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S&P 500 vs Real Estate Returns: Which is the Better Investment?

Comparing Historical and Recent Returns of the S&P 500 and Real Estate Investments: An Analysis of Their Similarities, Differences, and the Benefits of Investing in Real Estate.

Investing is not only about growing wealth but also about diversifying your portfolio. Having a diverse range of investments can help spread risk and mitigate losses. In addition to generating high returns, investors often seek to minimize their overall risk exposure. In this article, we will explore the benefits of diversification and how real estate and the S&P 500 can play a role in achieving this goal. We will also examine the historical performance of these two investment options over the long-term and short-term, as well as their differences in terms of risk, liquidity, and tax advantages.

Both the S&P 500 index and real estate have the potential to generate high returns, but lets dive a little deeper into how they compare over the long-term and short-term?

A Quick Disclaimer

Data can vary depending on its source in certain situations. For example, financial data about a company can be different depending on whether it was reported by the company itself, a third-party financial analyst, or a news outlet. The way the data is collected, analyzed, and reported can differ from one source to another, leading to discrepancies in the data. It's important to consider the source of the data and its potential biases when making decisions based on the information provided.

Now lets dive in!



Heading #1: Long-Term Returns

Over the last century, the S&P 500 has been one of the most reliable ways to generate long-term investment returns. From 1926 to 2020, the average annual return for the S&P 500 was approximately 10%. During this period, the index experienced both boom and bust cycles, but overall, it has proven to be a solid investment.

On the other hand, real estate has also delivered impressive long-term returns. According to data from the National Council of Real Estate Investment Fiduciaries (NCREIF), commercial real estate returned an average of 9.5% annually from 1926 to 2020. This includes returns from office, retail, and apartment properties. Over the same period, residential real estate returned an average of 5.9% annually.

It is important to note that real estate is not a single asset class, but rather a broad sector that encompasses a variety of properties. Different types of real estate can have vastly different returns. For example, apartment buildings have historically outperformed other types of commercial real estate, while single-family homes have performed well in certain markets.

Heading #2: Short-Term Returns?

According to data reported by the S&P Dow Jones Indices, the S&P 500 has had an average annual return of approximately 7.5% over the past 20 years. During this time, the index experienced significant volatility, including the dot-com crash of the early 2000s and the financial crisis of 2008.

Data reported by the National Council of Real Estate Investment Fiduciaries (NCREIF) shows that real estate returns over the past 20 years have also been impressive. From 2000 to 2020, commercial real estate had an average annual return of 8.6%, while residential real estate had an average annual return of 5.8%.

Heading #3: Pro OR Con?

Both the S&P 500 and real estate offer investors the potential for high returns. However, there are some key differences between the two.

Firstly, real estate is generally considered to be a less liquid asset than stocks. It can take longer to buy or sell a property compared to buying or selling stocks, which can impact an investor’s ability to quickly react to market changes.

However, the illiquid nature of real estate can also work in an investor's favor. Because it takes time and effort to buy or sell a property, it can limit the number of speculators and short-term investors in the market, resulting in less volatility and a more stable market overall. Additionally, long-term investors can benefit from the steady cash flow provided by rental income, which can help offset any potential decreases in property value.

Secondly, real estate investments often require more active management than stocks. Investors must maintain the property, find tenants, and collect rent. This requires a significant investment of time and resources.

However, many investors choose to invest in real estate through syndicators or real estate investment trusts (REITs), which allows them to outsource the management responsibilities to professionals. This frees up the investor’s time and resources while still allowing them to benefit from the potential returns of real estate. Additionally, investing in a syndication or REIT provides diversification benefits as investors can invest in multiple properties with varying characteristics, rather than being limited to a single property.

Heading #4: Tax Benefits of Real Estate Investment

Real estate investments offer several tax benefits that are not available to stock investors. Firstly, depreciation can be utilized to offset rental income, reducing the amount of taxable income. Essentially, depreciation allows property owners to deduct a portion of the cost of the property over its useful life, thus reducing the amount of taxable rental income.

Secondly, rental property owners can deduct certain expenses related to the property such as mortgage interest, property taxes, repairs, and maintenance costs. These deductions can further reduce the amount of taxable rental income.

Lastly, real estate investors can take advantage of 1031 exchanges, which allow them to defer capital gains taxes by reinvesting proceeds from the sale of a property into a new one. This means that if an investor sells a property and uses the proceeds to purchase another property, they can defer paying capital gains taxes until they sell the new property. Overall, these tax benefits can significantly increase the after-tax returns of real estate investments.


When compared to stock investments like the S&P 500, the tax benefits of real estate can lead to exponential returns over time. Let's say an investor purchases a $500,000 rental property that generates $25,000 in rental income per year. Utilizing depreciation and deductions, the taxable income could be reduced by $15,000, resulting in only $10,000 being subject to taxes. Additionally, if the property is sold for a profit and the investor reinvests the proceeds into another property using a 1031 exchange, they can defer paying capital gains taxes. Over time, these tax benefits can add up and result in significant increases in returns when compared to stock investments.

In closing, it's crucial to recognize that the performance of both the S&P 500 and real estate is subject to various factors, including market conditions and location. Real estate returns can vary significantly based on property type, location, and local economic conditions. Moreover, real estate investments often require active management, as landlords handle tenant acquisition, property maintenance, and other daily responsibilities. Conversely, the stock market can be influenced by interest rates, global economic events, and political shifts. As a result, investors must assess their risk tolerance and investment objectives carefully to determine the most suitable option. Remember, seeking professional advice and conducting thorough research are essential steps towards making informed investment decisions.

By Eric Johnson, Full Time Investor & Co-Founder of Elevation Equities

Please note that the information provided in this blog should not be taken as financial advice. It is simply the personal opinions and experiences of the author and is not a substitute for professional financial advice from a licensed financial advisor. Before making any investment decisions, it is important to conduct thorough research, understand your personal financial goals, and consult with a financial professional.


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