Will an investment property beat keeping my cash in the bank?
Property vs savings calculator
Buying it means giving up the interest the cash would have earned sitting still. Here is the yearly growth it needs just to draw level, once purchase costs, loan interest, rates and selling costs have all had their turn.
Figures and method reviewed · How we calculate
To match 5.0% in savings, this property must gain
5.49% a year
The property has to gain 5.49% a year to match a 5% savings account over 10 years.
- Savings after 10 years
- $1,647,009
- The property
- $1,495,499
- Property behind by
- $151,510
Your numbers
What each option is worth as you go
Each line is what you would walk away with if you sold up that month, after selling costs and after clearing the loan. The property starts below what you put in because buying and selling costs are real money.
The property never overtakes the savings account within this period. Over the period you feed it $445,079 in top-ups.
If growth turns out differently
Show the numbers
| Growth | Property | Savings | Difference |
|---|---|---|---|
| 0% | $269,155 | $1,647,009 | -$1,377,855 |
| 1% | $473,168 | $1,647,009 | -$1,173,841 |
| 2% | $696,194 | $1,647,009 | -$950,815 |
| 3% | $939,792 | $1,647,009 | -$707,218 |
| 4% | $1,205,631 | $1,647,009 | -$441,378 |
| 5% | $1,495,499 | $1,647,009 | -$151,510 |
| 6% | $1,811,308 | $1,647,009 | +$164,298 |
| 7% | $2,155,100 | $1,647,009 | +$508,091 |
| 8% | $2,529,059 | $1,647,009 | +$882,049 |
| 9% | $2,935,514 | $1,647,009 | +$1,288,505 |
| 10% | $3,376,953 | $1,647,009 | +$1,729,943 |
Where the money goes
| Item | Effect | Amount | Running total |
|---|---|---|---|
| Your cash | $1,000,000 | ||
| Purchase costs | -$100,000 | $900,000 | |
| Rent collected | +$573,194 | $1,473,194 | |
| Letting fees | -$34,392 | $1,438,802 | |
| Rates, insurance, upkeep | -$268,881 | $1,169,921 | |
| Loan interest | -$715,000 | $454,921 | |
| Capital growth | +$1,257,789 | $1,712,710 | |
| Selling costs | -$81,445 | $1,631,266 | |
| Interest on interim cash | -$135,766 | $1,495,499 | |
| What you walk away with | $1,495,499 |
Assumptions and costsloan, fees, growth rates
How to read the result
The big number is the break-even capital growth: how much the property has to rise in value each year for buying it to leave you exactly as well off as leaving the same cash in a savings account. Below that rate the savings account wins, above it the property does.
It already counts everything that is knowable: purchase costs, loan interest, rent after vacancy and management, holding costs, and the costs of selling at the end. Growth is the only input left to judgement, which is why the answer is expressed as growth.
A worked example
The calculator starts with $1,000,000 of cash and a $2,000,000 property, against a savings account paying 5% for 10 years.
- Getting in. Purchase costs of 5%, $100,000, come out of your cash, leaving a $900,000 deposit. The loan is therefore $1,100,000, not $1,000,000, which is the detail most often missed when this is worked out by hand.
- Year one. Rent of $1,000 a week for 50 weeks brings in $50,000. Management at 6% takes $3,000, holding costs such as rates, insurance and repairs at 1.2% of the price take $24,000, and interest-only repayments at 6.5% take $71,500. That leaves a shortfall of $48,500 for the year, which you top up from elsewhere.
- The alternative. The same $1,000,000 in savings grows to $1,647,009 over 10 years.
The gross yield is 2.6% against a 6.5% loan, so the rent cannot carry the purchase on its own and growth has to make up the difference. It needs 5.49% a year just to finish level with the savings account. At 5% a year, the savings account ends $151,510 ahead.
How much depends on growth
| Capital growth | Result after 10 years |
|---|---|
| 0% a year | Savings ahead by $1,377,855 |
| 3% a year | Savings ahead by $707,218 |
| 5% a year | Savings ahead by $151,510 |
| 7% a year | Rental ahead by $508,091 |
Borrowing magnifies the outcome in both directions. A couple of points of growth either side of the break-even moves the result by hundreds of thousands, which is the risk of a leveraged purchase in one table.
