When considering where to allocate your hard-earned money, the debate between real estate and stock market investments, such as the S&P 500, is ever-present. While both offer growth opportunities, real estate has unique advantages that make it a compelling choice for long-term investors.

The stock market has enjoyed a historic bull run over the last decade, with the S&P 500 delivering a stunning 13% annual return. However, according to Goldman Sachs, that remarkable growth is unlikely to continue. As a result, investors are looking for alternatives, and real estate could be one of the most attractive options.

Over the next decade, factors such as stability, leverage potential, diversification, and economic trends position real estate as a superior investment option compared to the S&P 500.

Goldman Sachs’ Sobering S&P 500 Forecast

Goldman Sachs strategists led by David Kostin project that the S&P 500’s returns will fall dramatically in the coming decade, citing a couple of reasons:

• The index’s recent growth has been driven by a handful of high-performing tech stocks, like Nvidia and Alphabet, which might not be able to sustain their exponential growth.
• The chances that the S&P 500 will under-perform other assets, such as Treasury bonds, are high (72%), and there is a 33% chance it will lag behind inflation.

For investors who enjoyed the strong performance of the past 10 years, a forecast of just 3% annual returns over the next decade may be underwhelming, especially when considering inflationary pressures and the potential risks of overvaluation.

Tangible Value and Stability

One of the most compelling reasons to invest in real estate is its tangible nature. Unlike stocks, which are abstract shares in a company’s future performance, real estate is a physical asset that fulfills a basic human need: shelter. This inherent utility creates stability in demand, which is less susceptible to the dramatic volatility that often plagues the stock market.

Real Estate as a Hedge Against Volatility

The S&P 500 represents the top 500 publicly traded companies in the U.S., which can be affected by a range of unpredictable factors, including geopolitical tensions, inflation spikes, and interest rate fluctuations. Real estate, in contrast, tends to experience more gradual price adjustments. While stocks can lose value rapidly during market downturns, real estate prices historically show resilience, especially in desirable locations.

Consistent Appreciation

Over time, real estate values have consistently appreciated, driven by population growth, urban development, and limited land supply. According to the National Association of Realtors, U.S. home prices have risen at an average annual rate of 3-5% over the past several decades. In contrast, the S&P 500’s average annual return, while higher at approximately 10%, is significantly more volatile and reliant on market performance.

The Power of Leverage

Real estate offers a unique advantage that is rarely available in the stock market: the power of leverage. Through mortgages and other financing tools, investors can control a valuable asset with only a fraction of the purchase price as a down payment.

Amplified Returns

For example, if you purchase a $300,000 property with a 20% down payment ($60,000) and it appreciates by 5% annually, your return on investment (ROI) is amplified significantly due to leverage. After one year, a 5% increase equates to $15,000, which represents a 25% return on your initial $60,000 investment. In the stock market, achieving such high returns within a year would typically require substantial risk.

Using Other People’s Money

Real estate allows investors to use “other people’s money” (OPM) to build wealth, whether through tenant rents covering your mortgage or securing loans with historically low interest rates. Leverage reduces the need for substantial upfront capital, enabling you to scale your portfolio more quickly compared to investing in the stock market.

Steady Passive Income Streams

Real estate offers another key advantage: the potential for passive income through rental properties. This consistent cash flow can supplement your earnings, fund additional investments, or serve as a safety net during economic downturns.

Cash Flow Resilience

During times of market uncertainty, dividend payments from stocks can be reduced or eliminated. By contrast, rental income is relatively stable, provided the property is in a strong rental market. Moreover, rents tend to increase over time, especially in areas with growing demand.

Tax Advantages

Real estate investors enjoy significant tax benefits, such as depreciation, deductions for property expenses, and favorable treatment of long-term capital gains. These incentives increase net income, further solidifying real estate as a superior option for generating wealth.

