The Opportunity Cost of
Real Estate vs the S&P 500

↓ Scroll to explore each scenario in detail

When people compare real estate to the S&P 500, they usually mean one of three things without ever saying it explicitly:

• •"Which one makes more money?"
• •"Which one is safer?"
• •"Which one feels more productive than doing nothing?" (a sense of control is very important to some)

Those are very different objectives, yet we collapse them into a single metric like IRR or CAGR and pretend the answer is obvious.

It isn't.

Investments don't fail because the math was wrong at year 20. They fail because something breaks at year 2, 4, or 7, and recovery is no longer possible.

A strategy that only works if nothing goes wrong isn't a strong strategy, even if the upside looks impressive.

The S&P 500 is often treated as the "boring default." In reality, it's a very good, specific bundle of tradeoffs:

• •High long-term expected returns
• •Brutal short-term volatility
• •Perfect liquidity
• •Zero control
• •No leverage (by default)
• •No tax steering
• •No intervention when things go wrong

It is not "safe." It is simple. It also has made people a lot of money, and been notoriously hard to outperform. (See Buffet's famous bet...)

The S&P doesn't care if you lose your job in a recession. It doesn't care if you panic-sell at the bottom. It doesn't care about your cash flow needs. It just compounds, violently at times - and assumes you survive the ride.

And crucially:

That property alone makes it far more survivable than many leveraged strategies that look superior on paper.

When we say real estate, we'll compare not only the purchase of one property in the scenario time period, but as many as you can in that time period something critically forgotten in many comparisons.

Real estate's appeal isn't returns. It's asymmetry.

Real estate doesn't fail slowly. It fails at decision pointsrate resets, capital calls, vacancies, life events where the wrong move is forced because no good move exists.

That's not visible in IRR spreadsheets.

Most real estate models quietly assume:

• •Rents grow smoothly
• •Cap rates stay stable
• •Financing remains available
• •Cash flow stress is temporary
• •Exit timing is flexible
• •The investor never panics

These aren't forecasts. They're requirements.

If any one of them fails at the wrong time, the path collapses not gradually, but abruptly. The deal doesn't underperform the market. It terminates.

Let's set up a clean comparison.

Two investors start on the same day with the same amount of capital.

• •Same tax bracket
• •Same time horizon
• •Same access to index funds
• •Same access to a real estate deal

One invests passively in an S&P 500 index fund.

The other buys a leveraged real estate property.

No one knows the future.

What matters is not who wins on average but how often each strategy survives long enough to win at all.

In the winning scenario, real estate doesn't win because it's magical. It wins because nothing forces a bad decision.

• •Cash flow stress is manageable
• •Leverage is conservative
• •Debt terms don't collide with downturns
• •Refinancing windows open when needed
• •The investor has enough liquidity to wait

Returns don't come from appreciation alone. They come from endurance.

The real estate investor doesn't need to sell at the wrong time. They don't need to inject capital under pressure. They don't lose optionality.

Though the risk with this deal is a little higher, the structure and terms lead to a very favorable outcome vs historical S&P returns:

In the losing scenario, the problem isn't that the deal was "bad."

It's that structure turned potential into a trap.

This buy is a "capital trap" - issues with expense growth and lease terms get you stuck, and the S&P runs away with it. Additionally, not using leverage didn't help - it meant they survived with a cash-flowing asset, but it wasn't pretty.

• •Expense growth erodes margins faster than rent growth
• •Lease terms lock in unfavorable economics
• •No leverage means survival but poor returns
• •Capital is trapped - can't pivot, can't compound elsewhere
• •The S&P compounds freely while your equity stagnates

Real estate doesn't need to fail catastrophically to lose. Sometimes it just needs to underperform long enough for the alternatives to win.

There's a scenario that doesn't fit neatly into "win" or "lose."

Less paper wealth, but more cash flow.

This is probably the most common state of affairs. Your total wealth at the end is lower than if you'd simply indexed - but you have more cash flow.

You're not "winning" vs the market in total return terms. But you have income you can touch without selling assets. For many investors, that tradeoff is the whole point.

This is the part most analyses skip.

Markets reward endurance, not brilliance.

A strategy that produces lower returns but keeps you solvent keeps you in the game - especially in real estate, as it gives you time to scale. A strategy that produces higher returns but occasionally wipes you out resets you to zero.

Opportunity cost isn't "Did this beat the market?" It's "How many paths ended in ruin?"

There's another cost that never shows up in spreadsheets.

Locked capital can't respond.

• •You can't pivot into a better deal
• •You can't exploit a downturn
• •You can't rebalance risk
• •You can't de-risk when your life changes

Index funds give you optionality at the cost of control. Real estate gives you control at the cost of optionality.

Neither is free. The tragedy is when investors give up optionality without being paid for it.

The honest answer: it depends on fragility.

• •How leveraged is the deal?
• •How long can it survive stress?
• •How many bad months can you endure?
• •What decisions become forced - and when?

If it can survive multiple bad years and still recover, then the comparison becomes interesting.

Instead of asking which one has higher returns, ask:

1. 1What's the probability of permanent capital loss?
2. 2What's the worst year, not the average year?
3. 3When do decisions become irreversible?
4. 4How much optionality do I give up?
5. 5What happens if I'm wrong early?

Returns matter. But survivability decides whether returns are ever realized.

Real estate can beat the S&P 500.

Index funds can quietly outperform most investors, even the legendary ones.

The difference isn't intelligence. It's whether the strategy can survive long enough for intelligence to matter.

This is why I made DealStrike.

It doesn't just show outcomes. It models distributions, stress paths, and survivability. Not to tell you what will happen, but to show you what must not happen.

And, if you want to be in on real estate, you need to commit if you want to make money.