Published Last updated 9 min read

Rent or Mortgage? Is Buying a House a Terrible Investment?

The main goal of a mortgage is misunderstood. While a lot of people are ready to spend all their savings on a house, I've got strong concerns that real estate is not the best investment.
Rent or Mortgage? Is Buying a House a Terrible Investment?
Photo by Breno Assis / Unsplash

Everybody tries to find the one-size-fits-all answer to that question without taking into account interest rates, location-specific opportunities, and a lot of other things.

That's the second most popular question in the world after "Do aliens exist?"

The Real Difference Between Rent and Mortgage

I've got a nice concept. At first sight, it seems like mortgage and rent are solutions to the same problem: "where should I live?".

I came across the idea that these two guys are completely different strategies that simply do not compete and should not be compared to each other.

What does Rent Actually Mean?

Rent is indeed an answer to "where should I live". As simple as your choice of your internet provider monthly plan, your Digital Ocean instance droplet, or gym annual ticket.

Should I build my own gym, or data center or put my own cables on the bottom of the Atlantic ocean? - No way.

What's Mortgage Under the Hood?

A mortgage is related to a quite different question: "should I borrow with rate X and invest in real estate".

So first of all we should find out if we should invest in real estate. That's exactly what I'm trying to find out.

I consider a mortgage as simply leverage for the real estate investment.

If the expected returns on investment are higher than the interest rate paid for the loan, and the risk is affordable, that all might make sense.

Why Do You Need a Real Estate ROI Calculator

The indicator is rather informative and allows us to see how real estate investment compares to a supposedly risk-free fixed-income bank deposit.

Additionally, we can always check global REIT indexes to feel the pulse of ROI.

Here is the calculation:


  • rent income is annualized income as % of the total price. Yield in other words.
  • the price change is annualized price change as % of the total price
  • expenses are annualized as % of the total price
  • for interest rate we can take common bank deposit rate.

It can be sometimes found on real estate online services, calculated for some specific region. For example, Moscow.

  • Unfortunately, it doesn't include liquidity, hidden risks of no renter, and wear out. Though the numbers can be adjusted to include it, of course.
  • Prices are also theoretical, as there is only one way to find out the real price - sell it.
  • We should keep in mind that it changes over time.

Rent income MUST be included. It makes sense because we should either rent it out or live in it and save money on rent ourselves.

A Lot of People Are Biased Considering Real Estate

For example, in Russia people tend to be extremely biased considering real estate. 17 years of enormous growth after the USSR collapse has definitely played its role.

A lot of my mates around consider real estate to be a silver bullet investment for all times. A worthy thing that would definitely pay off in the future.  

While the residential property is considered to be a silver bullet, commercial real estate is valued even higher. Absolute gold.

Real estate index, Moscow

Many of them are ready to spend all their savings and get into a mortgage, just to possess their own property.

My point is that real estate is not a rocket. Furthermore, I've got concerns that real estate prices have all chances to get into serious trouble in the future.

How Do I Consider Real Estate?

Real Estate is Infrastructure

Real estate prices are considerably determined by location. While the location is infrastructure in a broad sense.

By infrastructure I mean not just physical facilities, like transport or distance to the city center and school. It's more about opportunities.

First of all, career and job opportunities, available judicature, education level, health care, and so on. After all, they combine into standards of living.

Infrastructure comes to be a determinant in demand for real estate, forming its prices. While the level of comfort is somewhat a derivative of all these things, and it's not crucial.

That's why a shitty apartment in city N may cost times more than the super elite penthouse in city R. Just because you've got times fewer chances to succeed in R.

Real Estate is a Future Infrastructure

Actually, real estate prices are projections of expected infrastructure. Indeed, we try to price now according to our beliefs about future opportunities of the location.

No matter how we regard real estate, it's starting to sound like an investment. If so, I'm gonna take out my crystal ball.

Real Estate is an Investment

REIT indexes vs S&P 500

If your real estate investment is not a REIT exchange-traded fund, it might bring you headaches.

Yeah, I know, I know... it's been an outstanding decade for stocks...

Anyway, does real estate at least outperform the inflation rate?!

Caveats of Holding Real Estate

Questionable Liquidity

Obviously, it's not something that can be easily bought or sold. Furthermore, real estate purchases bear noticeable agency service commissions, time, and yes, headaches.

Maintenance Costs

Real estate maintenance comes at a cost. Taxes, utilities, repairing, and insurance, in exchange for the risk of loss.

If it is a standalone house, it usually requires constant improvements and fixes. (Very similar to your project codebase)

Real Estate is Wearing Out

Real estate unlike wine, doesn't get better with years. Wires and cables, water pipes, and dry rot in the attic or cellar.

Don't forget that it's becoming old-fashioned rather fast, devaluing the costs of design and repairing.

Building Standards Are Changing Fast

Though it's all country and city-specific, in general, there are more advanced house-building standards in more developed countries.

In other words, those things that can be only met in overpriced "elite" residential compounds of shitty locations are likely to be absolutely natural in more developed locations.