Inflation Protection

Inflation erodes the purchasing power of money, making it a critical factor in investment decisions. Real estate is often hailed as an effective hedge against inflation because property values and rental incomes tend to rise alongside inflation.

Real Assets Thrive in Inflationary Environments

As inflation increases, so does the cost of building materials and labor, which in turn drives up property prices. Meanwhile, fixed-rate mortgage payments remain unchanged, further boosting the ROI for real estate investors. The S&P 500, while providing some inflation protection, is often more susceptible to interest rate hikes, which can drag down stock valuations.

Historical Performance During Inflationary Periods

Historically, real estate has outperformed stocks during periods of high inflation. The 1970s, a decade marked by significant inflation, saw substantial gains in real estate values while stock market returns were relatively muted.

Diversification Benefits

A well-diversified portfolio is key to mitigating risk, and real estate offers an excellent way to achieve this. Unlike stocks, which are directly tied to the financial performance of companies, real estate is influenced by different economic factors such as local job markets, population growth, and housing supply.

A Self-Directed IRA is the best way to diversify your retirement portfolio. It allows to you invest in alternative assets, including real estate, that you wouldn’t normally be allowed to invest in. This is because traditional retirement plans only allow for traditional investments. Self-directing your retirement allows for (almost) any type of investment you want.

Low Correlation with Stocks

Real estate has a low correlation with the stock market, meaning its performance does not move in tandem with stocks. This makes it an ideal diversification tool to balance risk in your investment portfolio.

Geographic and Asset-Class Diversification

Real estate also allows for diversification across different markets and property types. Residential, commercial, industrial, and vacation properties each have unique risk and reward profiles, enabling investors to tailor their portfolios to their goals.

Long-Term Economic and Demographic Trends

Several macroeconomic and demographic factors favor real estate as an investment over the next decade.

Urbanization and Population Growth

As cities continue to expand and populations grow, the demand for housing, commercial spaces, and infrastructure will rise. The U.S. Census Bureau projects that the population will grow by approximately 25 million by 2035, fueling demand for real estate in high-growth areas.

Remote Work and Lifestyle Shifts

The pandemic has reshaped how and where people live, with growing demand for suburban and rural homes, as well as properties with home-office spaces. These trends are expected to continue, providing new opportunities for real estate investors.

Control Over Your Investment

Real estate offers a level of control that is rarely available in the stock market. As a property owner, you can influence the value of your investment through improvements, marketing, and strategic management.

Value-Add Opportunities

Renovations, upgrades, and effective property management can significantly increase a property’s value and rental income. In the stock market, investors are passive participants with little ability to influence the performance of their investments.

Direct Ownership

Unlike stocks, which are subject to corporate decisions and market sentiment, real estate provides direct ownership and a sense of security. Even during economic downturns, your property retains intrinsic value and utility.

Challenges and Risks to Consider

While real estate offers numerous advantages, it is not without challenges. These include:

• Liquidity Constraints: Real estate transactions can take weeks or months, making it less liquid than stocks.
• Management Responsibilities: Owning and managing properties requires time and effort, or the cost of hiring property managers.
• Market Risks: Real estate markets can experience downturns, particularly in overbuilt areas or during economic recessions.

Despite these challenges, careful planning and due diligence can mitigate risks, making real estate a highly rewarding investment.

Conclusion: A Decade of Opportunity

As we look ahead to the next decade, real estate emerges as a stronger investment choice compared to the S&P 500. Its tangible value, stability, and leverage potential offer unique advantages for wealth creation. Moreover, the potential for passive income, inflation protection, and diversification aligns with the needs of long-term investors seeking consistent growth. Couple that with expert predictions, and you can make a case for real estate outshining traditional investments.

While the S&P 500 remains an attractive option for those comfortable with volatility, real estate provides a balanced and reliable path to financial security. By capitalizing on current economic trends, leveraging low interest rates, and focusing on high-growth markets, investors can position themselves for significant success in the years to come.