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Most Americans have some form of retirement savings, typically held in a tax-advantaged retirement account like a 401(k). At the same time, 65% of American households own their homes. That begs the question: should you save for retirement or invest in real estate? And, if you are saving up for retirement, should you put your money in a tax-advantaged account or real estate? Another way to approach this question is to consider whether you should use your money to buy stocks or property. It all depends.
For help developing a financial strategy for your savings, consider working with a financial advisor.
Invest In Both If Possible
Although you are certainly able to invest in both a retirement account and real estate, not everyone has the funds to support both. Therefore, you may have to choose just one.
There are some similarities between a retirement account and real estate, as they both serve to diversify your portfolio. However, although these two asset classes are fairly well-correlated (meaning they tend to share the same performance), they still belong to different markets. Therefore, they respond differently to market volatility.
As a general rule, you should avoid putting all of your money into a single asset class. Whenever possible, don’t just invest in land or stocks, as that may pose unnecessary risk to your portfolio. If you are able, it is wise to invest in both real estate and the stock market to diversify your portfolio.
Investing In Real Estate
Real estate investments can be especially beneficial for people in certain situations. It is an attractive choice for investors with a lot of startup capital and a higher risk tolerance However, it is not ideal for investors who need more financial stability.
A number of investment strategies can be used to nvest in real estate. While you can pursue some more sophisticated options, such as generating income through rentals or investing in properties to flip, the most common ways to invest in real estate are either buying a property directly or investing in a real estate investment trust (REIT).
When you invest in an REIT, you buy shares of a portfolio-based fund. This is similar to buying shares in a mutual fund or an ETF.
The main difference is that an REIT portfolio owns physical properties, such as offices, apartments and homes. It rents and sells those properties, and the portfolio’s returns are based on the income those properties generate. The good news about an REIT is that you can include this in most 401(k), IRA or other tax-advantaged retirement accounts. These share-based products can fit into any standard investment portfolio.
Buying a home is simpler. You purchase residential real estate, hold it and then sell it for a profit years later. If you live there as your primary residence, you can get significant tax advantages when it comes time to sell. Otherwise, you can just hold the property as an investment asset and pay taxes on the property as ordinary capital gains.
As far as buying a property, the more money you have up front, the more viable it will be to buy and hold a property for retirement.
One of the things that tends to shock first-time homeowners is the staggering amount of interest assessed on a mortgage. With the average interest rate sitting at 6.72%, you will pay more interest than the principal itself with a 30-year mortgage.
Example of Total Interest on a 30-Year Mortgage
Sales price: $475,000
Interest rate: 7%
Term: 30 years
Total interest paid: $661,268
Total paid for loan: $1,136,268
It’s important to be clear here: this does not deductions on future gains or other forms of opportunity cost. This will be a real fixed expense. If you pay off this loan over 30 years before selling the house, you will spend $1,136,268 in combined principal and interest. To make a net profit on this investment, you will need to sell the house for more than that amount.
This assumes you borrow the entire cost of the home upfront. However, the more money you put down as a down payment, the less you will have to borrow and the less interest you will pay. This is why buying real estate is often a much stronger option for investors with a significant up-front amount of capital.
However, buying real estate is a higher-risk, potentially higher-reward approach compared with stock investing. Returns can be difficult to predict, as a bear market could cause housing prices to plummet, devaluing your home and causing losses if you sell.
Buying Stocks
In most cases, you will make more money investing in stocks or a simple S&P 500 index fund than by purchasing real estate. This is because stocks generally outperform real estate investments.
If, for example, you bought a house at the average market price in 1995, you would have paid approximately $114,600. If you sold at the average market price for August 2025, you would collect $369,147. This is a gain of over $250,000 over 30 years. However, if you invested that same $153,000 in the S&P 500 in 1995, your account would now be worth almost $3.4 million.
