S&P 500 vs. Rental Property: The Math Behind a Balanced 20-Year Strategy

Investing in an S&P 500 index fund is a gold-standard strategy, but how does it truly stack up against long-term real estate?

I’m not here to talk you out of the S&P 500, I invest in it myself. Instead, I want to pull back the curtain on how to calculate real estate returns and explain why I believe real estate is another great avenue for building long term wealth.

The Benchmark: S&P 500 Performance (20-Year Windows)

The S&P 500 is the ultimate "set it and forget it" tool. Looking at rolling 20-year windows between 1980 and 2025:

• Average Annual Return: 9.83%

• Worst 20-Year Window: 5.57% (1998–2017)

• Best 20-Year Window: 15.54% (1980–1999)

At the average return, $1,000 becomes $6,520 in 20 years. It’s clean, efficient, and beats the average 2.62% inflation rate handsomely.

Comparing 20-Year Rolling Window Average Annual Growth of S&P 500 US Index Fund vs the US Inflation During the Same Periods.

* S&P 500 Annual Return Data: https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html

* US Annual Inflation Data: https://www.investopedia.com/inflation-rate-by-year-7253832

The "Engine" of Real Estate: Breaking Down the Assumptions

Assessing real estate is more complex because your return doesn't just come from a price ticker - it functions as a business model. I’ve built a conservative model backed by historical data that assumes current market conditions (including today's high interest rates).

Below is a simplified breakdown of the model assumptions. It includes several numbers, but please bear with me - it’s a great crash course in the mechanics of real estate.

1. The Entry ($140,000 Total Capital)

• Purchase Price: $500,000 - Standardizing near the US median.

• Down Payment: $125,000 - 25% for an investment loan.

• Closing & Prep: $15,000 - 3% for mortgage fees and making the home "rent-ready".

2. The Income Stream (The Passive Engine)

• Rent-to-Value ratio: 6.75% ($2,812/mo). This is also known as the “Gross Yield”. Yes, many investors look for houses at the 8-12% Gross Yield range, my model assumes more conservative/stable areas.

• Vacancy: 6%. Assumes the house sits empty for 1.5 months every two years. Historically I see lower vacancy for my properties.

• Property Value Growth: 3.68%. This is the 20-year window average for the areas I’m considering, lower than the national average of 3.92%.

• Rent Growth: 2.94% annual increase. Rent historically grew at 83-88% of the value rate, I’m assuming 80% for the purpose of this model (3.68%*80%=2.94%).

Tracking 20-Year Rolling Window Average Annual Growth of US House Prices & US House Rental Prices.

* US Housing Price Index: https://fred.stlouisfed.org/series/USSTHPI

* US House Rental Price Index: https://fred.stlouisfed.org/series/CUUR0000SEHA#0

3. The Expenses (Where the Money Goes)

• Mortgage (P&I): $2,310/mo (6.25% fixed). The magic: This cost stays flat while your income climbs.

• Management & Maintenance: 18% of gross rent (covers property manager, repairs, HOA, and LLC fees). This data vary by location and property management providers. These numbers reflect what I’ve seen over the years for my properties.

• Taxes & Insurance: 0.8% of property value ($333/mo) - I usually choose areas with lower property taxes.

Total Wealth Generated: The 20-Year Result

When we apply these updated growth rates over a 20-year horizon, we see the multiplier effect on your capital. While your initial out-of-pocket was $140,000, we track the growth relative to your $125,000 initial equity:

Future House Value: $1,030,077 (Initial $500k purchase + $530,077, at 3.68% annual appreciation).

• Remaining Loan Balance: $203,489 (rent income from your tenant paid for your $170k debt+interest).

• Total Investment Value: $868,985 (This includes your $125k initial principal, rental gains, and market appreciation).

• Net Value Generated: $728,985 (Total investment value minus your $140k entry cost. This is the “extra” money you created!).

• MOIC (Multiple of Invested Capital): x6.21

• IRR (Internal Rate of Return): 9.62%

Real Estate Investment Value over 20-Year Window

* $500K Single Family House, $125K Down Payment, 30yr Fixed Rate Loan w/ 6.25% Interest, 3.68%/yr Property Value Increase, 6.75% Initial Rent, 2.94% Rent Value Increase @6% Vacancy, Including projected Property Taxes, Insurance, Property Management, Maintenance, LLC Management & HOA Expenses

Sensitivity Analysis: Moving the Levers

The 9.62% IRR is our baseline, but real estate returns are sensitive to how the market moves. Here is how that return changes under different "what-if" scenarios:

• The Optimized Case: If you refinance from 6.25% to 5% interest and maintain a lower 4% vacancy, your IRR climbs to 11.32%.

• The Growth Case: If the area sees 5.38% appreciation (a historical high for this area) combined with that 5% interest rate, your IRR jumps to 14.59%.

