Why buying a house is a bad investment

Dateline: Dusheti, Georgia

As a lifelong workaholic, I’ve made the decision that on the rare times I decide to relax, I want to really relax.

Sometimes, that means a quiet weekend in the countryside in a place like here in Dusheti, where I can put my phone away and meditate alongside the peace of nature. Other times, it means mindless American TV shows.

Owing to my need to impart business inspiration even into my hobbies and relaxation time, one of my favorite mindless TV shows is Bravo’s Million Dollar Listing: Los Angeles.

There’s something intriguing (and a bit envy-inducing) about the agents so dramatically featured: the old money flair of Josh Flagg, the new money boiler room hustle of Josh Altman, or the international grandeur of two British guys who jumped across the pond to cash in.

There’s also something about the fact that Los Angeles real estate has become so ridiculously, mind-numbingly expensive, with developers paying anywhere from $3 million all the way up to $9 million to buy a teardown in the better parts of Beverly Hills or the Hollywood Hills.

In any major city, land prices in desirable areas trade at a premium, but the numbers bandied around on this show — and reflected in real life on real estate websites — smack of a total bubble.

The hills behind my homes in Georgia and Montenegro have vistas just as beautiful as the views people on this TV show were gawking over and justifying $5 million prices for a teardown, and $20 million for completed construction.

The other day my girlfriend and I sat around with my team and watched the show just to make fun of “the amazing views” where the ocean was barely on the edge of the horizon or you could see some nice palm trees on a hill. I recently walked up the street from my house and saw vistas and gorge views that would give those LA views a run for their money.

But the real issue at hand here is not whether the views and construction, etc. are better in the United States or overseas. The real issue is that people see such real estate purchases as investments.

REAL real estate investments

I love real estate. If you’ve read even a little bit of my blog, you know that I am a fan of real estate investing. But not every real estate purchase counts as a real estate investment. If you’re from the US, you are well aware of the belief that buying a home is one of the best investments you could make.

It’s not.

I wouldn’t even count it as an investment.

The US government gives so many special incentives to homebuyers to the point that people think a home purchase is a great idea. Even if that idea comes with a $25 million price tag.

To make matters worse, real estate agents go around spreading the erroneous belief that a home purchase is an investment. Unlike in the actual investment industry, real estate agents don’t have an obligation to hand out the facts. They also tend to make promises about a home’s investment potential without anything to back up their claim. They can say it’s a great investment when there’s no investment at all.

Homes can be a great place to establish roots (if that’s what you want), decorate to your hearts’ content and install cool sound systems in the ceiling, but they aren’t an investment. All the decor and unneeded installations are simply you paying for a certain type of lifestyle.

They’re not an investment.

Don’t make the mistake of thinking they are.

You can’t depend on the market to keep up with your profligate spending. If you really looked at a home purchase as an investment, you’d call it a house and rent it out. You don’t replace the tires on a rental car and you certainly don’t put the latest sound system in a rental property. Purchasing a rental property is purely a business decision and you treat it as such.

That’s an investment.

The worst investment

If you’re still not convinced that buying a house is a bad investment, let me do a little more explaining. If you actually do the math, homeownership is probably the worst investment you could make. Let’s take a look:

  • Average home price in the United States ≈ $355,000
  • Required 20% downpayment = $71,000
  • Loan balance = $284,000
  • Current interest rate for a 30-year fixed mortgage = 3.5%
  • Monthly payment ≈ $1,700
  • Total principal and interest paid by the end of the mortgage: $612,000 (or $257,000 more than the original amount)
  • Average property tax rate is 1.15% ≈ $122,500 over 30 years
  • Maintenance (for upkeep, maintenance, repairs, etc.) at 1% per year = $3,550 a year or $106,500 over 30 years

Total out-of-pocket costs over 30 years = $841,000

But the calculation doesn’t stop there. As Brian Lund points out, the real cost of owning a home is the opportunity cost. What would you do with the extra $257,000 you would be saving in interest payments? What would you do with the extra $3,500 per year saved in maintenance fees? And how about that $122,500 you’d save over the years by cutting out property tax?

Of course, you do need somewhere to live. So suppose you rent a similar home for 75% of your monthly mortgage payment. Paying $1,275 a month for 30 years would mean you’d pay $459,000 in housing over 30 years. That means you’ve saved yourself an extra $382,000, simply by NOT owning a home.

What if you took the money you were going to put into a downpayment and put it toward something that will actually give you a return? And what if you added all those savings (you know, the $382,000 you’re going to save over 30 years) to those investments?

