Real estate or index funds: Which is better for building long-term wealth?


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Whether you choose real estate or index funds as your primary investment, each has an outstanding track record of building wealth.

But is one better than the other, if maybe only by a little bit?

This topic was inspired by this question from a reader:

“My question: Real estate or long-term index fund investing?

I know the answer is probably both, but I’ve been a person who invests in stocks (mainly ETFs and index funds). However, on my social feed, I’m getting more and more people pushing rental real estate investing as a better way to wealth than stocks.

I do have a rental because it was my previous primary home before becoming a rental. So, while I know rentals, I worry that I’d make a mistake buying a property for more than it’s worth, having a prolonged period of no renters, or a large capital expenditure that might occur later down the road.

But so many people are into it that I feel like I’m left out. I’m grinding right now and think I’ll have $45k to put towards a rental at the end of the year so that’s why I am thinking about a rental.

But if my numbers are right and I can get the market to return 9%, then yes, in 30 years when I plan to retire, that $45k becomes $597,000. I guess you can argue that if you buy a home, it could appreciate to $400k and cash flow a significant amount of money. Any insight?”

– Patrick

This is an age-old question, and maybe it has no one answer. As a spoiler alert, I think the answer will be different for each investor.

Let’s try to break down the reasons why this is such a tough choice. But before we do, I want to let you know I’m not a heavily experienced real estate investor.

My answers are based on my own limited experience, and I’ll be coming at the topic from a financial angle.

For help managing your investments, consider working with a fiduciary financial advisor. Find an advisor who serves your area today (Sponsored).

Why Invest in Real Estate?

Real estate has proven to be one of the biggest wealth generators in history. It is estimated that up to 90% of millionaires obtain their wealth primarily by investing in real estate.

What makes real estate such a special investment?

1. Long-term capital appreciation

The median price of a home in 1970 was around $23,000. But by the end of 2021, that figure has risen to $408,000. That’s an incredible 1,770% increase in 50 years. Few investments can match that performance.

2. Rental income

Properly structured, real estate investment can generate regular income, in addition to long-term capital appreciation. While the income may only cover the monthly payment of the property after purchase, returns will become increasingly positive as rents increase. And once the mortgage on the property has been paid, most of the rental income will be profit to the owner.

3. Generous tax breaks

At least with investment property, depreciation expense can be claimed to reduce any tax liability. The benefit of depreciation is that it’s a “paper expense”—you can use it to lower your income, even though there is no out-of-pocket cost involved.

But there may be an even bigger tax break when you sell the property. Investments for more than one year get the benefit of lower long-term capital gains tax rates. For example, while ordinary income and short-term capital gains are taxed at rates ranging between 10% and 37%, long-term capital gains tax rates are limited to between 0% and 20%.

4. Leverage

Real estate is one investment where a small investor can make a big play with a small amount of money. You can purchase an investment property with 20% down and finance the rest from the bank. With an owner-occupied property, the down payment may be no more than 3%. Because of the high level of leverage, the long-term returns on real estate will be even higher than would be the case if you paid the full price in cash for the property.

5. Real estate is a tangible asset

Some investors prefer holding physical assets to paper and electronic investments, like stocks and bonds. Real estate is the ultimate tangible asset because it represents ownership of land itself.

6. It can be directly managed

When you invest in an index fund, or even in stocks and bonds, you’re turning control of your money over to the fund manager or company management. But when you invest in individual property, you control the entire process.

The Risks of Investing in Real Estate

Despite the easy and painless path the get-rich-quick-in-real-estate crowd claims it to be, real estate has real risks—and they’re not minor.

Here are some examples:

Overpaying for a property. This is more likely during hot markets, when multiple offers boost the property values. But if you buy-in at or near the top of the market, you may not recover your investment for a long time. This is made worse by leverage. Since most of the funds used to purchase real estate are borrowed, and that creates a fixed obligation, what’s really at stake is your equity. A 10% reduction in property values could cut a 20% investment in half.

Unexpected structural problems. Even if a property passes a home inspection with flying colors, it can still have structural problems. Two or three years after the purchase, the furnace could meltdown, the roof may need replacing, or you can learn the property has substantial termite damage.

Rising interest rates. These affect all investments, including stocks. Rising rates have a bigger impact on real estate because of the leverage factor. If rates rise significantly, your property value may go flat or even decline.

A deteriorating rental market. This can happen because the major employer in the area closes down a large facility, or because a huge new apartment complex goes up nearby. Either situation can cause tenants to become scarce, forcing you to lower your rent.

