Real Estate Gains vs. Stock Market Gains in California - over the last decade

Here’s a common question that arises to most of California residents. Is it better to invest in real estate or stock market? As part of this, the researcher performed some analysis over the past decade to see which sector performed better. Here’s the researcher’s analysis, in brief, using AI techniques that are available in the market currently:

Comparing real estate gains in California with stock market gains over the last decade (roughly July 2015 to July 2025) involves a lot of variables, especially for real estate. We’ll make some reasonable assumptions to illustrate the potential differences.

Key Considerations for Real Estate:

• Location within California: California is vast and diverse. Bay Area, Southern California, and Central Valley have vastly different price points and appreciation rates. We’ll use statewide averages, but local performance can vary significantly.
• Property Type: Single-family homes, condos, and multi-unit properties will have different rental yields and appreciation.
• Mortgage Rates: Mortgage rates fluctuated significantly over the last decade. We’ll use an average, but individual rates would impact the financial outcome.
• Rental Income and Expenses: This is highly variable. We’ll use estimated average rental yields and typical expenses.
• Leverage (75% Mortgage): This amplifies both gains and losses.

Assumptions for the Calculation (approx. July 2015 - July 2025):

• California Real Estate (with 75% Mortgage):
• Median Home Price Appreciation:
  • Median CA home price in 2015 (estimated from trends): ~$884,350 (from May 2025 data, we'll use this as an approximation for mid-2025).
  • Appreciation:: (884,350−475,662)/475,662≈85.9% over 10 years. This is a total return, not annualized.
  • Rental Yields (Gross) California generally has lower rental yields due to high property values. Gross rental yields for major cities in California range from 3-9% in 2025, with an average likely in the 4-6% range. Let's assume an average gross rental yield of 4.5% annually on the property value.
• Expenses:
  • Property Taxes: California's average effective property tax rate is around 0.71% to 0.75% of the assessed value annually.
  • Mortgage Interest (75% LTV):
    • Average 30-year fixed mortgage rates from 2015-2025: This varied significantly. Let's consider a rough average over the period: Rates were low (3-4%) from 2015-2021 and rose significantly to 5-7% from 2022-2025. A blended average over the decade might be around 4.5% - 5.0%. Let's use 4.75% for calculation.
    • Initial Mortgage Amount
  • Other Expenses: Vacancy, maintenance, insurance, property management (if applicable), HOA fees (if applicable). These can easily eat up 1-2% of property value annually. Let's estimate 1.5% annually for these.

Hypothetical Real Estate Investment Scenario:

• Initial Investment (Down Payment): 25% of $475,662 = $118,915.50
• Annual Rental Income: 4.5% of the average property value over the decade. This would increase as value increases, but for simplicity, we’ll use an average. Let’s say a rough average property value over the decade is around $680,000. So, $680,000 * 0.045 = $30,600/year.
• Annual Property Tax: Average 0.73% of average property value = $680,000 * 0.0073 = $4,964/year. (Note: In CA, Proposition 13 limits assessed value increases to 2% annually, so the actual tax paid would be lower than 0.73% of current market value if held for 10 years, but we’re trying to capture the overall cost over the period).
• Annual Mortgage Interest (approximate and simplified): On a $356,746.50 loan at 4.75%, the early years’ interest is higher. Let’s approximate the total interest paid over 10 years using an amortization schedule. Over 10 years, roughly $120,000 - $150,000 in interest might be paid on a 30-year mortgage. Let’s use an average of $13,500/year. (Principal repayment is not a loss, it’s equity build-up).
• Other Annual Expenses: $680,000 * 0.015 = $10,200/year.

Total Cash Flow (Simplified Annual Average): $30,600 (rent) - $4,964 (taxes) - $13,500 (interest) - $10,200 (other) = $1,936 net positive cash flow per year (before principal paydown and non-cash items). This demonstrates how tight cash flow can be in high-cost areas like California. Many properties would be cash flow negative initially, relying on appreciation.

Real Estate Total Return Calculation (simplified):

• Capital Appreciation: 85.9% on the initial property value of $475,662 = $408,610 gain.
• Total Net Rental Income over 10 years: $1,936/year * 10 years = $19,360.
• Principal Paid Down: This is equity built up, not a “return” in the same way as appreciation or dividends, but it adds to the overall wealth. Over 10 years, on a $356,746.50 mortgage at 4.75%, approximately $75,000 - $85,000 in principal would be paid down. Let’s use $80,000.

Total Gain from Real Estate (Approximate): $408,610 (appreciation) + $19,360 (net rental income) = $427,970. This is on an initial cash outlay of $118,915.50 (down payment). Return on Cash Invested: $427,970 / $118,915.50 ≈ 359.8%

Stock Market (S&P 500) Gains:

• Total Return (including dividends) for S&P 500 (July 2015 - July 2025):
  • Data from Google Search indicates the S&P 500 Total Return (SP500TR) from 2015-01-02 to 2025-07-25 (current date) shows a change from 3768.68 to 14109.8.
  • Total Return: (14109.8−3768.68)/3768.68≈274.4%
  • Other search results show a 10-year (2014-2024) average annualized return of 11.3%, which would translate to a total return of (1.113)10−1≈192.3%. The data showing 274.4% is more up-to-date and directly reflects total return including dividends. We’ll use this.

Comparison:

• California Real Estate (with 75% mortgage): Approximately 359.8% return on cash invested.
• S&P 500 (including dividends): Approximately 274.4% total return.

Conclusion (Simplified):

Based on these rough estimates and assumptions, California real estate with 75% leverage appears to have significantly outperformed the S&P 500 over the last decade (July 2015 - July 2025).

Important Caveats and Nuances:

• Leverage Effect: The primary driver of real estate’s outperformance in this scenario is the leverage. You’re controlling a large asset with a relatively small down payment, amplifying the returns from appreciation. The S&P 500 return calculation is unlevered.
• Risk: Leverage also amplifies risk. If real estate values had declined, losses would have been much greater with a 75% mortgage.
• Liquidity: Real estate is far less liquid than stocks. Selling a house takes time, effort, and incurs significant transaction costs (realtor fees, closing costs).
• Effort/Management: Owning rental property involves ongoing effort (tenants, maintenance, repairs, legal compliance), or paying a property manager, which further reduces net returns. Stock market investing is largely passive.
• Tax Implications: Both have different tax treatments for capital gains, depreciation (for real estate), and income. This analysis doesn’t delve into detailed tax implications, which can significantly alter net returns.
• Market Timing: These are historical averages. If an investor bought at the peak of the market or sold at the trough, their individual returns would differ wildly.
• Inflation: This analysis is in nominal terms. Real returns (adjusted for inflation) would be lower for both.

In essence, while the S&P 500 delivered robust returns, the significant appreciation in California real estate combined with the power of leverage likely gave real estate investors an edge in terms of percentage return on their initial cash outlay over the past decade.