That means that with the shift of building standards in the future, your current real estate simply might get left behind.

Questions About the Future of Real Estate

How Will Supply and Demand Changes Affect Real Estate Prices?

There are 7,6 billion of us, and we are probably gonna double in the next 100 years. We will need a place to live.

Would real estate prices increase just because of that? Will the increased demand be absorbed by building companies that are constantly building new square meters?

Building companies are usually highly leveraged. They simply cannot stop building. In general, they are interested in building and selling more.

At the same time, they are not interested in price drops, so they have to balance supply with demand. Build and sell as much as possible without a price drop.

At least while there are no cheaper ways of building houses.

3d printed houses are already here

I imagine that in the future we will be able to download a 3D model of a house from something like GitHub for houses. Schedule a building-site-3D-printing-robot in an uber-like app and get a house in a couple of weeks.

How Will Rates, Yields, Taxes Affect Real Estate Prices?

We have no idea about the monetary policy of the governments in the future.

We don't know how large the taxes on real estate will be and what the whole economy will look like. We don't know if we are gonna have basic income or zero rates.

But what we've already seen is negative mortgage rates. Is it the shadow of the future economic state of things?

How Will Remote Work Transform Demand for Real Estate

Can we wipe out location dependence with IT implied to remote workflow?

It reminds me of the times when the industrial revolution led to the urbanization process. But now it's vice versa. IT may drive the de-urbanization process and allow us to change the modern megapolis lifestyle to something more relaxed.

On the employers' side, it definitely requires significant workflow transformation. But after all, it only brings profits. Freedom to hire talents all over the world, save on headquarters, etc.

I've met only a few guys who ever agreed to work on-site in the office after the extensive remote experience.

It brings profit for all except landlords, but at least they would have a chance to turn their anthill headquarters into cozy coworking spaces.

I believe that remote jobs may open new opportunities for cost-efficient locations with a high level of comfort and ecology. For those, that lacked attention before due to poor job opportunities.

Will this skyrocket prices for those locations? Frankly, I doubt it.

Even if we redistribute real estate prices of the most expensive locations in the whole world, the average price of previously underpriced areas won't get significantly higher.

  • Like redistribution of wealth won't make everyone rich.
  • Like peeing in the ocean won't make it warmer.

How Will E-commerce Affect Commercial Real Estate?

That's one more nail in the coffin of real estate. This time it is a commercial real estate funeral.

Why do we need those billions of square meters of stalls if we can buy anything online without time wasting?

Ok, as for clothes it's still questionable. But as for the rest... I can hardly remember my latest visit to the mall, except to pick up my delivered package. Even groceries are a thing I usually get delivered.

How Will Sharing Economy Affect Real Estate?

Sharing makes sense when need something for a short period of time. Usually, there is a threshold, when possession becomes more beneficial than rent. That principle works for everything: taxi vs carshare vs own car. The same for houses, e-scooters, yachts, etc.

What if we are not going to stay in the same place for our whole life and would like to swap cold winter for a warm seaside? Windy autumn for a mild summer, eh?

How many houses will we need for that and do we need to possess any of them?

Is Real Estate Gonna Be Disrupted?

Lost Places 2019 - Heilstätte Grabowsee
When I was a child, self-driving cars, VR, AR could be only seen in science fiction, while the only telephone at our home had a disk dial and wire. Photo by Denny Müller / Unsplash

That all may sound like real estate is already dead.  But it's not! Hodlers are firmly against it!

Even though I feel quite pessimistic about real estate in general, I have no idea what on earth can drop the demand for the most amazing touristic attractions on the earth.

Anyway, we cannot turn a blind eye to the fact that the shape of how we interact with real estate might significantly change. Unfortunately, we don't know how much it will take for the next disruption: 30 years or 100 and what will be the result.

Can you imagine, we took a mortgage with a 10% rate and paid for decades just to have a place to live?  

I'm Worried Because I'm a Holder

One of the reasons for my concerns is that I'm also a holder. I've got an apartment.

I also have a hobby. I like to explore real estate items for sale online. Check the prices, and look at interiors, locations, and views from the window. That's pretty exciting, you know.

Sometimes I meet items of my dream that I would like to live in. Sometimes quite affordable, sometimes affordable only with the help of a mortgage. Sometimes I meet super attractive deals, that could really make sense.

And you know what? I always throw away these thoughts from my head due to my view on real estate in general.

If only we lived in a world where REIT didn't 3x underperform SP500.

Key Takeaways

Mortgage or rent?

  • Rent if need a place to live
  • Invest if ROI is attractive
  • Use leverage if ROI covers loan interest rate

What we might expect from the day after tomorrow?

  • Lower building costs
  • Higher demand due to population growth that may be balanced by supply
  • Decrease of locational demand driven by career and jobs
  • Increase of locational demand driven by the comfort of living, ecology, and cost-efficiency
  • Tourists' attractive locations are gonna feel fine
  • Decrease in mortgage rates