• The Recession Case: If vacancy hits 8%,appreciation slows to 2.79% (a historical low for stable areas) and original 6.25% loan is kept, and you had an unexpected expense of $15,000 at some point, your IRR is "reduced" to 7.12%.

Even in the "Recession Case," the real estate return (7.12%) remains higher than the S&P 500's worst 20-year window (@5.57%), illustrating the stability of this asset class.

The Takeaway: Real estate’s "worst-case" scenario since 1980 still outperformed the S&P 500’s "worst-case" scenario by 1.55%.

The 20-Year Window Annual IRR - Volatility Comparison (1980-2025):

* S&P 500: 9.83% Average IRR - Between 5.57% Floor to 15.54% Ceiling.

* Single Family Real Estate Rental: 9.62% expected IRR - Between 7.12% Floor and 14.59% Ceiling.

Why Real Estate is a Generational Wealth Builder

While the S&P 500 return is slightly higher on average, real estate offers unique structural advantages that "pure" paper assets don't:

• Principal Paydown: Your tenant is essentially funding a massive savings account for you. After 20 years, your $375k loan is whittled down to ~$203k - paid for by someone else.

• Tax Efficiency: You can "write off" the value of the building (depreciation) against your rental income, often paying $0 in taxes on that monthly cash flow throughout 20+ years.

• The "Step-Up" Legacy: If you pass a property to your heirs, the "cost basis" resets to the current market value. This can effectively help you avoid the “Recapture Tax”, wiping out 20+ years of capital gains taxes & depreciation for the next generation.

• Responsible Illiquidity: You can’t panic-sell a house during a 10% market correction. This "forced discipline" is often the reason real estate investors actually reach the finish line while stock investors "hop out" at the wrong time. It also means that you don’t need to reduce your exposure to the volatile asset as you get older.

Summary: S&P 500 vs. Real Estate at a Glance

Feature	S&P 500 ("Liquid Growth")	Real Estate ("Generational Play")
Effort Level	100% Passive	Semi-Passive (Requires oversight)
Liquidity	High (Sell in seconds)	Medium (Months to liquidate, Stay the course)
Historical Floor	5.57% (Higher volatility, Reduce exposure as you age)	7.12% (Lower vulnerability)
Tax Efficiency	Standard Capital Gains	High (Depreciation & Step-up)
Access to Value	Sell (Time the market)	Refinance (Keep the asset)
Investor Mindset	"Extract value from capital"	"Build a long term foundation"

The Bottom Line: Why I Do Both

I don't believe in choosing "one or the other." Real estate should not be your only investment. Keeping liquid assets for a rainy day is non-negotiable - illiquidity is simply a risk you cannot ignore.

It’s also important to be honest: real estate isn’t truly passive. It takes work. However, it is an incredible vehicle for those playing the long game, it is an unparalleled wealth-building vehicle.

While the S&P 500 is an efficient way to grow your liquid assets with zero effort, Real Estate is the long term, structural play for building generational wealth. It allows you to:

• Insulate against Volatility: Benefit from a significantly higher historical "floor" during market dips.

• Optimize for Taxes: Keep more of your income through depreciation and provide your heirs a "stepped-up" inheritance.

• Access Value Without Selling: Use refinancing to pull capital out of the asset rather than being forced to liquidate it.

I do both because I want the liquidity of the market and the structural power of real estate.

One provides growth for today; the other builds a foundation for generations.

Have questions or want to dive deeper into the data? Reach out at info@mylongterm.com

The 3.92% Gold Standard: Are Investors Really Pricing You Out?

There is a loud narrative in America today: institutional investors are buying up the "American Dream" and driving home prices beyond the reach of families (or consumer home buyers), causing a US housing affordability crisis. But when you look at the historical data, the reality is much more nuanced - and perhaps more optimistic for individual buyers.

1. The Investor "Boogeyman" vs. Reality

Despite the headlines, large institutional investors aren't a new "invading force". Historically, investors (both small and large institutes) represent 18 - 24% of home purchases. We have seen a recent uptick in these numbers, with investor share climbing toward 30% in the past year, up from a stable 18.5% between 2020 and 2023.

However, it is important to look at the context: this increase is happening within a significantly smaller "pie". Total home sales have dropped to roughly 4 million in the past year - a sharp dip from the 6 million+ annual pace during the pandemic and the 5 million average in the years prior.

My read is that today’s challenging environment of higher interest rates has sidelined many traditional buyers. We can see this clearly in the cash purchase rate: as mortgage rates spiked, the share of homes bought with all-cash (vs. financed) surged to 32 - 35% between 2023 and 2024. This "cash-is-king" environment naturally favored investors and wealthy buyers. But the market is finally starting to ease. In the past quarter, the cash purchase rate dipped back down to ~30%. While still higher than the 27.5% pre-pandemic average, it is a signal that the market is starting to reopen for traditional homeowners.

