People criticize real estate as being slow and boring, but slow and steady may be just what the doctor ordered for building great wealth over the long term.
Given that stocks have performed so well over a long period of time, you might think that most people would be much better off investing in stocks than in real estate, right? Just take a look at the chart below comparing the returns of the S&P 500 to the median U.S. home price. There is no doubt that since 1995, stocks have seemed to be the more profitable option.
However, after doing a free financial review of my 401(k) rollover IRA and then crunching the numbers on some of my real estate holdings, I realized that stocks don’t necessarily generate more wealth. In fact, I made more money from one house than I made from my entire 26 years of 401(k) investing.
This is a surprising conclusion that I only realized after brainstorming with another financial professional. It may not be true that stocks are always a better investment than real estate. Let’s look at the numbers through my case study.
Home Returns and 401(k) Returns
It took me 13 years, from 1999 to 2012, to max out my 401(k) to around $300,000. Granted, my returns were modest due to the dot-com bubble of 2000 and the global financial crisis of 2008-2009.
Then, from 2012 to 2025, the current rollover IRA grows by about $1,280,000, to about $1,580,000 without any additional contributions. This is a top-tier return with a CAGR of approximately 14.2%.
However, the 26-year total of my 401(k)/rollover IRA grew to $1,580,000, which still does not match the income I received when I sold my old home in 2017.
In February 2005, I purchased a house in San Francisco for $1,525,000 with a 20% down payment ($305,000). When I sold it in 2017 for $2,742,500, I walked away with approx. $1,780,000 After taxes, fees and paying off the mortgage.
The neat thing is that I have roughly the same amount of capital invested in stocks and real estate – about $300,000 in my IRA rollover in 2012 and a $305,000 down payment on my house in 2005. This allows me to compare returns over similar 12.5 to 13 year periods: 2012 to 2025 for IRAs and 2005 to 2025 for real estate. Mid 2017.
Yes, investment horizons vary. But here’s the kicker: The 13-year term used in my IRA covers one of the strongest stock market runs in history (2012-2025). Meanwhile, my real estate period included the global financial crisis (2005-2017). That makes the fact that I ended up making more money from the house than from stocks even more surprising.
Why I make more money from home than from stocks
The main reason I made more money with houses in 12.5 years than I did in stocks in 26 years (let alone 13 years) Forced savings, leverage and larger absolute dollar investments. In early 2005, I came up with a down payment of $305,000, spending everything I had, plus a one-month bridge loan because my 2004 year-end bonus wouldn’t be paid until after the deal closed in March 2005.
So I invested $305,000 in one lump sum, and over 13 years, I invested about $240,000 in the 401(k) plan (plus the company match). I then purchased the property for five times more than my down payment—$1,525,000. For the next 12.5 years, I simply paid off my mortgage, sweated through the global financial crisis, and enjoyed life at home.
Even if I had the option to use leverage to buy five times more of the stock, like I did with my house, I wouldn’t do it. Stocks are too volatile. Unlike residences, they provide zero utility.
Of course, I still have to pay property taxes, maintenance fees, and mortgage interest charges. However, these costs are offset by non-payment of rent. In fact, between 2014 and 2017, we rented our house for $7,500 to $8,200 a month because we ourselves were not willing to pay that much if we rented.
After about two years of owning a home, renting becomes more expensive than owning. Nine years later, renting is much more expensive.
Lower living expenses to increase passive income
In 2014, we purchased a smaller fixer-upper home on San Francisco’s West Side for about 40% less than the market value of our old home. The CD matured, so I had liquidity to deploy. This move increased our semi-passive income stream for three years before we sold the property in 2017.
I then reinvest 100% of the proceeds in stocks, municipal bonds, and private real estate. It feels great to no longer have to deal with tenants and maintenance issues.
This example shows how much flexibility you have to adjust your finances in retirement, if needed. Just as you might adjust your safe withdrawal rate based on the performance of the economy and your portfolio, you can also make strategic moves along the way to help ensure your wealth lasts.
Returns are important, but the amount is more important
We often focus on returns, and for good reason. If we didn’t expect a risky asset to perform better than the risk-free rate, we would never invest in it. But when it comes to real estate, most people don’t think about the annualized return on their primary residence. They buy the best house they can afford and enjoy it.