Is owning a home with the hope of appreciation and tax benefits really worth what you could do with all that money?

If you want to put the calculation into more solid terms, you can follow James Altucher’s formulas:

OWN = down payment + size of mortgage, + all the interest payments, + all the taxes + all maintenance + opportunity cost of time.

RENT = All of your rental payments added up MINUS what you would make buying bonds with the money you would’ve used on a downpayment.

OR you can head on over to the New York Times interactive calculator where you can input more than 20 variables to see if you can get the math to add up in favor of buying a house.

What about the hybrid approach?

As I mentioned earlier, the only way you can really look at a home purchase as an investment is if you own someone else’s home. In other words, own rental properties.

But what about the hybrid option of buying a property that you both live in and rent?

For example, I live part-time in Tbilisi in a house that I basically built on speculation. I put some nicer touches in the property because I figured I’d be staying there for a time while I figured out what I wanted to do. I spent a bit more because I approached it as a hybrid.

However, as my girlfriend always says, hybrid is not the place you want to be. You want to be firmly in one camp or the other. You want to be clear and focused. And, I’ll admit,º I got a little out of focus.

Still, in my case, I’m not looking at my hybrid property as an investment. Rather, it’s an investment experiment. I wanted to design this home to confirm the market in Georgia for properties with an open floor plan and western decor and lighting, as opposed to Georgian decor. And I’ve been proven right on that hunch. In that regard, it was an experiment that worked out well and will be a good investment.

But here’s the key: I was realistic with my expectations from the moment I started. I knew exactly what I wanted out of the property and didn’t plan on the property being anything other than that. Yes, I was confident that the property value wouldn’t go down, but I wasn’t depending on it. I treat this property as a place to spend time and as a store of value. I don’t expect appreciation OR rent.

If you’re just beginning as an investor, I wouldn’t recommend that kind of approach. Thinking you’ll live there and then rent it out will make you overpay and under-focus on the business side.
And treating the place as your full-time residence completely removes the business aspect of the purchase.

Own a home because you enjoy the benefits that come with ownership, not because its’ an amazing investment.

How to find actual real estate investments

To be honest, some people may be better off buying real estate in the US for investment purposes. However, there are many benefits to owning foreign real estate. For example, I live in the spec house I built in Georgia. Consequently, it’s a non-reportable piece of real estate. It’s out of the banking system and safe. Someone can’t just push a button and take it away in the US.

In that sense, my hybrid spec house is also an investment in asset protection. I knew that the value of homes in the area that I’m in won’t go down, so essentially I’m treating my home like a bank account, with a potential for investment upside.

Still, to make sure you get all the benefits that come with owning foreign real estate, you do need to understand the tax consequences both where you are buying and back home. If you’re a US citizen or resident of a country that taxes on worldwide income, you won’t have as many advantages. Income earned from a foreign rental property will be taxed at home as well.

The other thing to look out for is emotional attachment. If you decide to own other people’s homes, you can’t get too emotionally attached, whether it’s a rental or a flip. This is why — as much as I’m working to create a new real estate category in countries like Georgia — I still have to be careful not to go overboard.

For instance, I recently had to choose whether or not to pay $270 extra for tiles in a house I am renovating and selling. I really wanted to make it look a bit nicer and the way I would want to live in it, but ultimately I had to remember that it’s an investment and I’d never see that money back from the kind of buyer I’ll be targeting.

In my own house, I’d spend the $270, but not because it’s an investment.

If you are interested in putting your money to work for you in real investments, don’t waste it on a home purchase just because you think it’s a smart move. Do the math first. I’m not saying owning a home is a bad idea, but I am saying it’s a bad investment.

Andrew Henderson
Last updated: Jan 25, 2021 at 12:22PM

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  1. kynthiaprothero

    The American dream of home “ownership” is nothing but a joke! The average American has 62% of their net worth tied up in their home, but how much INCOME does that investment earn? Nothing! or better yet, NEGATIVE nothing! Property taxes, insurance, upkeep, HOA dues, etc. on a paid off home can take a HUGE bite out of your Social Security check

    Me? I’m either going to purchase a home for cheap (all cash) during the next crash, or just keep saving my money and renting! As I save money on rent, my cell phone ($20/month from boost), my car insurance ($25/month from Insurance Panda), etc., I’ll be able to invest more into index funds with my freed up capital… something homeowners can never do!