Legal problems. Because someone will be occupying your investment real estate, there’s always the potential for legal problems. Sure, you can have insurance to cover a lawsuit. But it will still cost you in time and aggravation. It’s also the possibility that a bad tenant could use the legal system to prevent eviction.

My Own Experience Investing in Real Estate

At the beginning of this article, I wrote that I’m not a heavily experienced real estate investor, but I do have one episode to relate to. I did try buying a rental property once, and it didn’t go well. You can read all about that experience in my article, 7 Lessons I Learned From Failing at Real Estate Investing.

Joseph Hogue wrote a guest post on this site, 7 Rules I Learned After Going Broke in Real Estate Investing, so I know I’m not the only one who had a bad experience. Joseph still invests in real estate, but the article lists several rules you need to be aware of if you’re going to make it work.

At the same time, I don’t use my own experience to discourage you from investing in real estate. It is possible to make money, and plenty of people do. But you do need to be aware of exactly how it works and what the potential pitfalls are.

There’s one more piece of personal advice I’d like to give: you don’t need physical property to invest in real estate. There are different ways to invest in real estate, and you may want to consider one as an alternative to owning property outright.


One popular alternative is real estate crowdfunding. My choice for real estate crowdfunding is Fundrise, where I’ve earned solid returns without ever owning property directly. One of the advantages of Fundrise is that anyone can invest on the platform, and with very little cash. It’s an opportunity to diversify your portfolio into real estate, with an investment that’s never more than you’re comfortable making.

I’ve been investing for 4 years now and have been happy with the returns. But even happier with the amount of time it takes me which is basically nothing.

Here’s a video I recapped on my 3-year returns with Fundrise:

Private Real Estate Notes

In a different direction, I also invest in private real estate notes. It’s a more advanced strategy, and I don’t recommend it to everyone. That’s because it involves purchasing nonperforming mortgages, a.k.a., bad loans.

The basic idea is that you buy a nonperforming mortgage at a deep discount. Since the mortgage is fully secured by property, there’s an excellent chance you’ll ultimately collect the full amount of the loan.

But if there’s insufficient equity in the home, you can take a loss. That’s why I don’t recommend a strategy for everyone.

But if you have a high-risk tolerance and an appetite for big profits, it may be a gamble worth taking.

For help managing your investments, consider working with a fiduciary financial advisor. Find an advisor who serves your area today (Sponsored).

Why Invest in Index Funds?

There are multiple reasons why stocks—and by extension, index funds—are one of the three major investments, along with bonds and real estate.

1. There are a variety of funds to invest in

You can invest in U.S. and foreign markets, and even in individual industry sectors, like technology, healthcare, or energy. You can even invest in index funds that hold other investments, like bonds, or even real estate.

2. Invest for income, growth, or both

Some funds specialize in growth stocks, while others focus on dividends. For example, the Invesco QQQ invests in the NASDAQ 100 index and has a long history of outperforming the S&P 500 index. But if you prefer dividend income, the Schwab U.S. Dividend Equity ETF (SCHD) has a dividend yield of 3%.

3. Investment diversification

When you invest in an index fund, you’re indirectly investing in shares of hundreds or thousands of companies. If any one of them fails, you barely notice the impact. This is the exact opposite of the situation with real estate. If a single property investment goes sour, you could be out of business.

4. Your portfolio is very liquid

You shouldn’t be trading investment positions on a regular basis, but it’s good to know you could liquidate a position or two if you needed to. Index funds can be traded on a daily basis.

5. There’s no legal liability

Since you’re investing in public corporations, any liability you might have is limited to your investment. A plaintiff or group of plaintiffs can’t come after you personally.

6. Index funds are truly passive investments

You invest your money, then wait for the returns to play out. In the meantime, there’s no property to maintain, no tenants to deal with, and no need for periodic renovations.

7. Index funds fit neatly into retirement plans

Index funds are probably the most common investments found in retirement plans. This is for all the reasons listed above. Unlike real estate, index funds are a clean investment. They can be held in a brokerage account, used to build a diversified portfolio, bought and sold as necessary, and require no direct management.

While it is possible to hold physical real estate in an IRA account, that requires special handling. That includes setting up a self-directed IRA account (SDIRA), which is not only complicated but involves a matrix of compliance issues that could cause the IRS to invalidate your plan completely.

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Online Stockbrokers like Robinhood will guide you with their vast knowledge, so you can wisely invest your hard-earned dollars. Don’t give it a second thought and click below.

