Why doesn't just everyone mortgage a property from bank, rent it out and make monthly payment to the bank by that rent?

Question

I don't have any background of loans and finance since I am an Engineer, but I have been planning to own a property lately. What I understood from my research is that there are two options to get a new property, if you don't have enough money in your account to actually buy it from the developer/owner. First is getting a loan from the bank by pledging any of my other existing property on the line as a collateral, and then making monthly payments to the bank (including the interest). Second option is to go for mortgage, where the bank will actually buy the property from the developer/owner and then sell it to you (ofcourse at a higher price). Here, I would own the new property under the clause that if I don't submit the due payments on time, then bank has the right to confiscate the property. However, for the latter case, I don't need any collateral at all and can still own a new property by just paying monthly installments.

But if this is possible, then why don't we see everyone doing it? I mean just go for mortgage, rent out the property and do the monthly payments to the bank, and you might still find yourself saving some money at the end of the month. As soon as get done with the complete payments to the bank, I can have a property written to my name where I haven't actually paid a single penny to own it.

But ofcourse, I don't think it would be that easy. So can anyone make comparison between the pros and cons of both, collateral and mortgage?

Answer 1

What stops people from doing this? At least one of:

• the person doesn't have the 10% (or better 25%) downpayment - banks don't lend 100% of the price, and of course there are costs associated with buying a house too (cleaning, painting, fixing problems you find after closing etc.)
• the person doesn't have the income to qualify for the mortgage. Sure, you intend to rent it, but banks don't lend money on intent.
• the person doesn't know how to find renters, screen renters so they end up only with good ones, pester renters who are late with rent, fix damage some renters cause (or just wear and tear) quickly between renters, clear out stuff people leave behind when they skip out after missing a few months of paying, and so on.
• the person knows how to do all that, but doesn't want to do that work for that money in return.
• the person is worried about the months with no rent (for whatever reason) and how they might end up having to cover the mortgage from their other income at times.
• the person is concerned they might overpay for the property or buy in the "wrong" area and not see an overall growth in the value of the property by the time they want to sell it.

I know people who've bought second places, rented them out, covered the mortgage and then some, not minded the work (one for example rented to his sister at slightly less than she would have paid on the open market and both were happy with that deal; another was a handy guy who liked to fix things married to a handy lady who liked to re-upholster furniture and run garage sales), and ended up selling the property for a profit. They're happy. Doesn't mean you would be if you did the same, and most certainly doesn't mean everyone should do it.

You're taking a financial risk (the mortgage is still due if you have no tenant, your tenant isn't paying, or you have to spend a lot on a new roof or whatever), you're tying up your capital and your borrowing power, meaning some other opportunities may arise that you won't be able to take, and you're taking on time-bound work that can be both physically and emotionally difficult. None of that is something everyone should do.

Answer 2

First, your understanding of mortgages is wrong. Banks don’t buy properties and sell them on to their mortgage customers, they lend the customers the money and the customers buy the properties.

Second, you don’t know that the rent you can charge will cover the mortgage and maintenance costs for the next thirty years. And nor does the bank. So a bank won’t lend you 100% of the money to buy a property you intended to rent out — you’ll need to put down a substantial deposit to reduce the risk to the bank. And you may still end up making a loss.

Third, of course, letting a property is work. You need to handle maintenance and repairs, find new tenants from time to time, and so on. You may already have a job and not want another one.

Answer 3

Running a rental property is a business. If you want another set of business obligations and hassles in your life (as discussed in other answers).it can produce income. Whether it would produce more income than investing in the stock market depends on a combination of your skills, your dedication, and luck

Note that another way to invest in real estate is to invest in the companies already buying and managing real estate. A REIT mutual fund gives you diversified participation in that area (reducing the role luck plays) in a simple transaction (reducing the roles of skills and dedication). I have shares in such an index fund as part of the "income" portion of my target investment profile. Like any other investment, including a business (which in turn includes rental), returns vary depending on what else is happening in the economy.

Note also that this is equivalent to "Why doesn't everyone buy a house to live in", if you think of that as renting from yourself. Same issues of being able to afford down payment, being confident that you can meet the mortgage payments plus the upkeep costs/effort plus the taxes plus the insurance plus the repairs, ... Not everyone has the resources to convince a bank that this is a good way to invest the bank's funds. And of course not everyone wants a house, or wants one where they can afford it.

Answer 4

Everyone does. That's why there was a property bubble in 2021-2022, when the question was asked.

What happens is that people figure out they can make free money if they buy properties, so they buy properties. Every time someone sells a property, whoever pays the most money gets to buy it. When there are more people who want to buy properties, then prices go up as they compete with each other to have the highest price.

The Case-Shiller Home Price Index, which measures house prices in the USA, reached its highest ever value, over 300. The index previously reached 200 around the 2006 housing crisis which caused the financial crisis, and 150 in "more normal" times. And now it is 300. Just in case you didn't catch that the first time I said it.

What happens after a bubble? Reality comes calling. There isn't free money - it always comes from somewhere. Now we are seeing mortgage interest rate increases, and house price decreases. People who have mortgages have to pay more every month, and they can't escape from the mortgages by selling the houses, because the house prices are lower. These are still ongoing, so we don't know what will happen at the end. In fact, you can't sell the house unless you can pay the mortgage back (this may be different in Islamic banking). Rent is still quite high, but rent will probably decrease, as well. And then you'll have this house that you can't sell, where you are paying a lot every month because of the mortgage, and not getting much rent. You might go bankrupt if you can't pay. And you will never get the money back, that the house cost.