If you want to reach financial independence and/or retire early (FIRE) within the next five to ten years, should you invest in real estate or stocks?

Both have their advantages and disadvantages. It turns out that several US and German universities, along with the German central bank, even ran an exhaustive study on real estate versus stocks to compare returns over the last 145 years.

The short version of their finding? Real estate had slightly higher returns, and significantly lower volatility and risk. But a deeper analysis proves less cut-and-dry, as stocks have outperformed real estate in the last 30 years.

If you’re looking for a fast track or retirement catch-up plan, here’s exactly what you need to know about real estate investing vs. the stock market – and how to capitalize on the strengths of each.

Advantages of Real Estate vs. Stocks

To help you decide between real estate or stocks for your early retirement plan, I’ll outline a series of advantages of disadvantages for both real estate investments and stocks. After explaining some of the pros and cons, I’ll break down some sample numbers for how your portfolio might look as you invest for passive income and FIRE.

Strap in!


Real estate investors can typically borrow 80% of the purchase price with a rental property loan. In other words, they can buy an asset worth $100,000 with only $20,000, and over time their tenants will pay off the mortgage for them.

If they house hack by buying a small multifamily and moving into one of the units, they can borrow up to 96.5% of the purchase price with an FHA loan.

Stock investors can take advantage of leverage as well, but with far less flexibility. When stock investors buy on margin, they can typically borrow up to 50% of the cost to buy new stocks. Even then, if the balance of their portfolio falls, they’re subject to a “margin call” – the brokerage can force them to sell their stocks (at a huge loss) to recover the loan.

Score one for real estate investing.

Income-Oriented Investments

Both real estate and stocks can appreciate in value over time, and both can generate passive income.

But here’s the thing: most stocks don’t generate much income in the form of dividend yield. In 2018, for example, the S&P 500 paid a dividend yield of around 1.9%.

Rental properties excel at generating passive income. Most rental investors aim for at least 7-8% in cash-on-cash returns from rental cash flow, and consider property appreciation a nice bonus.

Which segues nicely into the next advantage: that rental cash flow is predictable.

Predictability of Returns

No, real estate investors can’t predict housing market movements, just like stock investors can’t predict stock market movements.

But they don’t have to. In the battle of real estate vs. stocks, one enormous advantage is that landlords can calculate a rental property’s cash flow before buying it.

Not on a month-by-month basis of course. This month you might suddenly have a $500 plumbing repair, while the next two months have no expenses, followed by a $1,000 furnace repair bill. Rental income and expenses might look something like this:

In the long term, however, rental property expenses are predictable. Landlords can (and should) set aside money every month for these long-term expenses, such as repairs and vacancies. The rest they can pocket as cash flow.

Rental properties aside, flippers can predict their returns as well. They know the purchase price, they know the cost of repairs, and they know the after-repair value (ARV). And while those numbers aren’t always perfect in their precision – the property may sell for $5,000 more or less than expected, for example – experienced investors can pinpoint these numbers accurately enough to reliably earn strong returns.

Control over Returns

Another win for real estate investing vs. stocks is that real estate investors have a degree of control over their returns. They can reduce tenant turnovers through better property management. They can upgrade the rental property to attract higher rents and higher quality tenants.

Landlords can also get creative and add extra revenue streams, more ways to make extra money on rental properties.

Nor does this control end with traditional landlords. Vacation rental landlords can use all sorts of strategies to drive more Airbnb bookings for a higher occupancy rate and higher returns.

Likewise, flippers can choose to invest more in repairs, or less, depending on the difference in ARV.

Inflation Adjusted Returns

One huge advantage for rental properties vs. stocks is that rents rise alongside inflation. In fact, rising rents are a primary driver of inflation.

A landlord’s mortgage payment stays the same over the years, but their rents rise. Imagine a landlord bought a property in 2010 that rented for $1,000, with a $500 mortgage payment. Ten years later in 2020, their mortgage payment remains $500, but the rent rose to $1,500. The spread between their mortgage payment and their rent doubled!

Alternatively, consider a stock investor. Say they earn 2.5% yield from dividends and see 5.5% from price growth, for an 8% return this year. But if there’s 2% inflation this year, their real return is 6%, not 8%.

Landlords don’t need to adjust their returns for inflation. Investors in just about everything else (including stocks) do.

