Real Estate vs. Stock Market Investing: Which One Builds Wealth Faster?

Introduction

You’ve probably heard people say that “renting is throwing money away” or maybe, “real estate is the best investment you can make.” These ideas have become so common, the average American seems to believe it inherently. But are these claims actually true? 

The reality is, of course, nuanced. Homeownership and owning rental properties can be great financial moves for some, but they’re not automatically better than investing in the stock market. When we strip away emotions, social pressure, and personal preferences to look at the data on its own, stocks tend to outperform real estate from a perspective of strictly comparing investment returns. 

This doesn’t mean real estate is a bad investment, but it is not a one-size-fits all. As with many decisions in personal finance, the decision depends on your financial goals, risk tolerance, and how active you want to be in managing your investments. In this blog post, we’ll explore whether renting is truly throwing money away, break down the real costs of homeownership, and compare the long-term returns of real estate and stocks. 

"Renting Is Throwing Money Away"

Ah, the American Dream. So deeply entangled with the idea of homeownership. Homeownership has been engrained into many of us since childhood as the marker of a successful adult. But is this true? 

In my opinion, not at all. Homes don’t buy financial freedom, while a stock market portfolio can. 

It is true that rent is a monthly cost with no asset tied to it, while a mortgage results in equity being built over time. However, many costs of homeownership, like closing costs, interest, insurance, property taxes, and maintenance, are all costs that are technically “thrown away” in the same manner as paying rent. I’ve seen clients whose mortgage interest alone is higher than the monthly rent that others are paying (in a similar area). 

There is also the hidden opportunity cost: saving for a down payment rather than investing in the stock market.  

Comparing Investment Returns: Real Estate vs. Stocks

I’ve become increasingly convinced that part of the hype around owning real estate is that it’s one of the only socially acceptable ways to discuss one’s personal wealth. It is uncommon for people to casually drop information about how much money they have in their stock portfolio, but people will quite freely tell you about their real estate purchases. It’s also a very tangible set of numbers: “I bought my house for $500,000 and it’s worth $1,000,000 today!” is a much more common sentiment than “I have invested $500,000 in my 401(k) over the years and it’s worth $2,000,000 today!” 

Historical Performance

Let’s look at the historical performance of these asset classes: 

‍

‍

I suspected that real estate returns were substantially lower than the S&P 500, but the research surprised me. Less than half of the S&P 500’s returns in every time period! Real estate as an asset class is much closer to bonds (in the long-term). 

But there’s a lot more complexity than is shown with just these returns. 

Firstly, it’s important to consider cash flow if the real estate in question is a rental property. The monthly return on that investment could be added to the real estate investment return of 4% to 6% (approximately). This is often very location-specific, and some states are much better than others when it comes to purchasing rental property and making a cash-flowing return on that investment. 

What about leverage?

It’s also very important to factor in leverage: real estate can see higher percentage returns due to financing a portion of the cost via a mortgage, but this is highly variable – the down payment and interest rate will have a dramatic impact on the numbers. The “CoC Return” or Cash on Cash Return calculation takes the annual pre-tax cash flow divided by the total cash invested. 

‍

If you purchased a $700,000 property with a down payment of $70,000, you would pay about $36,000 in interest in the first year (with today’s interest rates around 6.25%). $6,800 would go towards the principal. If there were also $10,000 in maintenance costs, the total cash invested in the first year would be $122,800. 

If you sell the property after one year for $750,000 (a 7% home value increase) & pay off the remaining mortgage: $750,000 - $623,200 = $126,800 would you be your cash flow. 

$126,800 minus your first year cash investment of $122,800 = $4,000. This is a 3.26% return before taxes. 

Alternatively, if the home value increased by 10% (as seen in 2020), the return would be $24,000, nearly 20%. (Note: This was an above average year of appreciation). 

The above analysis doesn’t consider closing costs or taxes, both of which would reduce the return. 

