A mortgage payment leaves your account as one number, so it’s natural to treat it as one thing. A cost.
Half of it isn’t.
Interest is a cost. It buys nothing, it’s gone, and you’d avoid it if you could. Principal is something else entirely — it moves money from your bank account to your balance sheet. Every principal dollar cuts what you owe and adds to what you own.
Book that as a loss and leveraged real estate looks far worse than it is, because you’ve counted your own savings as an expense.
That distinction is the whole reason I think about property returns the way I do.
What I’m actually adding up
Over the life of the investment:
Total return = free cash flow + equity from paying down debt + appreciation
Three sources. Miss one and you’ll misjudge the deal, usually by a lot.
The cap rate, which is where most conversations start, captures none of them properly. It’s net operating income divided by price, calculated before financing — so it’s silent on the largest cheque you write every month.
The uncomfortable part
Take a $500,000 property, 75% financed at 6% over 25 years, held twenty years. The three components come to roughly $808,000 on $125,000 of equity.
Sounds enormous. Then you try to turn it into an annual rate and discover that “annualized” means at least three different things.
Divide the total by the down payment and by twenty years and you get 32%. That describes scale — the money came back about seven and a half times over — but it isn’t a rate you can set beside anything, because the denominator stays fixed at your original cheque while the equity actually at work multiplies.
The same deal compounds at about 10.6%, and returns 13% on an internal rate of return that accounts for when the cash arrives. Those two are the like-for-like comparison.
And here’s the part I’d rather say plainly: the S&P 500 has returned roughly 11% a year over the past twenty years with dividends reinvested. So on the compound measure, the building slightly loses to an index fund. On IRR it’s ahead by about two points — two points that have to cover every tenant call, every vacancy, every roof and every hour of paperwork across two decades.
On those numbers alone it’s questionable whether it’s worth doing. Not terrible. Questionable. I don’t think that should be waved away.
Why I still do it
Because of what sits inside those percentages.
I put in $125,000. Over twenty years the tenants pay down $250,676 of the mortgage — twice my down payment — and I finish holding roughly $662,212 of equity, having collected $270,856 of cash along the way. I funded none of that principal. The rent did.
That’s not a trick of presentation. It’s the mechanism: borrowed money buying an asset that services its own debt, with somebody else retiring the loan. Nobody lends you three dollars for every one of yours to buy units in a broad-market fund, and if they did, no tenant would be making the payments.
So the comparison isn’t really 13% against 11%. It’s 13% earned on a quarter of the purchase price, against 11% earned on money that’s all mine.
The condition attached is patience. The return is back-loaded by construction — year one throws off a fraction of what year twenty does — so it only works if the building can carry itself long enough for any of it to arrive.
That’s my take, not a rule. Plenty of people do this differently.
The full version, with the year-by-year numbers and every source: https://www.yougotthiswealth.com/blog/real-estate-total-return-canada/?utm_source=substack&utm_medium=email&utm_campaign=brief_2026_09_16&utm_content=canonical
Sources: CBRE Canada Q2 2026; Official Data Foundation, S&P 500 returns 2006–2026.
If you’d rather see how investment properties tie into your household finances than on a worked example, that’s the thing I’ve been building — https://app.yougotthiswealth.com/auth?utm_source=substack&utm_medium=email&utm_campaign=brief_2026_09_16&utm_content=soft_cta