      I completely agree… Unless you’re buying a house you can truly afford and paying cash or putting down no less than fifty percent and doing a fifteen year mortgage and paying it off in ten or five years… Your home isn’t an investment. I hate this… And not everyone qualifies for the first time home buyers credit… Do research people!!!!! Buy what you can afford not the loan amount lenders will give you. Not to mention acomidat all loans now for homes are compounded so they aren’t even coming from one place which is why they want you to pay over thirty years to make as much money as possible. Actually they want you to default so they can take the house back

    • Cesar

      Here in Texas property taxes are insane. 3%-4% per year, if you’re late you must pay 20% on late fees and if you don’t pay the tax you loose the House in the tax foreclosure Auction. You pretty much pay rent on you’re house for life.

  2. thisisponzi

    The calculation for the total rents spent for 30 years at $1,275 a month is not realistic. You can’t find an apartment where rent stayed the same for 30 years. You did not factor the fact that rents increases and most of the time every year. In LA even the rent controlled apartment increased their rent 3% a year. Even with that minimum increase the $1,275 a month starting rent you will end up paying $ 727,903 for the 30 years of renting. If we take the average rental increase of 8% per year which is what most landlord use it would cost you $ 1,733,233 for the 30 years of renting! If you buy a house and assume it will increase in value at just 3% per year(avg house appr in US) your $355,000 house will be worth $ 836,581 at the end of 30 years. Even if you paid a total of 841K at the end of 30 years you still have most of your money once you sell. You have gained an equity of close to 500K in your house in 30 years while when you rent you can’t show any equity.


      That’s not true… You’re only hoping your house will go up… At any time the housing market can collapse again and your house is worth less than you bought it for. Also your house is only worth as much as someone is willing to pay for it… And if you really wanted to make a return you’d put down no less than fifty percent or pay full cash but if not your put diem a huge payment and pay it off asap

      • thisisponzi

        If you only have a short term outlook then yes you could go upside down with a house. Those who bought in 2005 are still licking their wounds in 2017 from the crash but if you have a longer term say 30 to 40 years assuming you buy early in your 20’s and sell in your 60’s then you have a good chance that your house has appreciated in value plus if you happen to buy in an up and coming neighborhood where prices could go up 10 to 15% in just a year like in some parts of California then you get more chances of realizing a profit in your retirement age. A 60,000 dlr house in 1960’s is worth about 200K in year 2000.

        • TATOR THOT

          That’s assuming you want to keep your house forty years… Many people don’t want to keep one house for forty years unless they have too… And now with how the economy is there is no guarantee that you will be able to afford your house note for thirty years… And why would anyone sell their house in their sixties to them get another note unless they downsized and pay cash, which most people don’t. Have a house note until your 75 or 90 again is not smart

          • thisisponzi

            You don’t have to keep the same house for 40 yrs. You can sell at the right time and carry your equity to the next house by making larger down payment. Most people don’t want to maintain a house when they get old so they sell and prefer to live in apartment or condo.

        • TATOR THOT

          You’re still not accounting for interest rates and upkeep… And just because you say or someone says your house is worth that… Doesn’t mean it is if you haven’t renovated it and kept it up to date, which most people who stay on a home for many years… Do not

          • thisisponzi

            Land value plays large role in price appreciation especially in crowded cities. Old houses are bought at a high price and get tear down to make way for new home. A house in Venice, CA bought in the 60’s would have appreciated many times in value today even if it is a shack due to the value of land in that area.

    • David

      As a renter, you can move a few miles away to a more affordable area any time you wish. Ive been renting in san diego for ten years. Im still paying the same I was ten years ago. I just had to relocate. My commute to work hasnt changed, and the neighborhood im in is up and coming. Ill probably have to move in a few years to the next up and coming, but thats fine considering what im saving.

      • Mike

        Funny: I own an apartment in Hong Kong and what I get in exchange for owning the apartment is that I get to live in it without paying anybody any rent. If I wanted to live in that VERY SAME APARTMENT and someone else owned it, I’d have to pony up about US$2200 to live in it (it would be higher, but I’ve already deducted my taxes and maintenance fee in order to make the numbers honest).

        Of course, since my marginal tax rate in the USA is 25%, the only way I’d have an extra $2200 in order to pay rent on such an apartment would be if I earned an extra $2933 per month before taxes, in order to have that $2200 after taxes. And the thing is, I WANT to live in this apartment, and I understand that when you want to live in an apartment that you don’t own, you have to pay for it.