Tax Advantages

Rental properties come with an enormous assortment of tax deductions, including many “paper” expenses that don’t actually cost real money.

For example, you can deduct for depreciation, and with the Tax Cuts and Jobs Act of 2017, most landlords can take an extra 20% pass-through deduction.

Best of all, you can take advantage of rental property tax deductions even if you take the standard deduction. Rental property tax deductions are “above the line” and come off your total rental income, before it’s added to your adjusted gross income.

Every conceivable expense associated with rental properties is deductible, including travel, home office, and other deductions only available to the self-employed. This abundance of deductions often leave landlords with a lower tax bill even though they saw profitable rental income.

Greater Stability

Stocks are notoriously volatile. And while home prices can fluctuate, they don’t fluctuate with anything like the peaks and valleys that stocks see.

Since 1975, housing prices have only declined three times, and only one of those (the Great Recession) was a drop over 10%. Yet there have been dozens of stock market drops of over 10%.

Rents are particularly stable. They rarely decline, and when they do it’s by very small margins. Check out this graph, showcasing how little rents dipped even at the height of the Great Recession (green is average rent, blue is median rent):

That’s one reason why real estate investors can accurately calculate rental cash flow: rents tend to be stable and to only move upward.


Real estate is, well, real. You can walk up and touch it. You can physically improve it. It can’t be stolen, it can’t declare bankruptcy, it can’t go out of business.

Yes, real estate can go down in value. In the Great Recession the average American home lost 23% of its value. But stocks can literally lose 100% of their value overnight – they’re paper assets, based on legal entities. There’s nothing inherent in their value.

Your rental property isn’t going anywhere. If it burns down, you have insurance. It has inherent value, which is why banks will lend 96.5% of its value to you, and why they only lend 50% of the value of stocks on margin.

Disadvantages of Real Estate

I love real estate as an investment, but it’s not all rainbows and butterflies, believe me.

Here are some of the disadvantages of real estate vs. stocks, even when it comes to reaching financial independence and retiring early.

Lack of Liquidity

Real estate takes time to buy and sell. It’s taken me upward of nine months to sell a property!

That means that if you encounter a true financial emergency and need money now, real estate won’t bail you out. It will take at least a month or two (often longer) to sell, and a similar timeframe to borrow against.

High Barriers to Entry

One reason for the impressive returns and perks of real estate investing vs. stocks is that it’s harder to invest in real estate. The barriers to entry are higher, which cuts both ways. It makes for great opportunities for investors with plenty of money and experience, but it also makes it difficult for newbies to enter the fray.

A 20% down payment, plus closing costs, plus cash reserves? That’s tens of thousands of dollars. At least. And the average American doesn’t have $30,000 sitting idly by and collecting dust.

Nor is cash the only barrier to entry. It takes knowledge and skill to find good deals on rental properties. It also takes knowledge and skill to manage properties effectively (although that you can delegate that work to a property manager if you like).

There’s even an element of knowledge in knowing how to come up with a down payment. 


Buying real estate takes work. Overseeing renovations for a flip takes work. Managing rental properties takes work. Preparing a property to sell takes work.

It’s a key difference between real estate investing vs. stocks. You can buy a stock or ETF or mutual fund in 30 seconds, and promptly forget about it. There’s just no comparison with real estate investing.

Diversification Difficulties

When each property costs so much of your capital, it makes it harder to diversify.

Imagine you have $120,000 to invest. You could buy one $120,000 property in cash, or finance four rental properties requiring $30,000 apiece in down payments and closing costs.

Or you could buy shares in thousands of companies spread across dozens of countries.

Advantages to Stocks vs. Real Estate

So what are the pros of investing in stocks vs. real estate?

Yes, I’m a “real estate guy,” but that doesn’t mean I don’t also love stocks. There are some critical advantages to stocks, and no retirement portfolio is complete without a diverse set of stock holdings.


You can buy and sell stocks instantaneously.

Got hit with a $5,000 medical bill and need money right now? Sell some stocks and you have cash in hand today.

Of course, it’s that same ease of buying and selling that drives stocks’ notorious volatility. Stock markets can fluctuate wildly based on a single financial news story. By tomorrow, it may be forgotten entirely, and the market swings in the other direction.

But there’s a certain reassurance in knowing that if you want your money out today, you can have it out today.

