected by the value of the property.  Part of the benefit of an efficient marketplace is that risk gets 'bought' by individuals who want it. This means that people with a low-risk tolerance (such as banks, people on fixed incomes, seniors, etc.) can avoid risk, and people with a high risk tolerance (stock investors, young people with high income, etc.) can take on that risk for higher average returns. The bank's reasoning should remind you of the risk associated with property ownership: increases in value are not a sure thing. If you do not understand the risk of your investment, you cannot be certain that you are being well compensated for that risk. Note also that most countries place regulations on their banks that limit the amount of their funds that can be placed in 'higher risk' asset classes. Typically, this something along the lines of ""If someone places a deposit with your bank, you can only invest that deposit in a low-risk debt-based asset [ie: you can take money deposited by customer A and use it to finance a mortgage for customer B]"". This is done in an attempt to prevent collapse of the financial sector, if risky investments start failing." Grade 'Eh' Bacon answers it well, the issue is risk. To explain further, when a bank issues a loan, that loan comes with certain legal rights. If the bank decided to partner with a construction company, many of those rights to collect would be gone. Debt is treated differently than equity in the legal system. Banks are good at debt, investors are good at equity.  We also oversimplify it by asking why banks don't prefer equity to debt. Some investment banks also like to deal in equity, so it's probably an inaccurate assumption that you start with. "The most succinct answer is ""Banks are in the Money business"". Not construction, not real estate, not any of the other things they may find find themselves sometimes being dragged (foreclosure) or tempted (construction) into. ""Money"" is their core competence, and as good business people they recognize that straying outside that just dilutes their focus." "Assumption - you live in a country like Australia, which has ""recourse"" mortgages. If you buy the apartment and take out a mortgage, the bank doesn't care too much if your apartment gets built or not. If the construction fails, you still owe the bank the money." Why should a bank get into construction specifically? Lots of business opportunities require capital. Conceivably banks could build factories, develop consumer electronics, complete with SpaceX, etc. It's all capital in, profits out, with varying levels of risk and returns. There's nothing special about constructing apartments. The reason banks don't run businesses is because there are plenty of private firms that compete with each other for business. What's the chance that a bank, with all its bureaucracy, can deliver cheaper apartments than an apartment developer? Pretty low in fact, and that's why they would rather lend to an apartment developer rather than building the apartments themselves. Banks are in the business of competing with other banks. The main work they do is to sort out good investments from poor ones. And if they can do that just a bit more efficiently than their competitors, they make big bucks. For example, it might only take a few additional hours to better vet a deal worth millions. Whereas with an apartment building, you wouldn't be able to make that amount of money per hour even if the materials and labor cost you nothing. "Historically, Banks are mandated to take relatively safe risks with their money.  In exchange, they gain a de-facto permission to invent new money.  They have regulations about what mix of assets they are permitted to own.  Real estate speculation will be in a different category than a mortgage to someone with good credit. Second, mortgages with a secured asset are pretty safe almost all of the time.  That person might stop paying their mortgage, but it is secured; when that happens, the bank gets the secured asset (the right-to-apartment or house or what have you). In a sense, the bank loses only if both the person paying the mortgage is less creditworthy than they look, and the secured asset cannot recoup their losses. In comparison, the person paying the mortgage loses if the secured asset cannot recoup their losses. The bank is buffered from risk two fold.  What more, the bank uses the customer to determine what to invest in. Deciding what to do with money is expensive and hard.  By both having a customer willing to put their good credit on the line and doing due diligence on the apartment, the Bank in effect uses you as a consultant who decides this may be a solid investment.  Much of the risk of failure is on you, so you have lots of incentive to make a good choice. If the Bank was instead deciding which apartment where worth buying, who would decide?  A bank employee, whose bonus this year depends on finding a ""great apartment to invest in?"", but the consequence of a bad choice doesn't show up for many years?  The people selling the bank the apartments? Such a business can exist.  There are real estate companies that take money, and invest it in real estate.  Often the borrow money from Banks secured against their existing real estate and use it to build more real estate.  (Notice the bit about it being secured against existing real estate; things go south, Bank gets stuff). The Bank's indirect investment in that apartment in the current system is covered by appraisals, the seller, the mortgage holder, and the system deciding that the mortgage holder is creditworthy. Banks sell risk.  They lend you money, you go off and do something risky with it, and they get a the low-risk return on investment of your loan.  Multiple such low-risk investments provides them with a relatively dependable stream of money, which they give out to their bondholders, deposit account customers, shareholders or what have you. When you take a mortgage out for that, you are buying risk from the bank.  You are more exposed to the failure of the investment than they are.  They get less return if things go really well." Banks should be risk averse by default. They make loans to people and businesses after measuring their ability to repay.  After they approve a big project loan like an apartment building, they don't give all the money to the builders upfront. They give money as progress is made and they make sure the funds are not being used inappropriately. There's no reason they couldn't do all this while owning the project, but that would also open them to lawsuits later on if anything wasn't built to code. By keeping the project at arm's length, they avoid future liability. The core competency of banks is to lend money from depositors and re-lend that money to borrowers.  They do not have the expertise to develop real estate.   They have trouble evening managing foreclosed real estate, such that they have to sell them at a discount. 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.
