Real estate

Where the return really comes from

The return on a real estate investment comes from four sources: the ongoing rental cash flow, rent growth over time, the change in the property's value, and leverage. None of these tells the whole story on its own.

The most common mistake is to look at just one number: the gross rental yield (annual rent divided by the purchase price). Example: a studio apartment costs €160,000 and the rent is €750 a month, so the gross rental yield is 5.6%. But the investor doesn't own the gross rent. They own the net cash flow: what is left after the maintenance charge, insurance, empty months, repairs and financing costs. With realistic costs, the net rental yield can easily be only 3–3.5% before taxes, about half the gross figure.

Leverage amplifies gains and losses

Leverage is the real estate investor's most powerful tool and also the biggest risk. It pushes the return on equity above the property's total return, as long as the cash flow covers the financing costs. When it no longer does, the same leverage works in reverse. Real estate isn't slow-moving only on the way up.

It is worth seeing the math of leverage in concrete terms. In a €200,000 apartment with €50,000 of equity and a €150,000 loan, a 10% rise in the property's value means a +40% return on equity, and a 10% fall means an equally large loss. As long as the rent covers the interest, leverage multiplies the return. When the interest rate rises or the tenant moves out, the same leverage multiplies the loss and can force you to sell at exactly the wrong time. Leverage doesn't make real estate safe. It makes it sensitive, and the smaller the equity, the greater the sensitivity.

Why the buy-to-let boom began, and why it ended

From 2015 to 2021, a buy-to-let apartment was an almost automatic way to grow wealth. The logic was simple: loans were available at close to zero interest, the rental yield clearly exceeded the financing costs, and the leveraged return on equity could be 10–15% without any special expertise. More than half of newly built apartments went to the rental market. The pattern worked as long as interest rates stayed low.

The logic of the boom reinforced itself as long as interest rates stayed low: rising prices produced leveraged profits, which attracted more buyers and pushed prices up further. A pattern built on a single variable like this is fragile. It works perfectly until it doesn't work at all. When the interest rate, the foundation of the whole model, turned, the same factors that had pushed prices up began to push them down, and the leveraged investor felt the reversal amplified.

Three factors turned the situation around

• Rising interest rates. When the loan rate rises from under one percent to three percent, the annual interest on a €150,000 loan grows from €1,200 to €4,500. That is +€275 a month straight out of the cash flow. In many properties, a positive cash flow turned negative within a single year.
• Oversupply of small apartments. Investor-driven construction produced mostly studios and one-bedroom apartments for years. When everyone was building the same product, competition for tenants tightened and the risk of empty months grew, especially outside the growth centers.
• Prices turned down. Housing prices fell by about 13% from the 2022 peak to December 2025. Someone who bought in the peak years of 2020–2021 is probably at a loss in market value, even if rents have developed as planned.

These three factors hitting at the same time made the correction steep, and none of them has fully unwound yet. Interest rates have come down from their peaks but not to zero, the oversupply of small apartments is unwinding slowly, and prices have only begun to stabilize. The lesson is not that real estate is a bad investment, but that its return depended decisively on the cost of financing, a factor many treated as a constant that turned out to be a variable.

Three interest rate stress tests before you buy

In today's environment, it makes sense to spend less time hunting for the right price per square meter and more time on resilience to interest rates. Before you decide to buy, ask three questions:

• What happens if the apartment is empty for two months?
• What happens if the financing cost rises by another percentage point?
• What happens if the housing company makes a decision on a major renovation next year?

The strength of these questions is that they shift your attention from an attractive price per square meter to the resilience of the cash flow, which is what really decides whether an investor gets through a difficult year. If the property can withstand all three stresses at the same time, it is financially sound. If even one of them breaks the cash flow, the leverage is too high. This test would have saved many who bought in 2020–2021 from unpleasant surprises, and in today's environment it is more important than ever.

The same correction at a different pace: Finland in a global context

The same interest rate environment punished real estate investors across Europe in 2022–2024. The decisive difference is how quickly the change in interest rates passed through to the market, and that depends on whether the debt is variable-rate or fixed-rate. In Sweden (as in Finland), loans are tied to short-term rates: prices fell almost 16% from their peak, but the turn came quickly. In Germany, a typical loan has a fixed rate for 10–15 years, so the correction came more slowly (−7.1% in 2023). The lesson for a Finnish investor: variable-rate debt means the market reacts to interest rates quickly. That is a risk when rates are rising, but an advantage when rates turn down.

The comparison with Europe shows that this was not a problem specific to Finland, but an interest rate mechanism that hit everywhere, at a different pace depending on the debt structure. Variable-rate debt means the market prices in a change in interest rates almost immediately. That is a risk when rates are rising but an advantage when they turn down, because the relief shows up in the cash flow quickly. A Finnish investor therefore has to follow the interest rate outlook more closely than a German one, whose fixed rate cushions the change for years.

A closer look at real estate funds

Open-ended or closed-ended? An open-ended fund offers redemptions regularly, but the underlying properties are illiquid. This tension was seen in 2022–2023, when several funds had to restrict or suspend redemptions to avoid forced sales. A closed-ended fund ties up capital for 5–10 years and is therefore a more honest structure, often with a higher expected return.

Valuations come with a delay. The fund's value is based on an appraiser's quarterly valuation, not a daily market price. The value can still look stable when the properties have already lost value. The risk shows up later, often just when many investors want to redeem at the same time. Costs: a management fee of 1–2% a year plus a possible performance fee. At 2% a year, 20% of the initial investment goes to fees over 10 years before any return has been counted.

How much and how: by portfolio size

• Under €100,000: it may not be worth allocating to real estate. A listed real estate company is the most accessible route and a good learning tool. You learn about interest rate sensitivity and valuation without a fund that ties up your money.
• €100,000–500,000: a real estate fund may be justified. Understand the liquidity terms before you subscribe.
• Over €500,000 + professional status: closed-ended funds and direct investments may come into the picture, where the asset manager's property selection adds clear value.

The logic of the size brackets is that real estate requires either enough capital for genuine diversification, or the humility to settle for a liquid route you can learn from. A single directly owned buy-to-let apartment is not a diversified portfolio. It is a concentrated bet on one property, one city and one tenant. That is why, with a small amount of capital, a listed real estate company is often a wiser first step than a leveraged studio apartment. Only with greater wealth do direct investments and closed-ended funds bring added value that justifies the property selection and diversification.

This content is for information purposes only and should not be construed as investment advice or a recommendation. Investing always involves the risk of losing capital. The value of financial instruments and investments can go up or down, and past performance is no guarantee of future returns.