Low Barrier to Entry

Have an extra $100 sitting in your bank account? You can invest it in stocks with very few headaches, knowledge, or costs.

No, really. You can open a brokerage account, transfer money into it, and buy a low-cost index fund that tracks the S&P 500 or Russell 2000 or some other stock index. Accounts are free to open, and the transaction fee is a $4.95 commission per trade.

Which, by the way, is waived if you buy a fund owned and managed by your broker.

Don’t get me wrong, evaluating and picking individual stocks takes knowledge. But you don’t have to go that route – you have the option of simply investing money “in the market” by investing in an index fund. No skill required.

There’s no equivalent option when buying a rental property or flipping a house.

Easy Tax-Free Retirement Contributions

You can invest in stocks tax-free for retirement with an IRA, 401(k), or other related retirement accounts.

And it’s easy – within five minutes you can set up an IRA through your brokerage. The process to buy or sell stocks in your IRA account is no different than in your brokerage account.

With that said, you can also invest in real estate through a self-directed IRA. But it’s a little more complicated, and you need to go through a trust company to administrate it for you.

Easy Diversification

With $100 and a few clicks, you can invest in index funds that own hundreds of companies. You can invest in US stock funds, European stock funds, Asian stock funds, emerging market stock funds.

Small market cap or large market cap, in sectors ranging from technology to healthcare to energy and beyond. It’s incredibly easy to diversify your stock portfolio.

Why does diversification matter? In a word, risk. The idea is a simple one, and there’s an old proverb that sums it up nicely: don’t put all your eggs in one basket.

Diversification is one of the great advantages of stocks vs. real estate.

Completely Passive Income

When you buy shares in an index fund, you can let them sit there, compounding as dividends reinvest, until you’re ready to retire. The only second thought you might have is rebalancing, and even that can be done passively through “cash flow rebalancing” (adjusting new stock purchases to shift your asset allocation as desired).

In the debate over real estate vs. stocks, sometimes proponents of real estate gloss over the fact that rental properties are not a completely passive source of income. It takes some labor to manage rental properties. Even if you outsource that labor to a property manager, you’ll still occasionally get phone calls from them asking for a check for $2,500 to replace the furnace.

Your stocks won’t call you at 4 AM complaining that a light bulb blew out. Your tenants might.

Disadvantages to Stocks

I touched on some of these above already, in reviewing some of the advantages of real estate investing vs. stocks. Keep these disadvantages in mind when deciding between real estate or stocks.


Stocks swing wildly in value. Real estate doesn’t.

That matters because volatility represents risk. If you buy a stock, high volatility means higher unpredictability. It could drop by 50%, or rise by 50%; you buy it and hope for the best.

Economists measure risk vs. return of an investment by dividing its average annual return over its volatility (measured by standard deviation of the return). It’s called a Sharpe ratio, literally a ratio of return over risk.

Remember that 145-year study I mentioned at the outset? Stocks had a Sharpe ratio of 0.27, while real estate had a Sharpe ratio of 0.7 – a much better ratio of returns over risk.

No Control over Returns

When you buy a stock, the only control you have is when to sell it. You have zero control over how it performs.

The company’s earnings could drop. Its CEO could be fired for a sex scandal. Or it could be bought out by a competitor and shares could skyrocket. None of which you can control.

No Predictability of Returns

Likewise, stock investors can’t predict any of those swings in value. You don’t know if earnings will rise or fall, or whether a merger will take place. You just buy and hope for the best.

A huge advantage of real estate vs. stocks is that investors can predict returns.

Sequence Risk

Sequence risk is a lengthy conversation in itself, but here’s the short version. When you first retire, a stock market crash would have a much greater impact on your returns than if it happened later in your retirement.

It’s a little counterintuitive, but the order – the sequence – of your returns actually matters just as much as the long-term average. A crash right after you retire can put such a large dent in your stock portfolio that it’s hard to recover.

But if a stock market crash occurs later in retirement, after years of strong returns, your portfolio has reached something like a “critical mass” where it can survive a bear market with less trauma.

Here’s exactly how rental properties can reduce sequence risk, and a reminder of how real estate complements stocks in your retirement portfolio.

The Data on Real Estate vs. Stocks for FIRE

First of all, what do stocks earn on average?