"It's called leverage. Here's an example from real estate. The underlying appreciation on a house in certain parts of America is something like 7% a year. So if you bought the house ""all cash,"" your return would be something like 7% a year. (Actually, a little more, because of the rent you would be collecting, or saving, if you were the ""renter."") Suppose you buy the same house, 20% down, 80% mortgage. The rent pays for your mortgage, taxes, insurance, etc. like it is supposed to. The house goes up the same 7% each year. But now your rate of return is 35%, that is 7%/20% (your down payment). You get the whole appreciation but put up only 20% of the money. The bank (and your renter) did the rest." It's because financing can fall through, and then the time between offer and closing is wasted. Often buyers will include preapprovals and other evidence of financing eligibility with their offer for this reason. "Economy of scale on one side versus ""person monetizing an illliquid asset"" on the other.  Most multifamily rental buildings are owned by professional real estate investors (as well as individuals growing an empire to become a professional real estate investor whom I will count in this group).  The rental difference between a 2000 Sq foot two bedroom apartment and 2000 Sq foot two bedroom standalone house is not large.  The construction cost per square foot for a standalone house is higher than for a multifamily building (of similar height and materials).  Maintenance calls, landscaping, and new roofs, dealing with permits and inspections, etc are much more efficient with multifamily properties.  On the supply side, most single family rentals tend to be the nonprofessional single property owner because they happen to already own the place, and for one reason or another a. Don't want to sell and b. Want to gain cash flow on the asset." The finance sector is comprised of such enterprises as banks, investment funds, insurance companies and real estate. It is traditionally contrasted with what has been called the 'real economy' because funds created and utilized in this sector produce neither goods, services or fixed capital. The unproductive nature of transactions can easily be seen in such things as real estate. When a company undertakes to build a house or whatever its input goes directly to the labor and goods necessary for such a project. At its worst the financial sector mobilizes funds not just for production but for simple acquisition. Should a company raise the funds to buy an already existing building or the mortgage on same quite obviously nothing is produced. Same building on day one as when it was owned by another.   That, of course, is an extreme example as are corporate takeovers via private equity. In that case the efforts of the financial sector are not just non-productive but are often in fact ''anti-productive'' as they destroy or prevent the use of real factors of production. This 'anti-productive' action was demonstrated on a massive global scale during the last financial crisis.   The basically parasitic nature of the financial sector isn't always so blatant. There are some that argue that its 'services' can be valuable to the real economy. Perhaps, but that has to be determined on a case by case examination **and** while keeping the idea ''is there a better way to do this** in one's mind. "The current mortgaged owner would typically not have the right to sell any portion of the house without approval from the bank. The bank doesn't ""own"" the house through the mortgage, but they do have a series of rights that, in some cases, look similar to ownership.  Remember that a mortgage is just a loan that uses a house as collateral, to reduce the risk to the lender in the event of default. If it was just a personal loan, without collateral, then there would be a much higher risk of default (and therefore the interest rate would be closer to 20% than 2%). But because the loan was taken with collateral, that collateral can't be sold without the bank's permission. If the bank allowed this to happen, then one risk would be exactly as you say - that the mortgagee stops paying the bank, and the bank no longer is able to recover the full value of the loan on selling the remaining 50% of the house owed as collateral." "People borrow money all the time to buy a house. Banks will lend money on one (up to 80%, sometimes more), because they consider it an ""investment."" If you own a large company and want to expand, a bank or bond issuer will first look at what you plan to do with the money, like build new factories, or whatever. Based on their experience, they may judge that you will earn enough money to pay them back. If you don't, they may ""repossess"" your factories and sell them to someone who can pay. As protection, you may be asked to ""mortgage"" your existing company to protect the lenders of the new money. If you don't pay back the money, the lenders get not only your new ""factories"" but also your existing company." "A mortgage is simply a loan backed by a property (and, because it's both very large and very common, covered by some specific laws).  As such, the bank isn't an ""investor"" in your house; it simply is lending you money with the property as collateral.  