Real estate investing can be a lucrative and exciting way to build wealth and achieve financial independence. However, it’s important to weigh the potential benefits and drawbacks before making any investment decisions. In this article, we’ll explore the pros and cons of real estate investing, including the location dependence, non-fungibility, non-divisibility, and illiquidity of real estate.
As Benjamin Graham once said, “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.” With that in mind, let’s dive into the pros and cons of real estate investing.
Historical Performance: Real Estate vs. Stocks vs. Gold
Before exploring the specific advantages and disadvantages of real estate, it’s valuable to understand how this asset class has performed historically compared to other major investment options. The data tells a compelling story about long-term wealth building.
$10,000 Invested in 1970: Where Would It Be Today?
Comparing nominal total returns across major asset classes over 50+ years (with dividends/rent reinvested).
Looking at the chart above, stocks have dramatically outperformed both real estate and gold over the past 50+ years. A $10,000 investment in the S&P 500 in 1970 would have grown to approximately $2.5 million today—compared to roughly $700,000 for real estate (including rental income) and $600,000 for gold.
The real estate figure includes an estimated 4% net rental yield annually, which is critical context—price appreciation alone would tell a very different story. This demonstrates how rental income transforms real estate from a modest performer into a meaningful wealth-building tool.
What About Inflation? Real vs. Nominal Returns
The figures above are nominal returns—the raw dollar amounts you’d see in your brokerage account. But a dollar in 1970 bought far more than a dollar today. When we adjust for inflation to measure actual purchasing power gained, the picture changes significantly:
| Asset Class | Nominal Value | Real Value (2024 $) | Real CAGR |
|---|---|---|---|
| S&P 500 | $2.5M | ~$300K | 6.5% |
| Real Estate | $700K | ~$85K | 4.0% |
| Gold | $600K | ~$73K | 3.8% |
Cumulative inflation from 1970 to 2024 was approximately 8x, meaning prices rose eightfold over this period. This is why the real (inflation-adjusted) values are roughly one-eighth of the nominal values.
The key insight remains unchanged: stocks significantly outperformed both real estate and gold in building actual wealth. However, understanding the distinction between nominal and real returns is crucial—don’t let large nominal numbers fool you into thinking you’re wealthier than you are. Data sourced from Robert Shiller’s historical data, NYU Stern, and the S&P 500 Historical Calculator.
Some additional context to consider:
Leverage amplifies real estate returns. Most real estate investors use mortgages, meaning they control a $500,000 property with perhaps $100,000 down. This leverage can multiply returns (and losses) substantially—more on this below.
The S&P 500 represents diversified equity ownership. Individual stock picking would likely produce very different results.
Real estate requires active management. Unlike stocks, rental properties demand time for tenant management, maintenance, and oversight—or fees paid to property managers.
Returns Across Different Economic Eras
Market conditions vary dramatically by decade. Understanding how each asset class performs during different economic environments can inform portfolio allocation decisions.
Average Annual Real Returns by Decade
How each asset class performed during different economic periods.
Several patterns emerge from this historical data:
Stocks excel during periods of economic expansion (1980s, 1990s, 2010s) but suffered during the stagflation of the 1970s and the lost decade of the 2000s.
Gold shines during uncertainty and inflation. The 1970s saw gold surge as inflation eroded the dollar’s purchasing power, and the 2000s saw another gold rally amid financial instability.
Real estate provides steadier, more modest returns with less dramatic swings in either direction—though the 2008 financial crisis proved it’s not immune to significant corrections.
The Risk-Return Tradeoff
Higher returns typically come with higher volatility. Understanding this relationship helps set realistic expectations.
Risk vs. Return: The Volatility Tradeoff
Higher returns often come with greater price swings. The size of each circle represents the asset's historical volatility.
This visualization reveals an important insight: gold offers the worst risk-adjusted returns of these three asset classes—high volatility with relatively low long-term returns. Real estate appears to offer moderate returns with lower volatility—but note that housing index volatility is artificially suppressed due to appraisal smoothing and infrequent transactions. Public REITs show volatility closer to equities.
The S&P 500 occupies the classic high-risk, high-reward position. For long-term investors who can stomach 30-40% drawdowns during market crashes, stocks have historically rewarded that patience.
The Leverage Multiplier: How Real Estate Investors Actually Build Wealth
Perhaps the most transformative difference between real estate and stock investing isn’t shown in any chart: leverage. While buying stocks on margin is risky and typically limited to 50%, real estate investors routinely use 80% leverage (20% down payment) with relatively low risk.