Rent and yield
| Weekly rent | Gross yield | Break-even growth |
|---|---|---|
| $800 | 2.1% | 5.92% |
| $1,000 | 2.6% | 5.49% |
| $1,200 | 3.1% | 5.05% |
| $1,500 | 3.9% | 4.34% |
The gross yield, a year's rent as a share of the price, is the quickest test of a rental. When it sits well below the loan rate, the property depends on growth to make money. When it approaches the loan rate, the rent carries more of the load.
Interest rates on both sides
| Savings rate | Break-even growth |
|---|---|
| 3% | 4.30% |
| 4% | 4.88% |
| 5% | 5.49% |
| 6% | 6.12% |
The loan rate raises the bar because the loan is large. The savings rate raises it because that is what the cash would have earned instead, and what each year's shortfall costs to fund. Switching the same loan from interest-only to principal and interest gives a break-even of 5.45%: repayments of principal leave as cash and come back as equity, so they change the cash flow far more than the outcome.
What this calculator leaves out
Tax, entirely. There is no income tax on rent or interest, no deduction for loan interest or expenses, no depreciation and no capital gains tax. In countries where rental losses can be deducted against other income and gains are taxed lightly, the true break-even is lower than the figure here. Where savings interest is taxed at your full rate, the savings account is also worth less than it looks. Treat the result as the before-tax view and take the tax side to an accountant.
Risk, too. A savings account pays roughly what it says. A property can fall in value, sit empty for longer than planned, or need a new roof, and it cannot be sold in an afternoon. Two options that break even on paper are not the same bet.
How it is calculated
- Purchase costs come out of your cash; the rest is the deposit, and the loan covers the price.
- Rent is collected for the weeks the property is let, less management fees. Rent and holding costs grow each year at their stated rates.
- Every month's surplus earns the savings rate until the end, and every shortfall costs it, because that is what the money would otherwise have earned.
- Net worth at every point is the property's value, less selling costs, less the loan still owed, plus the accumulated cash. The savings account compounds monthly at its quoted rate.
- The break-even is the growth rate at which the two finish level, found by search.
Read more about how these calculators work, or compare renting against buying a home to live in.
Questions about this calculator
Does this calculation include tax?
No tax of any kind is modelled. There is no income tax on the interest or the rent, no deduction for loan interest or expenses, no capital gains tax and no depreciation.
Tax rules differ in every country and often by state or province, so building one country’s rules in would make the answer wrong everywhere else. Where loan interest is deductible against other income and capital gains are taxed more lightly than interest, the real breakeven growth is lower than the figure here. Treat this as the cautious end of the range and take the rest to an accountant.
What capital growth rate should I assume?
Nobody knows, which is the honest answer and the reason the tool is built around a breakeven figure rather than a forecast. Instead of guessing a rate and trusting the result, read the breakeven and ask whether this particular property, in this particular street, is likely to beat it.
The sensitivity chart is there for the same reason. If the answer flips between plausible rates, the decision is closer than a single number would suggest.
Do the interest rates stay the same for the whole period?
Yes, and they will not in reality. The savings rate and the loan rate both hold still for the entire period, because nobody can say what either will be in year seven.
The loan rate is the one worth testing. Try a rate one or two points higher and see how far the breakeven moves: for a leveraged purchase it moves a long way, which is itself a useful thing to know before signing.
Are the figures adjusted for inflation?
No. Every amount is nominal, so a balance twenty years out buys less than the same number would today.
Both options are flattered by exactly the same effect, so the comparison between them still holds. It is only the absolute amounts that look larger than they are.
Does it account for the risk of each option?
No, and no calculator can. A savings account returns roughly what it says it will. A property might fall in value, sit empty longer than you planned, or need a new roof, and it cannot be sold in an afternoon.
Borrowing magnifies the outcome in both directions. Two options that break even on paper are not the same bet, which is why the breakeven figure is a starting point for the question rather than an answer to it.
What happens to the rent, and to the months that run at a loss?
Rent left over after costs earns the savings rate until the end of the period. Shortfalls you top up cost the savings rate too, because that is what the money would have earned had you not spent it. That is what makes the savings account a genuine opportunity cost rather than just another line on the chart.
If you would borrow to cover a shortfall rather than fund it from savings, it costs more than this assumes and the real breakeven is higher.
Why does the property line start below what I put in?
Because the chart answers "what would I walk away with if I sold today" at every point, and selling costs money. Purchase costs are gone the moment you buy, and the agent and legal fees on the way out are charged at every month on the chart, not just at the end.
It is the same reason a property needs a few years of growth before it is worth what you paid for it.
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Guides
- 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.
- 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.