That said, buying real estate can be a strong speculative move. In areas like revitalized urban areas, the price of real estate has skyrocketed over the years. Today it is common for people to sell downtown homes for more money than they spent when they bought it. If you had purchased a townhouse in downtown San Francisco or South Boston 30 years ago, you might easily sell it today for several million dollars.
This makes real estate a case-by-case option. If you find the right market, real estate can be an extraordinarily good investment. Buying and holding property can offer outsized returns, so long as you do not spend too much on extra costs like interest payments, maintenance and property taxes.
Traditionally, though, the historic returns on real estate pale in comparison to the compound growth available from the stock market.
Tax Advantages of Retirement Accounts vs. Real Estate
It is important to consider taxes when determining whether to save for retirement or invest in real estate.
Retirement accounts like 401(k)s, traditional IRAs and Roth IRAs come with significant tax advantages designed to encourage long-term saving. For example, contributions to a 401(k) or traditional IRA are typically made pre-tax, allowing your investments to grow tax-deferred until you withdraw funds in retirement. Roth IRAs, on the other hand, are funded with after-tax dollars, but qualified withdrawals in retirement are entirely tax-free.
Real estate also comes with potential tax benefits, although they work differently. If you own a primary residence, you may be eligible for the mortgage interest deduction and the capital gains exclusion.
With the capital gains exclusion, you get up to $250,000 for single filers or $500,000 for married couples filing jointly, if you sell the home after living in it for at least two of the last five years. For indebtedness that occurred before December 16, 2017, you can deduct up to $500,000 for single filers or $1 million for married couples filing jointly.
Investors with rental properties can deduct a number of property-related expenses that can help lower taxable income.
- Mortgage interest
- Property taxes
- Maintenance
- Depreciation
Say you invest $100,000 in a Roth IRA, and it grows to $250,000 by retirement. You will not owe taxes on any gains if you follow the qualified withdrawal rules. Alternatively, let’s say you buy a $100,000 rental property that doubles in value and generates $5,000 in annual net rental income. In this case, you will owe annual income tax on that rental income and then capital gains tax when you sell, unless you use a 1031 exchange or qualify for certain exemptions.
In this case, the long-term tax burden can eat into your total return, depending on your tax bracket and investment strategy.
Liquidity and Accessibility of Funds
Another key consideration when comparing retirement accounts to real estate is liquidity, which is how easily and quickly you can access your money.
With retirement accounts like 401(k)s and IRAs, you typically cannot withdraw funds before age 59½ without incurring a 10% early withdrawal penalty, unless you qualify for a hardship exemption or special rule. Even with Roth IRAs, these accounts are designed to be long-term investment vehicles, not short-term cash sources.
Real estate, while potentially profitable, is a highly illiquid investment. Selling a property can take weeks or even months, and transaction costs, such as agent commissions, legal fees, home improvements and closing costs, can eat into your gains. If you need quick access to cash, real estate can be cumbersome to liquidate, especially during a recession.
That said, rental properties can provide consistent passive income through rent payments, which can help with monthly cash flow. By contrast, retirement portfolios typically generate income through interest, dividends or systematic withdrawals that are tailored to your retirement needs.
The key difference is control; retirement accounts offer more flexibility in creating reliable and hands-off passive income, while real estate income requires ongoing management and involvement.
Bottom Line
When deciding whether to save for retirement or invest in real estate, there are several factors to consider, such as liquidity and tax implications. If you are saving for retirement, a tax-advantaged retirement fund with diversified stocks will offer the highest returns for most investors. However, if you have a lot of up-front capital and a tolerance for risk, real estate could be a good speculative asset, depending on market conditions.
Consider consulting a financial advisor who can provide the best investment strategies based on your future plans and risk tolerance.
Investing Tips
- Wondering how much money you’ll need for retirement? Consider getting a sense of your goal with SmartAsset’s free retirement calculator.
- A financial advisor can help you make sure you’re making the right investment decisions. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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