Unlike stocks, buying and selling real estate is expensive and cumbersome. Instead, we just pay the bills, create memories, and hope to one day sell them for a profit. In my 22 years of owning real estate, I have never considered selling because I thought this would be the ideal time to take a profit. We buy properties first for lifestyle, second for cash flow, and third for capital appreciation.
The sad reality is that it takes a lot of investment to make life-changing money. Of course, getting a 10x return on stocks would be awesome. But if you invest just $1,000, profits are unlikely to have a significant impact.
By comparison, with the median home price in the United States now over $420,000, and even over $1 million in some cities, most people will naturally end up investing far more in real estate than in any single stock. The larger upfront investment is a big reason why primary residences tend to create more wealth over time.
401(k)/IRA vs. Down Payment Returns
According to my records, my 401(k) generated approx. 4% IRR from 1999 to 2012, my rollover IRA produced approx. 14.2% Internal rate of return from 2012 to 2025.
For my home investment, my $305,000 down payment turned into approximately $1,780,000 in 12.5 years, with an internal rate of return of approximately 8.7%. That’s unspectacular by stock market standards, but the absolute gain of about $1,480,000 after taxes and fees is considerable.
I also paid off my principal on average about $2,000 per month for 12.5 years, which adds up to about $300,000 of additional equity. This is money that could have been spent on cars, watches, or other lifestyle upgrades, but instead it quietly builds wealth behind the scenes through forced savings.
If we include these principal payments as part of the total investment, my true internal rate of return is actually rise to about 11.1%. This initially surprised many people. The IRR increases because principal repayments are not considered an expense in the IRR calculation. This is an additional investment that you can recoup when you sell. As the property appreciates and I get back all the principal I paid, these steady contributions increase returns instead of decreasing them.
Even if you just focus on the return minus the principal repayment of about $300,000 over 12.5 years, turning a $305,000 down payment into $1,480,000 still equals 4.85 times return. That’s the beauty of leverage when things are going well. Of course, if your assets lose value, you could lose a lot.
The power of leverage and discipline
This experience shows that you don’t need to hit home runs to build meaningful wealth. You just have to get on base and stay in the game long enough. Yes, buying a home with local economic catalysts is important for home price appreciation. Some communities will perform better than others.
Buying a primary residence forces you to save, helps you benefit from leverage, and provides utility in the form of a home. Your home’s IRR may not be spectacular, but the absolute dollar gain may be meaningful.
At the same time, investing in the stock market requires consistent discipline and belief. It’s easy to say you’ll “invest the difference” when you rent, but it’s much harder to do that when life keeps throwing you new expenses and temptations over the decades.
It’s also easy to believe that you’ll buy on dips and never sell at the wrong time. However, because stocks are so cheap and easy to trade, we retail investors often make unforced errors.
With real estate, all you do is live your life. Since the average homeownership period is about 12 years, you can probably get through most of a bear market without panic selling.
Housing security and profitability are established simultaneously
I don’t like renting forever, mainly because it creates so much uncertainty about housing in retirement. Yes, stocks have historically outperformed real estate on paper. But in reality, the average person ends up amassing more wealth from their primary residence simply because they invest more and hold on to it longer.
in the end, Both Real estate and stocks can lead you to financial independence. They just take you there in different ways. Real estate provides stability and forces savings. Stocks provide liquidity and convenience. The most important thing is to choose a path that you can stick to throughout the cycle.
If you can stick with both for a long time, that’s when the magic really happens.
Reader questions
To achieve financial freedom, what is your ideal balance between stocks and real estate? Have you made more money so far from real estate or the stock market? Do you think the forced savings aspect of homeownership is undervalued? If you could go back, would you buy sooner, later, or rent longer?
Passive investing in real estate
Not everyone can come up with a large down payment to buy a home, but that doesn’t mean you should miss out on the long-term appreciation and income potential of real estate.
That’s why I invested too Fund risesa platform that provides everyday investors with access to a diverse range of residential and commercial properties across the country. With over $3 billion in assets and over 350,000 investors, it’s one of the easiest ways to gain exposure to an asset class that has steadily built wealth for generations.
Historically, real estate has been a reliable inflation hedge and stable compounder, even when the stock market is volatile. Now, almost anyone can start building a real estate portfolio with as little as $10.
Fundrise has supported Financial Samurai Because we’ve had the same philosophy over the years: disciplined investing in tangible assets to help people achieve financial independence over time.