So, it doesn't get any share of the profit. As long as you sell the house on your own, for more than you owe, most of the time in the US you will get about 92-94% of the sale price back, minus whatever you owe on the house.  The 6-8% you don't get will go to the realtors as commission (unless you sell by owner and don't sell to someone with a buyer's agent), and to pay some of the costs of the sale (how much of those you pay depends on the deal you make with the buyer, but it's common to pay some of them in some areas).  You also will owe taxes (potentially).  You then pay the bank back from that amount. As such, in your example, let's say Bob owes $50k on his house, and sells it with a realtor for $150k.  He gets $150k-0.06*150k = 141k after commission. He then hands the bank a check for the current payoff of the loan: that amount is usually slightly higher than the remaining principal, because you owe the interest that's accrued between [last payment you made] and [day of sale].  Let's say this is a 6% loan, which works out to around 0.5% per month, and it's been half a month since his last payment, so he owes another 0.25%, or another $125.  Some mortgages also may have prepayment penalties (check your note).  In this case there isn't a penalty, so the bank gets $50,125 from the sale.  Usually, the bank would get that immediately at closing - ie, he doesn't get the full $141k or $150k and then write a check, instead the title/closing company gets that amount, and gives the $9k to the realtors, the $50,125 to the bank, and the remaining $90,875 to him.   Don't forget he may also owe income taxes, and sometimes other local taxes, on the profit on the sale. In this case the IRS wouldn't get anything (as it's under $250k), assuming it's a primary residence, but keep that in mind. Also - in the case of a foreclosure, the bank will get some extra money to pay for the costs it incurred in foreclosing on and selling the house." The underlying investment is usually somewhat independent of your mortgage, since it encompasses a bundle of mortgages, and not only yours. It works similarly to a fund. When, you pay off the old mortgage while re-financing, the fund receives the outstanding debt in from of cash, which can be used to buy new mortgages. Construction loans have an entirely set of rules and factors than mortgages and that's hard to reconcile into one instrument.  Also, I'm guessing the bank would be a bit shy about giving a commitment to a home loan before they have any information about how the construction process is going.  There would have to be a ton of contingencies put into mortgage and they probably can't account for everything. Correct. The developers know that and the Fed will still willingly back all these mortgages and the Government is backing all the private insurers who also know their risk is too great in these areas. Private insurers would never insure these homes without the Government backing them.  It is moral hazard gone wild. "Generally, when you own something - you can give it as a collateral for a secured loan. That's how car loans work and that's how mortgages work. Your ""equity"" in the asset is the current fair value of the asset minus all your obligations secured by it. So if you own a property free and clear, you have 100% of its fair market value as your equity. When you mortgage your property, banks will usually use some percentage loan-to-value to ensure they're not giving you more than your equity now or in a foreseeable future. Depending on the type and length of the loan, the LTV percentage varies between 65% and 95%. Before the market crash in 2008 you could even get more than 100% LTV, but not anymore. For investment the LTV will typically be lower than for primary residence, and the rates higher. I don't want to confuse you with down-payments and deposits as it doesn't matter (unless you're in Australia, apparently). So, as an example, assume you have an apartment you rent out, which you own free and clear. Lets assume its current FMV is $100K. You go to a bank and mortgage the apartment for a loan (get a loan secured by that apartment) at 65% LTV (typical for condos for investment). You got yourself $65K to buy another unit free and clear. You now have 2 apartments with FMV $165K, your equity $100K and your liability $65K. Mortgaging the new unit at the same 65% LTV will yield you another $42K loan - you may buy a third unit with this money. Your equity remains constant when you take the loan and invest it in the new purchase, but the FMV of your assets grows, as does the liability secured by them. But while the mortgage has fixed interest rate (usually, not always), the assets appreciate at different rates. Now, lets be optimistic and assume, for the sake of simplicity of the example, that in 2 years, your $100K condo is worth $200K. Voila, you can take another $65K loan on it. The cycle goes on. That's how your grandfather did it." What the comments above say is true, but one more thing is there. FD rates are directly proportional to loan rates. However, banks make money because loan rates will always be higher than FD rates. Failing some answers to my comment, I am going to make some assumptions: Based upon a quick review of this article I'd probably be in the Russell 2000 Value Index Fund (IWN).  Quite simply it gives you broad market exposure so you can be diversified by purchasing one fund. One of the key success factors is starting, not if you pick the best fund at the onset.  I can recall, 20 years ago being amazed (and it was quite a feat) at someone who was able to invest $400 per month.  These days that won't get you to the ROTH maximum and smart 20 somethings are doing just that. No.   The US manufactures more goods than any other country, and only China is close. However, instead of making clothes, the US makes higher value items, like medical equipment. The impression that manufacturing is dead in the US is because of this, and because manufacturing has become highly automated, so there are far fewer manufacturing jobs than there were in the past.