        Let’s not mince words: that $2933 per month pre-tax is a return on investment. And whatever it is that’s bringing in that US$35,000 return on investment is properly called an investment. And if you REALLY want to insist that it’s not an “investment”, then my reply is that I’ll gladly take a non-investment that brings in a $35,000 return on investment, especially considering that I only paid $240,000 to buy that non-investment that brings in a $35,000 return on investment (9 years ago).

        With non-investments that bring in returns on investment like that, who needs actual investments?

  3. Anthony

    I think the article is comparing apples to oranges with the whole buy vs. rent argument. Most people buy thinking their property will appreciate over time. That’s a long term investment. Same rules apply to any other kind of buy and hold investment. In Warren Buffet terms if you buy dollar bills for 50 cents, over time you will get a nice return on your investment. In the rent scenario you are talking about cash flow. Most people don’t know how to invest their money so having extra cash flow every month will probably just go to waste. For most “retail” Americans I think the buying and holding of property makes sense given the right conditions (location, market timing etc). Historically it’s relatively safe. Population is only growing and everyone needs a place to live.

    For myself, all I knew when I started out is that I didn’t want to pay someone else’s mortgage. I wanted the rights to my own asset. When I bought my house in Silicon Valley in 2008, I didn’t know how close to the bottom the market was. But I did know that it could be now or never so I took the plunge. At the time my mortgage, taxes etc ended up being about the same as what rent would’ve been. The market proceeded to drop well below my purchase price until about the end of 2010. I knew that it would come back at some point and it was just a matter of time. Now it’s almost doubled in value and I’m getting ready to sell and downgrade to bank the cash to use for other investments. Had I rented over those years I don’t know that I could’ve generated the same amount of return by investing in other things. So as with anything in life, your mileage may vary.

    • Irina Loncar

      Hi Anthony, thank you for your comment. We appreciate hearing different opinions 🙂

  4. Anxhela

    I paid a ridiculous amount of property tax in New England: $10,800/yr. for a 3,000 sq. ft. house. Holy Goat, that’s $900/month! I sold it and now I’m renting a beautiful apartment for $350.00/month in Tirana, Albania where the people love Americans and the food is wonderful.

  5. Salvo

    For many years I felt like I was making a mistake not buying a house. I always felt that buying a property would have made it harder for me to leave if I wanted to. Now I feel much lighter and, yes, now I believe money can be invested in more rewarding ways then real estate (in some countries). “Buying the dip” in real estate, like Anthony did, is very difficult.

  6. Mikkel Thorup

    Haha I love you quoted James Altchur, he’s hilarious, he actually ditched all his belongings and now just lives from one Air BNB to another all year round in NY.

    But yea no need to buy a house to live in, some many other opportunities out there. Thanks for the great article Andrew

  7. Gokulram Arunasalam

    Rent vs. buy is a complex debate. Home ownership isn’t always a strict economic decision, but is driven by the desire for social status, a ‘nest’ for the family etc etc.

    Gokulram Arunasalam

  8. Chris Jones

    I’m not sure you considered that If someone buys an apartment in case (low maintences costs). The Apartment is located in a city where the apartment will appreciate very well, and it can be rented out frequentl, that it can be a great investment. Property taxes are not that bad, especially since the property is still using abatements. Even when those expire it will still not be that bad.

  9. Eric

    There are markets where it makes sense to buy vs rent or at least evens out way differently. You rent at $1275 is completely unrealistic for an equivalent house priced at $355K. At least where I am located
    $1275 here rent you a junior 1 bedroom with shared laundry. $355K buys you a very nice 2 bedroom condo with garage and laundry or a 3 bedroom. That is just not comparable.
    Same for homes. although renting home starts renting at $2000+, nothing any lower.

    There is also the problem of decent rentals being available. Not everyone is willing to live in vintage crappy apartment with no laundr, parking, old appliance and little sound/heat insulation, just to save a buck. There is a cost to everything. crappy kitchen -> more dining out? We are not talking about fancy decor here but just the ability to have decent stove, water pressure, heating, electric ventilation in the bathroom. Modern comforts to a basic degree.

    The lesson really should be, a home is not an investment, but if you can buy for a total payment (maintenance, mortgage, insurance, taxes) that is equal or lower than your rent for an equivalent property and you are going to stay put then it may not be a bad idea. YMMV.

  10. Jason

    What the real estate defenders always miss is that even if they sell their home for a “profit” on paper, they need a place to live so most people buy another home in the same region that has appreciated at the same rate. Even if your home doubles in value, so has everything else. All you do is roll over debt into new debt…unless u move to a cheaper region like California to Alabama.


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