Every year since 2014, real estate has been ranked as the number-one long-term investment by investors, according to Gallup. In the 2024 survey, 36% of Americans placed real estate at the top, well above the 22% favoring stocks and 18% choosing gold. But does real estate truly offer the best long-term returns?
The Real Estate Performance Phenomenon
The responses to the Gallup survey make sense considering real estate’s strong performance post-2008 Great Recession and its recent recovery from the coronavirus pandemic. Many Americans have personally benefited from rising real estate values or know someone who has. Despite its recent success, other asset classes have historically outperformed real estate over the long term. Here are three such investments.
Stocks: The Unmatched Performer
When it comes to long-term performance, stocks have a stellar track record compared to real estate. According to the S&P CoreLogic Case-Shiller U.S. National Home Price Index, real estate has returned 6.99% annually over the past decade and 9% over the last five years. These returns are impressive, especially during favorable periods for real estate. However, the S&P 500 index has consistently outperformed real estate, with average annual gains of 10.87% over the past 10 years and 13.4% over the last five.
This trend holds true over longer periods as well. Experian data shows that over the past 30 years, the S&P 500 has averaged annual returns of 8%, compared to 5.4% for the housing market. Notably, the S&P 500 has never experienced a 20-year rolling period with negative returns, making stocks a compelling long-term investment.
Bonds: Steady and Reliable
While bonds don’t offer the dramatic outperformance of stocks, they still surpass real estate in the long run. Over the past 30 years, bonds have returned 6.8% annually, according to Charles Schwab, compared to real estate’s 5.4%.
There are exceptions on a yearly basis. For instance, in 2022, real estate returned 5.67% while corporate bonds fell by 15.14%. Despite such anomalies, bonds generally have the edge over extended periods. Additionally, bonds come with the promise of principal return, provided the issuer’s financial strength is sound, offering a level of security not guaranteed in real estate investments.
Tax-Advantaged Accounts: Maximizing Growth
Tax-advantaged accounts, like IRAs and 401(k) plans, might not be traditional “investments,” but they can outperform real estate in terms of long-term benefits. These accounts offer tax-deferred growth and provide tax deductions on contributions, potentially saving investors up to 25% annually, depending on their tax bracket. While real estate also offers tax benefits, the deductions from tax-advantaged accounts can significantly boost overall returns.
Considerations for Real Estate Investments
One major drawback of real estate is its illiquidity. Unlike stocks, ETFs, or bonds, which can be liquidated almost instantly, selling property can take weeks or months. Real estate also requires substantial upfront costs and ongoing expenses like maintenance, property taxes, and insurance.
Furthermore, real estate values can be highly localized, meaning national averages may not reflect the performance of your particular investment. The leveraged nature of real estate investments can amplify both gains and losses, adding to the risk.
Conclusion
Investing in real estate certainly has its merits, providing shelter, potential rental income, and various tax benefits. However, in terms of liquidity and long-term returns, stocks, bonds, and tax-advantaged accounts often outperform real estate. While most Americans view real estate as the best investment option, exploring other asset classes could yield better long-term financial results.
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This article originally appeared on GoBankingRates.com: 3 Long-Term Investments That Are Always Better Than Real Estate