The Risks of Investing in Index Funds

Stocks, and the index funds that invest in them, have become the primary investment vehicle over the past few decades. But like real estate, they’re not without risks.

Some examples include:

The market could crash. This is probably the biggest fear of anyone who invests in the stock market. It’s not entirely unjustified either. We’ve experienced a couple of crashes in just the past couple of years. Though it was short, the Dot-Com crash was deep, particularly in the NASDAQ stocks, which dropped by about 80%.

The Financial Meltdown of 2008 was also short, but it dropped enough to scare plenty of people out of the market. And even those who held on through the crash had to wait years to get back to their original positions. You’ll need the kind of risk tolerance that enables you to wait out these major setbacks.

The market can go into a prolonged bear market. Though market crashes may be scarier on the surface, a long bear market has the potential to do even more damage. What makes it worse is that so many of today’s investors have never experienced that type of market and how much damage it can do.

Inflation could hurt long-term returns. There’s really good news and bad news on this front. The good news is that stocks have outperformed inflation over the long term. While inflation has averaged about 3% over the past several decades, stock returns have been close to 10%.

But the bad news is that inflation can depress stock prices over the short run. Inflation causes prices to rise, which cuts business profitability. It also puts upward pressure on interest rates, adding to the negative effect on stock prices. The long-term effect of inflation could hurt stock returns for several years.

Real Estate Returns vs. Index Funds Returns

All the above advantages and disadvantages aside, return on investment is the single biggest factor in determining the desirability of an asset. And as it turns out, the returns on both real estate and index funds are very positive.

We can get an idea of the returns on real estate by looking at two different examples.

First, let’s look at the 10-year returns of the SP 500 index vs the U.S. Real Estate Index (chart courtesy of

Koyfin chart

Looking at this chart the S&P 500 is the clear winner with a cumulative return of 112.67% compared to U.S. Real Estate at 83.44%.

Another comparison we can look at are ETFs of both indexes. First, let’s look at the Vanguard Real Estate ETF (VNQ). Results from that fund are as follows:


S&P versus real estate

Now let’s look at the average returns on stock-based index funds. We’ll use the Vanguard S&P 500 ETF (VOO):


After tax return

When you look at the “Returns before taxes” in the first column (1-year) from each of the two screenshots above, real estate comes up as the clear winner. In 2021, it easily outdistanced stocks from 40.33% to 20.60%.

That certainly made real estate investment the choice in 2021, but what about the longer-term trend?

That clearly favors stocks. They easily outperformed real estate during the three-year and five-year terms, and most importantly for 10 years. In fact, stocks outperformed real estate by a full five percentage points each year for 10 years, 16.51% to 11.50%.

For help managing your investments, consider working with a fiduciary financial advisor. Find an advisor who serves your area today (Sponsored).

Unfortunately, the comparison of returns between real estate and index funds is hardly a pure-play. First, there are different ways to own real estate. An owner-occupied home is only the most obvious, but there is also rental real estate, which can be either residential or commercial.

Leverage also plays a role, since a property with a higher percentage of financing is likely to provide higher long-term returns than one paid for in cash.

The same is true of index funds. Since there are so many different ones to choose from, there are also a variety of returns. For example, the long-term returns on a growth fund are generally higher than they are for an income fund.

Real Estate or Index Funds – Which is the Better Way to Build Long-term Wealth?

Now let me get back to answering Patrick’s question more directly: are real estate or index funds the better investment?

Based on my analysis above, the combination of higher returns over the past 10 years, greater liquidity, ability to diversify, and suitability for retirement plans, clearly favors index funds over real estate.

But when it comes to investing, it’s never quite that simple. If Patrick, or one of his clients (he’s a CPA), prefers the control and direct ownership real estate provides and is willing to invest over several decades, real estate could be the better investment.

But for anyone who doesn’t want to get their hands dirty with an investment, index funds are the better choice.

Personally, I favor index funds. But at the same time, I’m well aware of the importance of diversification. In a best-of-all-worlds scenario, you want to have both index funds and real estate. After all, there are certain market conditions where stocks perform better, and others where real estate is the better play. If you hold both, you’ll benefit from either outcome.

But since both investment classes are so popular—and for so many obvious reasons—and are a regular part of the American wealth-building scene, you really can’t go wrong with either.

Think of it as one of those rare opportunities where you’re presented with a choice of two equally profitable investments.

Patrick, I hope I’ve answered your question, or at least given you some concrete criteria to use in judging one investment against the other.

