For the baby boom generation, homeownership was the primary path to wealth creation. In 2025, boomers own $19 trillion in residential real estate, out of the $47.9 trillion value of the US owner-occupied real estate market. (1)
But is real estate still a sure way to build wealth? That’s the question Lena asks herself. She is a 32-year-old single mother with a young son. After the recent death of his estranged father, he inherited $420,000. Once he paid off his debts, he was left with about $400,000 and a big decision to make.
With no college education and currently working as a waitress, Lena is weighing two options: use the money to buy a house for long-term stability or invest in the stock market to build wealth for retirement and her son’s future education. You want to make sure the money lasts.
This is how Lena can develop equal investment in real estate and the stock market.
Historically, stocks have typically outperformed real estate, although there are important caveats that Lena should consider when making her decision.
If you invest in a low-cost index fund that tracks the S&P 500, you can expect an inflation-adjusted average annual return of 7.66%. By comparison, residential real estate in the United States has appreciated about 5.5% annually over the past 30 years.
At first glance, this can make the stock seem like the obvious choice. However, there are key differences to keep in mind.
First, stocks tend to be more volatile than the real estate market, which generally experiences slower but steadier growth. Second, success in the stock market depends on disciplined investing. Lena should consider sticking to diversified index funds and avoid frequent trading or stock picking, which often underperform and carry higher risk.
Since she is in her early 30s and her son is still young, Lena has time to weather the ups and downs of the market and benefit from long-term compound growth. Stocks also carry lower capital gains taxes and fewer ongoing costs than real estate.
If you invest your $400,000 in an S&P 500 index fund and let it grow, you could have about $1.21 million in 15 years (just in time for your son’s college) and about $5.3 million in 35 years, when you’re ready to retire.
Even without making additional contributions, this investment could provide Lena with a solid foundation for her financial security during her retirement.
Lena’s desire to buy a house for herself and her son is understandable. Home ownership often represents stability; However, with a modest income, it could pose serious challenges.
While real estate is less volatile than stocks, it comes with ongoing costs: property taxes (typically 1% to 2% annually), maintenance (about 1%), insurance, and possible homeowners’ association fees. For a $300,000 home, these could add up to about $12,970 per year, a heavy burden on a waitress’ salary.
Unexpected repairs or emergencies could also put Lena into debt if she lacks sufficient reserves. While it may be possible to purchase a smaller home for less than $400,000 and set aside funds for its upkeep, dipping into those emergency savings when problems arise can be a risk.
Unlike stocks, real estate is not liquid, and Lena couldn’t easily access the value of her home in a crisis without selling or going into debt. Plus, buying a home requires a lot of research, especially in a competitive market where you’ll have to balance location, price, commute, and school quality.
In contrast, index funds typically charge very low fees (between 0.03 and 0.15%) and offer easier access to invested funds if needed.
Read more: Vanguard reveals what could happen to US stocks and is ringing alarm bells for retirees. Here’s why and how to protect yourself
Lena may not have to choose between buying a house and saving for retirement. In some cities in the United States, it is still possible to buy a home for $200,000 or less. (2) If you are willing to move and start over with your child, you could manage both home ownership and investing in the stock market.
However, moving away from your support network could increase your expenses. Childcare alone could cost you up to $24,000 a year, depending on location.
If Lena invested $200,000 in an S&P 500 index fund and left it untouched, it could grow to about $605,125 in 15 years and about $2.65 million in 35 years. This would give you a solid foundation for retirement.
Meanwhile, if the $200,000 home appreciates at an average annual rate of 5.5%, it would be worth $1.3 million over 35 years.
While investing in stocks may offer Lena the greatest financial return, buying a home could still be the right choice if it provides peace of mind and a sense of stability for your child.
Ultimately, this is a personal decision. Instead of stressing over finding the “perfect” option, Lena can feel confident knowing that both stock market and real estate investing are responsible ways to use her inheritance.
Whichever path you choose, adopting solid financial habits will be the key to long-term success:
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Stay debt free: Now that her debts are paid off, Lena should stick to a realistic budget and avoid incurring new debt.
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Build a Solid Emergency Fund: Setting aside some funds for unexpected expenses will help with financial stability.
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Set clear goals: A financial advisor can help customize a plan that she understands and feels confident in.
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daily CRE (1); Realtor.com (2).
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