The trickiest thing in comparing a stock market return to real estate is the high degree of variability. Because of this, there isn’t any universally reliable data to gauge the true historical return for housing like there is for other asset classes. 

Total Cost Considerations

There are many costs that need to be considered with real estate: mortgage interest, taxes, insurance, maintenance, transaction costs, and for rentals, additional maintenance costs, vacancies, and property management need to be considered as well. Refinancing needs to be accounted for. Additionally, real estate requires active management, and the equity is tied up unless refinanced or sold.  

Investment portfolio fees will include: fund fees, taxes (capital gains, dividends), and management fees but overall much lower frictional costs. Stocks compound automatically and dividends can be automatically reinvested. 

Risk & Flexibility: Which Is Safer?

Real estate comes with the risk of housing market downturns. Having so much wealth tied up on one asset can necessitate selling the property if an unexpected life change occurs. Houses can end up being worth less than their purchase price, and even lower than their mortgage balance. 

Illiquidity is also an issue. Selling a property takes time, effort, and money. 

There is also a lack of diversification in real estate - a significant amount of wealth ends up being tied to one house (or maybe a few rental properties). 

The stock market is constantly moving, but history shows long-term growth. Short-term swings are often more dramatic than what we see in real estate, but it’s partially that people pay much more attention to the value of their stock market portfolios compared to their homes. 

There is a greater risk of emotional investing with the stock market as well - buying and selling is easier than ever. 

When Does Real Estate Make More Sense?

Real estate can certainly be a great investment, but I believe it requires significantly more analysis than is often given. In particular, real estate investing is often best if in an area with strong price appreciation and demand. You also have to be willing to be a landlord, or to pay someone to do this work. Ultimately, I will always recommend diversification – having too high a percentage of one’s wealth in real estate is not ideal. 

Conclusion: Which One Wins?

If we’re strictly looking at long-term returns, diversification, and ease of investing, the stock market tends to win. Historically, stocks offer higher average returns with far less hassle—no maintenance, no tenants, and no six-figure down payment needed to get started. Plus, they’re easier to buy and sell, which gives you more flexibility.

But real estate isn’t just about numbers. For many, homeownership is a lifestyle expense offering stability and a sense of success. For others, rental properties can be a way to build wealth and increase income, if they’re willing to take on the work of being a landlord and managing the risks.

There are absolutely real estate scenarios that could result in outsized returns, but it’s important to do the analysis before assuming a real estate investment is going to be a worthwhile investment. 

The idea that “renting is throwing money away” oversimplifies the real financial picture. Paying rent isn’t a waste; it’s a trade-off for flexibility and the opportunity to invest in other assets (like stocks) that could potentially grow faster over time.

At the end of the day, the best investment is the one that fits your goals, risk tolerance, and lifestyle. You can build wealth through real estate, stocks, or a mix of both, but what matters most is making an informed decision that works for you.

Sources: 

Invest.net. (n.d.). Expected returns of investing in real estate. Invest.net. Retrieved February 26, 2025, from https://invest.net/blog/expected-returns-of-investing-in-real-estate

Carlson, B. (2024, January). What is the historical rate of return on housing? A Wealth of Common Sense. Retrieved from https://awealthofcommonsense.com/2024/01/what-is-the-historical-rate-of-return-on-housing/

Damodaran, A. (n.d.). Home page. NYU Stern. Retrieved February 26, 2025, from https://pages.stern.nyu.edu/~adamodar/New_Home_Page/home.htm

Forbes Business Council. (2022, June 1). Understanding real estate investment returns. Forbes. Retrieved from https://www.forbes.com/councils/forbesbusinesscouncil/2022/06/01/understanding-real-estate-investment-returns/

Gunderson, G. (2020, December 2). Is renting really a waste of money? Forbes. Retrieved from https://www.forbes.com/sites/garrettgunderson/2020/12/02/is-renting-really-a-waste-of-money/

‍