If you have a question you’d like to submit, fee free to use our Contact submission page. If you do submit a question, understand the information you provide will be included in an upcoming post. But we won’t use your full name unless you give us permission to.


This article originally appeared on and was syndicated by

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Can real estate help you retire early?


While people have been retiring early since there was work to shirk, the “FIRE movement” went mainstream in the early 2010s, popularized by Mr. Money Mustache and a few other bloggers.


But does financial independence necessarily mean retiring early? How do you achieve financial freedom? And what hidden pros and cons of FIRE are you probably overlooking?


Here’s your 30,000-foot view of financial independence and early retirement, plus a formula to achieve it.


FIRE is an acronym for financial independence/retire early, or alternately financial independence/early retirement.


But those actually represent two distinct concepts. Early retirement refers to quitting your career job, never to return to the workforce. Or at least not to a high-stress, high-income career.


Increasingly, some retirees blur the line and continue working a fun job either full- or part-time. But more on that later.


Deposit Photos


Financial independence, sometimes called financial freedom, means being able to cover your living expenses with passive income from investments. In other words, your day job becomes optional, and you no longer need to trade time for money.

For example, say you live on $4,000 per month.


You buy a rental property that generates you $500/month in rental cash flow. You like seeing that extra $500/month come in, so you buy another property, and then another. When you have $4,000 of rental cash flow coming in each month, you can live on the rents alone. You could quit your job in a blaze of glory if you liked.


Note that the term “financial independence” has two different meanings, depending on the context. Aside from the financial freedom definition, it sometimes also means the ability to pay your own bills as an independent adult. Thus, a stoner 24-year-old who spends his days playing video games in his parents’ basement and barely working is not financially independent in either sense.


Julia_Sudnitskaya / istockphoto


You get the gist: with enough passive income, you can pay your bills and stop working if you want.


But what should you invest in to reach financial independence and retire early? How much of a nest egg do you need?


Honestly, these are the easy parts of financial independence and early retirement. Easy enough that I can explain them in a few paragraphs.


The hard part is maintaining low living expenses and a high savings rate, month in and month out.


As outlined above, you can invest in rental properties to generate passive income. And in doing so, you can bend, if not break entirely, the 4% Rule (more on that momentarily).


But as much as we love rental income around here at SparkRental, it’s far from the only type of passive income. You can earn passive streams of income from stock dividends, bonds, real estate crowdfunding investments, and countless other sources.

Rather than trying to pile all your money into one asset class, and earning all your passive income in one way, aim to create many passive streams of income.


For example, I earn money from rents, but also from stock dividends, real estate crowdfunding investments, private notes I’ve lent, and from businesses I own. No one source of my income would blow your mind, but they add up.


If you’re new to investing, I recommend starting with stock investing through a robo-advisor like Acorns or SoFi Invest. It requires no skill on your part, you can automate it, and you can start building an investment portfolio with $10.


When you’re ready for the next step of diversification, add a real estate crowdfunding platform like Fundrise or Groundfloor. It’s equally easy and passive, no expertise or work required.


Only consider buying your first rental property when you’re ready to pick up a new set of skills, and to devote lots of hours to it outside of your day job.


1989_s/ istockphoto


As outlined above, financial independence requires covering your living expenses with passive income. It doesn’t require an exact net worth.


Still, traditional financial planners tell you to save up 25 times your annual spending (not your annual income!). That’s because financial planners consider 4% a safe withdrawal rate: if you pull 4% out of your retirement portfolio in the year you retire, then adjust that upward each year for inflation, your net egg should last you at least 30 years. Financial advisors refer to this as the 4% Rule.


But if you retire at 40, you need your nest egg to last you 40-60 years, not 30. In that case, a 3.5% withdrawal rate should let your nest egg keep growing forever (see this explanation from CFP Michael Kitces for the math). Rather than multiplying your annual expenses by 25, multiply it by 28.6 to reach your target nest egg for early retirement.


Note that withdrawal rates only apply to your stocks and bonds, not your real estate investments. Your real estate generates ongoing income, with no need to sell off assets.


Most people who reach financial independence don’t actually stop working. Oh, they may quit their high-octane career job. But there are only so many days in a row you can sip margaritas on a beach before you get bored and fat.


Rather, most people simply switch to a new career that fulfills them. It may not pay well, but that doesn’t matter when you reach financial freedom. Some people start blogs or online businesses, such as travel blogs documenting their adventures. Others work for nonprofits, changing the world for the better. Some focus on writing novels, or painting, or other artistic endeavors.