Here’s how leverage transforms returns with a concrete example:
Scenario: $500,000 property with 20% down ($100,000 investment)
| Metric | Without Leverage | With 5x Leverage |
|---|---|---|
| Property appreciation (4%) | $20,000 | $20,000 |
| Return on YOUR money | 4% | 20% |
| 10-year equity growth | $48,000 | $240,000 |
| Effective CAGR on invested capital | 4% | ~13% |
Note: This shows gross returns before financing costs. Historical mortgage rates have ranged from 3% (2020s) to 15%+ (1980s), which significantly reduces net returns. A 7% mortgage on $400K = $28,000/year in interest alone.
Adding rental income makes this even more compelling:
- Annual rent collected: $30,000 (6% gross yield)
- After mortgage, taxes, maintenance: ~$6,000 net cash flow
- Cash-on-cash return: 6% on your $100,000 down payment
- Combined return (appreciation + cash flow): Potentially 18-25% annually on invested capital
This is why many real estate investors achieve returns competitive with—or exceeding—stock market returns, despite real estate’s lower unleveraged appreciation rates. The ability to control a large asset with a small down payment, collect rent that covers (or exceeds) carrying costs, and benefit from appreciation on the full property value creates a powerful wealth-building engine.
The catch? Leverage amplifies losses too. A 20% property value decline wipes out your entire equity in this scenario. Real estate investors must be prepared for illiquidity during downturns and have reserves to weather vacancies or unexpected repairs.
Pros of Real Estate Investing
Potential for Appreciation
One of the biggest advantages of real estate investing is the potential for property value appreciation over time. According to data from Zillow, the median home value in the United States has increased by over 40% in the past decade alone. By carefully selecting properties in desirable areas and holding onto them for the long-term, investors can potentially reap significant gains.
Cash Flow Through Rental Income
Another potential benefit of real estate investing is the cash flow generated through rental income. By renting out properties, investors can generate a steady stream of passive income that can help fund their living expenses or be reinvested for further growth.
Tax Benefits
Real estate investors can also benefit from various tax advantages. For example, rental income is generally taxed at a lower rate than regular income, and investors can often deduct expenses such as mortgage interest and property taxes from their taxable income.
Cons of Real Estate Investing
Location Dependence
Unlike other investments such as stocks or bonds, real estate investing is highly dependent on location. A property’s location can greatly impact its value, rental income potential, and overall return on investment. Investors must be willing to do their research and carefully consider the location of any properties they are considering.
Non-Fungibility of Real Estate
Another challenge with real estate investing is the non-fungibility of properties. Unlike other investments, real estate properties are unique and not easily interchangeable. This can make it difficult to diversify a real estate portfolio and may limit an investor’s options for buying and selling properties.
Non-Divisibility
Real estate properties also tend to be non-divisible, meaning they cannot be easily broken down into smaller units for investment purposes. This can make it challenging for smaller investors to enter the real estate market, as they may not have the capital to purchase an entire property on their own.
Illiquidity
Finally, real estate investments tend to be illiquid, meaning they cannot be easily bought or sold like stocks or other assets. This can make it challenging to liquidate real estate investments quickly in the event that an investor needs cash for other purposes.
Data Methodology & Limitations
The charts in this article use data from January 1970 through December 2024. Important methodological notes:
S&P 500 returns are total returns including reinvested dividends, sourced from Robert Shiller’s historical data and NYU Stern.
Real estate returns combine Case-Shiller national home price index appreciation with an assumed 4% net rental yield. This is a constructed series—no single observed total return index exists for residential real estate. Actual investor returns vary enormously by location, property type, and management approach. Additionally, housing price indices exhibit artificially low volatility due to appraisal smoothing and infrequent transactions. Public REITs, which trade daily, show volatility comparable to equities (~15-17%).
Gold returns are spot price changes from the LBMA, which produces no income. Gold’s path includes the 1970s surge (over 100% in 1979 alone), the brutal 1980-2000 decline, and the 2000s recovery.
Inflation adjustment uses BLS Consumer Price Index data. Real returns shown in decade comparisons are approximate geometric averages.
Conclusion
In conclusion, real estate investing can be a lucrative and exciting way to build wealth and achieve financial independence. However, it’s important to carefully consider the potential risks and rewards before making any investment decisions. By understanding the location dependence, non-fungibility, non-divisibility, and illiquidity of real estate, investors can make informed decisions that are well-positioned for long-term success.
As John Templeton once said, “The four most dangerous words in investing are: ’this time it’s different.’” While real estate investing may present unique challenges, it can also offer unique rewards for those who are willing to put in the time and effort to do their due diligence and make informed investment decisions.