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by herczegzsolt
987 days ago
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Mortgage is not a cost accounting wise. Interest is a cost, but capital repayment is already "profit" which the landlord will keep at the end of the loan. Let's say rent is mortgage + 30%. If we assume all the risks and costs (maintenance, insurance, etc) are eating up all of that 30%, they still make a whopping 200%+ profit in the long run. In a fair business relation with 20-30% profit, the landlord would actually loose cash each month until the mortgage is over, with the expectation to realize profit when the property is sold. This rarely happens. |
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Only a small sliver of the first mortgage payment is principal. Most of it is interest and the escrow for the property tax and insurance. By the last mortgage payment most of the interest has been replaced with principal, because by then the landlord is the one who owns the property instead of the bank, so now they get what used to be the interest. The property tax and insurance payments never go away, they just stop going through the bank.
The question you have to ask if you think they're overcharging is, why don't more people do it? If it got higher returns than other investments, why wouldn't people sell their stocks and buy real estate? The answer is that they do, until it doesn't anymore. And then it doesn't anymore, because the price of real estate goes up until investing in real estate no longer has above-market risk-adjusted returns.
We have pretty good numbers on this: Here's a common real estate ETF, it's basically "be a landlord, but as a stock", 10-year average return 5.49%:
https://investor.vanguard.com/investment-products/etfs/profi...
S&P 500 ETF, 10-year average return 11.86%:
https://investor.vanguard.com/investment-products/etfs/profi...
If the landlords are making so much money, how come they're not making so much money?