But because you won’t actually stop working, you probably won’t stop earning money. You’ll just earn less than you do today — which means you don’t need to cover all of your living expenses with passive income. You just need enough to bridge the gap between what you spend and how much your dream job pays.


For example, imagine you spend $70,000 per year while working a soul-sucking job. You dream of becoming a travel writer, but that only pays $55,000. You don’t need $70,000 in passive income to quit your 9-5 job — you just need $15,000 per year, to supplement the income from your dream job.


You may not technically be financially independent, but who cares? You still get to live the same post-FIRE lifestyle without having to meet the full definition of financial freedom.




To reach financial independence and early retirement fast, cut your living expenses as low as you can. Not only does that boost your savings rate, allowing you to funnel more money into investments, it also lowers your target passive income and nest egg. Remember, for every dollar you spend in retirement, you need $25 invested (or $28.60 if you plan to retire young)!


For maximum savings in a single move, try house hacking to score free housing.

Automate your savings with a robo-advisor, or by setting up automatic recurring transfers.


When you’re ready to expand into rental properties, read up on down payment hacks to buy a rental property with no money down. But beware of using too much leverage in real estate investing, it can leave you with negative cash flow.


You’ll be surprised how quickly your investments take on a life of their own and start generating passive income. Avoid lifestyle creep as your income rises, and keep funneling your returns and passive income back into new investments.


Honestly that’s where the challenge of financial independence and early retirement lies: not in the math or investment strategies, but in the discipline of keeping your living expenses low and your savings rate high.


designer491/ iStock


The FIRE lifestyle of low living expenses and high savings comes with some surprising perks.


To begin with, recessions are less scary. As you earn more passive income, you rely less on your 9-5 job to cover your bills. If your job disappears to a recession, you can cover many of your bills with rental income, dividends, and other passive income sources.


That same lower dependence on your day job puts you in a better position to negotiate a higher salary or benefits. You can push hard because you’re less daunted by the idea of aggravating your boss. Your world wouldn’t end if you lost your job.


Those negotiated benefits could include working remotely, allowing you to move somewhere with lower cost of living. I live in Brazil for example, allowing me to live a luxurious lifestyle on relatively few US dollars each month.


You may not need life insurance or long-term disability insurance. Low living expenses and a high savings rate means your family could probably survive on one income, if one partner shuffled off this mortal coil.


While many young adults complain that student loans prevent them from investing, living a frugal lifestyle while paying them off makes it easy to keep that “extreme savings” going. You can just start funneling that money into passive income streams and retirement savings rather than student debt.


Read up on other hidden benefits of the FIRE lifestyle here.


Haters gonna hate — and the FIRE movement has plenty of haters.


Some say it involves too much sacrifice, that people pursuing FIRE save for the future at the expense of the present. As someone who saves 65% of his household income and spends months out of the year vacationing abroad, I can tell you firsthand that’s a bogus criticism.


The woke crowd might retort:


“Yeah but you’re a 40-year-old white male who owns an online business, you probably earn a boatload of money.”


I can assure you I do not. It took years for SparkRental to turn a profit, and even today we reinvest most of our profits back into the business. You know, doing evil things like hiring people and creating jobs.


To this day, my family lives almost entirely on my wife’s modest teacher salary.

Some whine that only married couples can achieve financial independence and early retirement. Others claim only single people can do it, citing marital disputes over money. They can’t both be right, but they can both be wrong.


Others worry about health insurance without employer coverage. Good thing you have so many health insurance options for early retirees.


Everyone has an excuse why they can’t build passive income and retire early. Most of them just don’t want to cut spending for a more frugal lifestyle — and there’s nothing wrong with that. By all means, live the normal suburban life keeping up with the Joneses. Just don’t tell me it’s impossible for middle-class people to retire at 40, because you’re wrong. Look no further than the Thompsons, who retired at 30.


Read the full list of FIRE movement criticisms, and the counterarguments from people actually living the FIRE lifestyle.



Love it or hate it, the FIRE movement proves that not everyone has to work the standard 40-year career. Some work for 10-20 years, invest a high percentage of their income, then reach financial independence and early retirement.


I plan to work forever — doing things I love. That includes writing, building lifestyle businesses, and perhaps working in the wine industry.


And the more passive income I earn, the less I worry about how much I earn from active income.


This article originally appeared on and was syndicated by


Featured Image Credit: Pra-chid / istockphoto.