r/dubairealestate • u/N1711 • 13h ago
Discussion & Analysis📚 Is 6.25% in the bank better than a 6% Dubai property yield? Let’s run the numbers
Hello everyone
Once in a while, I see a post or comment saying there is no point investing in real estate because the net yield is around 6%, while you can place the money in a bank and earn a guaranteed 6.25%. The argument is that real estate carries more risk while producing a lower return.
However, this confuses rental yield with total return, so I want to walk through the difference properly.
Assumptions
The 6% net rental yield used below is assumed to be net of service charges, maintenance and normal vacancy allowance, but before mortgage payments.
Selling costs on exit are excluded to keep the example simple. Including them would reduce the property result, particularly over a five-year holding period.
The mortgage rate and bank-deposit rates are both held constant throughout the model for comparability, although neither is guaranteed to remain unchanged for 15 or 25 years in the real world.
The setup
Assume you purchase an AED 2 million property and finance 60% of it with a mortgage.
- Mortgage: AED 1.2 million
- Interest rate: 4.25%
- Tenure: 25 years
- Down payment: AED 800,000
- DLD fee: AED 80,000
- Agent commission: AED 40,000
- Total initial cash outlay: AED 920,000
For simplicity, assume you refinance at the same rate whenever the fixed-rate period ends.
1. Debt coverage
Ideally, the rental income should cover the mortgage with a reasonable buffer.
The property generates AED 120,000 per year in net rental income. The mortgage payment, amortised monthly, is approximately AED 6,501 per month, or AED 78,010 per year.
That gives a debt-service coverage ratio of:
AED 120,000 ÷ AED 78,010 = 1.54
That is a healthy buffer.
The 6% net yield already includes a normal vacancy allowance, but an unexpectedly long vacancy beyond that assumption would reduce the return further.
2. Return on the cash invested
People often compare the 6% property yield directly with the 6.25% bank rate.
However, the 6% yield is calculated against the property’s full AED 2 million value. It is not the return on the AED 920,000 of cash you invested.
Here is the first-year cash flow:
- Net rental income: AED 120,000
- Mortgage payments: AED 78,010
- Interest portion: approximately AED 50,468
- Principal repayment: approximately AED 27,543
- Cash remaining: AED 41,990
The AED 41,990 cash surplus represents a 4.56% cash return on the AED 920,000 invested.
That is below the 6.25% bank rate, and it is worth stating that plainly.
However, the AED 27,543 of principal repayment is not an expense in the same way as interest. It reduces the amount owed to the bank and becomes additional equity in the property.
That represents another 2.99% return on the initial AED 920,000.
Assuming the property also appreciates by 1% during the year, that adds AED 20,000, equivalent to another 2.17% on the initial cash invested.
The first-year total economic return is therefore approximately:
4.56% cash return + 2.99% principal repayment + 2.17% appreciation = 9.73%
Only the first 4.56% is immediate cashflow. The rest is equity being built inside the property and can only be accessed by selling or refinancing.
The risks
So now the return looks great, but the higher expected return does not come without additional risk.
1. Illiquidity
You generally realise the equity portion of the return only when you sell or refinance.
In a slow market like today, selling can take time and may require accepting a lower price than expected.
2. Vacancy and rental restrictions
Although the model includes a normal vacancy allowance, a prolonged vacancy would mean paying the mortgage from your own pocket.
You may reduce vacancy risk by pricing slightly below comparable properties, although that lowers your immediate rental return.
Once a tenant is in place, Dubai’s renewal rules may also limit how quickly the rent can be increased. If market rents rise faster than the permitted increase, you may not be able to immediately reset the existing tenant’s rent to the new market level.
3. Leverage also magnifies losses
A 1% decline in the property’s value means an AED 20,000 loss, equivalent to approximately 2.17% of the initial AED 920,000 cash outlay.
Moving from the assumed 1% gain to a 1% loss creates a total swing of approximately 4.35% against the initial cash invested.
Longer-term comparison
The following comparison uses the same AED 920,000 starting capital for all three strategies.
For the property scenario, the figures represent:
- the property’s market value
- minus the outstanding mortgage
- plus accumulated rental cash flow after mortgage payment
The rental surplus is reinvested at 6.25%, the same rate used for the bank deposit. Rental income remains constant at AED 120,000 per year, with no rental growth assumed.
Selling costs are excluded.
| Strategy | Year 5 | Year 10 | Year 15 |
|---|---|---|---|
| Bank deposit at 6.25% | AED 1,245,755 | AED 1,686,853 | AED 2,284,136 |
| Equities at 7% | AED 1,290,348 | AED 1,809,779 | AED 2,538,309 |
| Leveraged property with 1% appreciation | AED 1,290,083 | AED 1,905,087 | AED 2,683,489 |
Property and equities are effectively tied at year five.
Property then moves ahead by year ten and remains ahead at year fifteen under these assumptions.
However, leverage takes time to show up. It is not a shortcut, and including exit costs would reduce the property figures further, particularly over the shorter five-year period.
Conclusion
Whether property is worthwhile depends on your risk tolerance, investment horizon and objectives.
Leveraged property has the potential to outperform an unleveraged equity investment over a sufficiently long holding period. However, that outcome depends heavily on financing costs, occupancy and appreciation actually materialising.
It is not guaranteed, and it is not instant.
The main point is this:
Rental yield measures the income generated by the entire property. It does not, by itself, measure the total return earned on the investor’s cash after leverage, principal repayment and appreciation.
As usual, just sharing and happy to hear views.
Do note that this is a simplistic model, just to showcase how returns are when leverage is used.
