The S&P 500 always beats real estate. Really? Think again

My stockbroker said it with absolute confidence, the kind that tells you the conversation is already over.

“The S&P 500 always beats real estate.”

I remember stopping him mid-sentence and saying, “Wait a second. You’re not comparing apples to apples.”

And that’s the problem right there. This debate almost always starts with a false premise.

The stock market crowd loves to say, “If you put X dollars into the S&P in 1994, you’d have millions today.” And they’re not wrong — if you actually put that money in, never touched it, never took income, never paid taxes along the way, and had the emotional discipline of a monk for three decades living through the stress of huge downturns in the market like 2001, 2008 and Covid19.

But that is not how real people live. And more importantly, that is not how real estate works.

Let’s use my own experience instead of a hypothetical.

Back in 1994, I bought a rental property for about $134,000. If I had put that same $134,000 into the S&P 500 back then and reinvested every dividend, I’d be sitting on roughly $3.2 million today. On paper, stocks win. End of discussion. That’s usually where the broker smiles and moves on.

Except… I didn’t write a $134,000 check.

The bank did.

I bought that property with a loan at about 5% interest on a 30-year mortgage. My actual cash out of pocket was closer to $27,000. That detail gets conveniently ignored in almost every stock-versus-real-estate argument.

Now let’s talk about what actually happened over time.

I started renting the property in the mid-90s for about $1,450 a month. Over the years, rents increased gradually, not aggressively, not dramatically — just steadily. Today that same property rents for about $2,450 a month. No hockey-stick growth, no fantasy assumptions. Just boring, realistic rent increases over roughly 30 years.

When you average that out, the property generated about $23,000 a year in rent. Over three decades, that adds up to roughly $700,000 in total rent collected.

And here’s the part Wall Street never mentions: that rent paid the mortgage.

Every month, tenants sent checks that covered the loan, chipped away at the principal, paid the interest, and slowly transferred ownership of the property from the bank to me. By the time the loan was paid off, I owned the property free and clear without ever funding the purchase myself in any meaningful way. Today the building owes me nothing, I have depreciated everything cent of my investment yet I am still collecting close to 30K a year in rent.

At the same time, inflation was doing its quiet work in the background. The property that cost $134,000 in 1994 is worth about $420,000 today. That appreciation wasn’t spectacular. It didn’t make headlines. But it was relentless.

And then there are taxes — the invisible multiplier no stock chart ever shows.

Rental income is treated very differently than investment income. Depreciation, expenses, travel, capital improvements and paper losses meant much of that rental cash flow was either lightly taxed or not taxed at all in real time. But it went even further than that. During my working years, those same paper losses didn’t just offset rental income — they reduced my entire taxable salary. On paper, the property often showed little or no profit, while in reality it was throwing off cash and building equity. That depreciation quietly lowered my W-2 income year after year, keeping more of my paycheck in my pocket while the asset did its work in the background.

That’s a concept most people never truly grasp. The stock market can defer taxes, but it can’t reach back and reduce the taxes on your regular paycheck. Real estate can. And over decades, that difference compounds just as powerfully as any market return.

So where does that leave us?

After 30 years, I ended up with a property worth $420,000, roughly $700,000 in rent collected along the way, and significant tax savings — all built on an initial cash investment of about $27,000.

Now let’s do the real apples-to-apples comparison.

If I had taken that same $27,000 and put it into the S&P 500 in 1994, it would be worth roughly $650,000 today. That’s an excellent return. Truly. But it produced no income, no tax shelter against my salary, no leverage, and no asset that someone else paid off for me.

Real estate didn’t just grow. It paid me while it grew. It reduced risk instead of amplifying it. It let me live my life, fund my family, and sleep at night without wondering what the market did today.

That’s the part spreadsheets miss.

Stocks are phenomenal at compounding money you don’t need for decades. Real estate is phenomenal at funding a life while quietly building wealth in the background.

Yes, there is work and some active management involved, but when someone tells me the S&P always beats real estate, I don’t argue anymore. I just smile and say, “Only if you pretend real estate works like a stock.”

It doesn’t.

And that’s exactly why it worked.