Does a rental property beat a savings account?
Only if it grows fast enough to cover the gap between its rent and its interest. Here is how fast that is, across yields and loan rates, before tax.
Updated · Figures calculated with the property vs savings calculator
The short answer
Only if it grows fast enough. A $2,000,000 rental bought with $1,000,000 of cash and a 6.5% interest-only loan, let at $1,000 a week, needs to rise by 5.49% a year just to match leaving the $1,000,000 in a 5% savings account for 10 years. That is before tax, after purchase costs, vacancy, management, holding costs and the costs of selling.
The figure that decides most of it is the gap between the property's rental yield and the loan rate. When rent covers far less than the interest, growth has to do almost all the work.
Break-even growth by rent and loan rate
For the same $2,000,000 property and $1,000,000 of cash, against 5% savings, over 10 years. Each column is a weekly rent, with its gross yield underneath:
| Loan rate | $700/wk 1.8% yield | $1,000/wk 2.6% yield | $1,300/wk 3.4% yield | $1,600/wk 4.2% yield | $1,900/wk 4.9% yield |
|---|---|---|---|---|---|
| 4.5% | 5.2% | 4.6% | 3.8% | 3.0% | 2.2% |
| 5.5% | 5.7% | 5.0% | 4.3% | 3.6% | 2.8% |
| 6.5% | 6.1% | 5.5% | 4.8% | 4.1% | 3.3% |
| 7.5% | 6.5% | 5.9% | 5.3% | 4.6% | 3.9% |
| 8.5% | 7.0% | 6.4% | 5.7% | 5.1% | 4.4% |
Each figure links to that scenario in the calculator. Moving right, more rent lowers the bar. Moving down, a dearer loan raises it. Low-yield property in expensive cities, often under 3%, sits at the top-left of the table, where the property has to grow strongly just to stand still against a savings account.
Why yield against the loan rate matters most
Gross yield is a year's rent as a share of the price: $1,000 a week on $2,000,000 is 2.6%. The loan costs 6.5% on everything borrowed. After vacancy, management and holding costs come out, a low-yield property runs at a loss every year, and every dollar of that loss is a dollar that could have been earning interest in the bank.
The property makes up for it only at the end, when it is sold for more than it cost. That is why the answer is expressed as growth: everything else is known on the day you buy.
How much you borrow
| Cash put in | Loan | Break-even growth |
|---|---|---|
| $600,000 | $1,500,000 | 5.73% |
| $1,000,000 | $1,100,000 | 5.49% |
| $1,400,000 | $700,000 | 5.24% |
With the loan rate above what savings pay, borrowing more makes the property harder to justify, not easier, even though each dollar of growth is then earned on less of your own money. Leverage magnifies the outcome in both directions: above the break-even the gains are larger, below it the losses are.
Other things that move it
- Holding costs. Rates, insurance, repairs and fees at 0.8% of the price a year give a break-even of 5.12%; at 1.6% it is 5.85%.
- How long you hold. Over 5 years the property needs 6.32%; over 20 years, 5.04%. Purchase and selling costs weigh most on a short hold.
- Interest-only or principal and interest. Switching the same loan to principal and interest gives 5.45%. Repaying principal changes the monthly cash flow far more than the final outcome, because the money comes back as equity.
Tax changes the picture, in both directions
These figures are before tax. In some countries rental losses can be deducted from other income and capital gains are taxed lightly, which lowers the growth a property needs, sometimes by a lot. Savings interest is usually taxed at your full rate, which makes the savings account worth less than it looks. Both effects favour property for higher earners. They differ so much between countries, and between people, that they are left for an accountant to apply to your situation.
How to test a property
- Take the asking price and a realistic weekly rent from comparable listings.
- Allow for vacancy, management fees and the yearly holding costs.
- Use the loan rate you would actually get, and try a point higher.
- Enter them in the property vs savings calculator and read the break-even.
- Compare it with the long-run growth of similar property in the same area, not the best recent year, and decide whether this one is likely to beat it.
More guides
- How much does a house need to appreciate to beat renting? Less than most people assume when rents are high, and far more when they are not. Here is the break-even growth across a range of rents and mortgage rates, and how to work out your own.
- Is it better to pay cash for a car or finance it? It comes down to one comparison: what your cash would earn against what the loan really costs. Here is how to make it properly, and the two offers that can flip it.
- Should you pay off your mortgage early or invest? Overpaying earns your mortgage rate for certain; investing has to beat it after tax and risk. Here is where the line falls, and what moves it.