The S&P 500 (an index of large-cap US stocks) has returned an average of roughly 10% annually since its inception in 1928. About 40% of that long-term average has come from dividends – in a perfectly average year, the S&P 500 might return a dividend yield of around 4% and see a 6% increase in stock prices.

With that said, inflation has averaged around 3% over the last 90 years, which must be subtracted to determine the real return. Adjusting for inflation, investors could therefore expect a return of around 7%.

Of course, stocks don’t just rise slow and steady. They leap by 25% one year, then collapse by 20% the next year, and wobble the next.

So it’s both useful and deceiving to think in terms of long-term average returns.

Real estate, meanwhile, is far more stable. Below is the median home sale price in the US since 1963 (not adjusted for inflation):

The average annual home price increase is around 5.3%. But that that doesn’t include inflation, and doesn’t account for US homes growing larger during that period.

Besides, if we’re interested in FIRE, we’re not that concerned with appreciation. It won’t pay our bills. Rental cash flow will, and rents adjust for inflation (more on that below).

Sample Numbers for FIRE: Stocks

Stanley invests only in stocks, while Rachel invests only in rental properties. We’ll be generous and give both of them 10% returns. Both of them want $50,000/year in income from their investments, to cover their living expenses in retirement.

Stanley plans on selling 3.5% of his stock portfolio every year to live on, upon reaching FIRE. That number is not arbitrary – financial planner Michael Kitces has demonstrated that investors can withdraw 3.5% every year and never run out of money. Compare that to the traditional “4% Rule;” investors who sell off 4% of their investment portfolio every year can only depend on it lasting around 30 years.

If Stanley wants $50,000/year in income, he therefore needs a nest egg of $1,428,571. Wait, huh? Don’t fret, the math is actually super simple: 3.5% of $1,428,571 = $50,000.

But that’s a lot of money. To save up $1,428,571 in ten years, with a 10% return, Stanley needs to save $89,636.25 a year.

No small feat. I hope Stanley earns a good income!

Sample Numbers for FIRE: Real Estate

Rachel buys rental properties for $100,000 apiece, rents them for $1,500, and has around $670 in monthly expenses. That leaves her with $830 a month in profit/cash flow – a return of around 10%.

Except Rachel doesn’t pay cash for her properties. She finances them with a 30-year rental property loan and puts down 20%, or $20,000. At a 6% interest rate, she pays $479.64/month for principal and interest. That lifts her total expenses per property to around $1,150, for a monthly cash flow of $350.

But it also lifts her cash-on-cash return. She invests $20,000 in cash, and gets back $4,200/year, boosting her cash-on-cash return from around 10% to over 20%.

It would take 12 properties earning $4,200/year to create $50,000 in income. At $20,000 a pop, that comes to $240,000 in down payments. A far cry from the $1,428,571 that Stanley needs!

This is why I love to argue that rental properties bend the normal retirement planning rules!

Correcting for Oversimplification

The numbers above are oversimplified of course. They don’t include closing costs, and critics would object that real estate deals with returns that high don’t come along every day.

But that simplicity cuts in the other direction too. We didn’t add money for Rachel’s property appreciation. We didn’t deduct money for Stanley’s brokerage fees, and we didn’t account for the inflation that Stanley will face.

Rachel’s rental income, meanwhile, will automatically rise to adjust for inflation, and in all likelihood rise faster than inflation.

Real Estate or Stocks for FIRE? Invest in Both

Yes, in the sample numbers above, it’s far faster to reach FIRE with real estate than with stocks. But reaching FIRE isn’t just about dollars and cents.

Financial independence and retiring early also rely on security and risk management. And you know by now, diversification is crucial for risk management.

I personally recommend investing in rental properties for income, and stocks for growth and diversity. Why choose only real estate or stocks? Invest in both, and get the best of both worlds.

If you encounter a true financial emergency, you’ll be able to liquidate stocks for immediate cash. If your stocks have a terrible year, you can lean more heavily on your rental properties, and not sell any stocks.

Less important than whether you invest in real estate vs. stocks is your savings rate. If you can live on half your income, or even less, you can reach financial independence quickly.

The trick to reaching FIRE is trimming your expenses, and pumping every penny you can into investments. Real estate investments, stock investments, private notes, bonds; just start building an investment portfolio.

You’ll learn as you go, but there’s no getting back lost time!

What’s your plan for reaching financial independence and early retirement?