Buy a house to rent out or invest? How to compare fairly

The comparison that often goes wrong

Many people compare a property's rental yield with the average stock market return. It seems logical, but it compares apples with oranges. A house involves a mortgage, purchase costs, maintenance, vacancy and selling costs. Investing does not.

How to make the comparison fair

• Start both routes with exactly the same own money: the down payment plus all purchase costs.
• For the house, count rent, vacancy, costs, mortgage interest and repayment.
• At the end, use the sale value minus selling costs and the remaining mortgage.
• For investing, count the return minus fund costs.
• Treat taxes the same way for both routes.

In this example investing is ahead at first, because the purchase costs put the house behind. Over the longer term the house catches up, partly thanks to the mortgage. Other assumptions give a different picture: value growth, rent and costs in particular make a big difference.

What the numbers do not show

• Location and surroundings: access, amenities and how the area develops.
• Rules: rental regulations, permits and taxes can change.
• Risks such as flooding or poor build quality.
• Time and effort: tenants, maintenance and management.
• Concentration: with one house, a large part of your wealth sits in one asset.