This shift suggests that the recent investor dominance was a result of a constrained environment, not a permanent takeover. While this "shrinking pie" isn't great for the non-investor community in the short term, it is likely a temporal shift. Even with this recent volatility, the vast majority of home sales - and the decades of historical data that follow - remain dominated by homeowners.

OK, so most of the historical US house sales data is dominated by non-investors. Let's assess the data more closely and see if we can draw some useful learnings about home value growth:

2. The "Gold Standard" of Real Estate Returns

The US Single Family home is a quite a sizable market, with 85 million houses. When we look at the historical sales data, we can see that ~5 million single-family homes are sold in the US every year , 85% of which are existing home resales. This means we have a huge amount of historical data (5M records per year!), and this data set mostly represents how existing home value holds.

The consistency of the US housing market is staggering. Since World War II, prices have only dropped year-over-year in 7 of the last 70 years, in went up year-over-year in the remaining 63 years (90%). To find the "truth" for a long-term investor, I analyzed a 20-year rolling window of the Federal Reserve's House Price Index from 1980 to 2024. By “20-year rolling window”, I mean - looking at the annual value increase between 1980 - 1999, 1981 - 2000, 1982 - 2001, etc.

The Findings:

• Average Annual ROI: The average annual value growth of these 20-year windows is 3.92%. I call this the Gold Standard for long-term planning.

• The Floor: Even the "worst" 20-year period (1993–2012), which included the subprime crisis, yielded a positive 2.92% annual return.

• The Ceiling: The highest 20-year window reached 5.17% annual growth (the 1987–2006 window, right before the crash).

At the end of the day, a 3.92% average annual growth is a remarkably consistent anchor for long-term wealth - especially when you consider it’s just the "top-line" value. When you layer on rental income, tax benefits, and the power of leverage, that return begins to look much more like 9 - 10% (a math deep-dive I’ll save for a future post).

But even with a "Gold Standard" in hand, a bigger question remains: Why? What is actually pushing these prices up decade after decade, and is it sustainable?

3. The Growth Gap: Why Slowing Population Doesn't Mean Slowing Prices

I went into this research with a fear. My intuition was that house price growth should correlate directly with population growth - the simple logic being, "the more people we have, the more houses we need". But as I looked at the data, the reality of the US population trend was anything but promising.

This led me to a scary question: If house prices rely on population growth, and that growth is slowing to a crawl, is the housing market destined to collapse?

The surprising answer is no. There is almost zero correlation between population growth trends and house price appreciation. While population growth has trended down since the 90s (from ~1.4% to <0.80%), house prices have continued their steady climb.

So, what does it correlate with? GDP.

The Correlation: House prices track the growth of the US economy (Gross Domestic Product). As we produce more value as a nation, that wealth is captured in our land. Between 1980 and 2024, US GDP grew almost every year, and even more consistency when looking at the 20-year windows, averaging a 4.95% annual growth for 20-year window - and very much aligned with the steady climb of real estate.

Annual ROI of 20yr window: US Home Prices vs US Population vs US GDP

What to look for in this graph: Notice how the green line (Population) is sliding toward zero, while the thick blue line (House Prices) stays tethered to the orange line (GDP). This visually proves that as long as the American economy produces more value, home prices have a foundation to rise, regardless of how many people are in the country.

Given the historical link between US economic growth and real estate appreciation, it is a safe assumption that real estate values will continue to rise as long as the US economy maintains its growth trajectory.

4. The "Step-Up" Secret: Why Supply Stays Low

Market liquidity is another factor maintaining the resilience of prices. A key reason for high prices is the Step-Up in Basis rule, which enables heirs to inherit a property at its present market value. This effectively eliminates the capital gains tax liability on the appreciation that occurred during the parents' ownership.

This creates a powerful incentive for older generations to hold onto their assets. Instead of downsizing, many homeowners stay in their family homes to protect that tax-free wealth transfer for their children. While this reduces the supply of homes for young families, it has been a cornerstone of how America builds and keeps wealth since 1921.

The Bottom Line

I realized I can’t change the tax code or stop the slow-down of population growth. But I can help people understand these "rules of the game".

Real estate isn't going up because of a few big investors; it’s going up because the US economy is growing and our tax laws reward long-term ownership.

I expect that the market is going to move upward with or without institutional investors.

The best way to fight back against the "wealth gap" is to get on the scoreboard.

References:

• US House Price Index: https://fred.stlouisfed.org/series/USSTHPIֿ

• US Population Growth Rate: https://www.macrotrends.net/global-metrics/countries/usa/united-states/population-growth-rate

• US GDP: https://www.macrotrends.net/global-metrics/countries/usa/united-states/gdp-gross-domestic-product

• Investor owned homes: https://nationalmortgageprofessional.com/news/small-investors-dominate-single-family-home-market

• Cash purchase rate: https://fred.stlouisfed.org/series/HSTFC

Have questions or want to dive deeper into the data? Reach out at info@mylongterm.com