Is Real Estate the Best Way to Help Build Generational Wealth?

For anyone who’s lived through the past decade, it would be hard to see ownership of real estate as anything but a big win for your money. Housing values have risen for nearly 15 years, just about doubling nationwide since 2015 (punctuated by a 40% spike during the first couple years of the pandemic alone).

It’s true that owning a home can help you build wealth. Over the long term, housing has generally gone up in value, making it a kind of “forced saving.” But is it the best path to generational wealth and financial freedom for your family? Let’s take a look.

THE TRADITIONAL ROLE OF REAL ESTATE IN FAMILY WEALTH

Everyone needs a place to live. So, housing can either be a pure expense if you rent, or a value store if you own the home you’re paying for.

In that way, you’ll generally build wealth even if the house never gets any more valuable, and that’s because when your mortgage is up, you own something worth a lot of money.

But housing can create wealth in another way. Unlike, say, a car, which is worth less the longer you own it, houses may get more valuable over time. So, at the end of your mortgage, you may own not only something of value, but something that has a lot more value than when you bought it.

What makes housing such an accessible way to build wealth is the role of mortgages. Imagine a typical family that bought a $200k home in 2015. It’s now worth $400k. They’ve accumulated $200k of new money. But unlike a $200k investment in, say, stocks, they didn’t have to have that money saved in order to get started – only enough for a down payment.

The bank provided most of the "investment," but the homebuyers will be the ones to benefit from any increase in value.

While it’s impossible to calculate the effects, the emotional benefits of owning a home could also have a positive impact financially. Achieving a traditional cornerstone of the American dream and watching your net worth go up can inspire you to keep saving and motivate you to reach other financial goals.

Of course, there’s an important thing to remember about the family in the now-$400k house. They can’t really do anything with that money until they sell the house. When they do, they’ll need a new place to live. And similar houses now likely cost about $400k. So, while home ownership can build your net worth, the only way to really benefit from it is to move someplace with lower housing costs, or to downsize to a less valuable home.

In a similar sense, any asset really only can be said to have a positive ROI if the returns are higher than inflation. If overall prices (for everything, not just housing) have doubled since you bought the house, then a doubled net worth doesn’t translate into additional buying power. That’s why returns after inflation are called “real” returns.

Since 2015, home values have risen much faster than overall prices. But that’s not always the case. For example, during the whole of the 1990s, house values grew more slowly than the rate of inflation (giving them a negative real return) and in the years following the 2008 housing crash, housing had both a negative return and an even worse negative real return.

CHALLENGES FACING REAL ESTATE TODAY

So far, we’ve mostly focused on the positive financial rewards of owning real estate. But there are financial downsides, and before we get into them, we need to make an important differentiation.

Owning a home to live in is very different than owning real estate as a pure investment.

As we discussed, you have to have a place to live, so owning a home has value far beyond the financial. And the tradeoff to owning is renting, which, in many cases, is a worse purely financial decision. As we always say, if it’s the right time to buy a home for you, then it’s the right time.

Investing in real estate is different because the other option on the table isn’t “throwing away money on rent.” It’s having the opportunity to invest that money in other things.

That said, here are some of the challenges facing investors in real estate:

• Interest rates. While not historically high, they’re much higher than in the past couple decades. And if you’re borrowing money to make an investment (which, to be clear, we don’t think you should do), that interest quickly eats into returns.
• High prices. It simply costs more today to make an investment in real estate. And some experts think housing prices may have hit a level where values cannot continue to rise at their recent pace, which obviously reduces their profitability.
• Lack of liquidity. If you need your investment back (for an emergency or another investment opportunity), you can’t just place a trade and have the money wired to your bank.
• Costs and time. Even if you pay in cash, real estate comes with property taxes, insurance premiums and closing costs. Also, houses have to be constantly maintained. You’ll either have to do it yourself or pay someone to take care of it.
• Lack of diversification. Land appreciates differently than houses. Condos have different returns than single-family homes. Prices in the Northeast have gone up faster than those in the South lately. We could go on, but the point is, it’s really hard to cover the entire real estate market as an individual investor, and that lack of diversification adds risk.
• Liability and property damage risk. If someone hurts themselves on your property, or high winds cause a tree to fall on it, you could be on the hook financially.

COMPARING REAL ESTATE TO OTHER ASSET CLASSES

If you’re still interested in a potential direct investment in real estate, let’s go back to our discussion on opportunity cost: Would you potentially make more money investing in something else instead?

REAL ESTATE VS. STOCKS AND OTHER ASSETS FOR WEALTH BUILDING

These are the historical average annual returns of some different asset classes over the past 45 years:

• Home values: 4.42%
• US large-cap stocks: 12.24%
• US bonds: 6.63%
• Commodities: 3.86%

Sources: Bloomberg, FHFA, IA SBBI, S&P Dow Jones Indices, Morningstar Direct; from 1/1/1980 through 9/30/2025, except for home values, which is through 6/30/2025. Home prices represented by FHFA US House Price Index NSA. US large-cap stocks represented by IA SBBI US Large Stock TR USD Ext. US bonds represented by Bloomberg US Agg Bond TR USD. Commodities represented by S&P GSCI TR USD.

As you can see, while hindsight is always 20/20 (and the past isn’t a guarantee of what will happen in the future), you would have made more money investing in a stock and/or bond portfolio over the last 45 years, rather than relying on housing price appreciation.

INFLATION PROTECTION AND CASH FLOW POTENTIAL

Some investors look to real estate to perform a specific role in an investment portfolio. One is to act as an inflation hedge. The idea is that when inflation is high, housing prices will go along for the ride and give your portfolio some protection from loss. But as we’ve seen, that’s not always the case.

We believe that overall, a diversified portfolio that includes a large proportion of stocks is the best inflation hedge.

Another reason some investors like real estate is its cash flow potential. Generally, if you buy housing as an investment, you rent it out, and any rent money provides a stream of income.

We’ve talked about some of the things that can eat into that cash flow: mortgage payments, taxes, management and upkeep, insurance. It’s important to take them into account when comparing cash flow potential to that of stock dividends or bond interest payments.

REITS AND OTHER DIVERSIFIED REAL ESTATE INVESTMENT OPTIONS

To this point, we’ve focused on directly owning real estate as the only way to invest in it. But there’s another option that’s grown increasingly popular: real estate investment trusts, or REITs.

An REIT owns the real estate directly, and you buy shares of the REIT. Going one step further, many investors invest in REIT mutual funds or ETFs: You own shares of the fund, which owns shares of REITs, which own real estate.

In doing so, you sidestep some of the issues of direct real estate ownership:

• You don’t have to personally manage the property, nor are you personally liable for what happens there
• You can have a diversified real estate portfolio even with a small investment
• You can seek investment options that provide more liquidity should you want to divest the investment.

However, some of the same considerations still apply:

• The costs to manage and upkeep the properties still come out of your pocket; they just reduce your returns
• You still may not make much money or could lose money if housing values/rent prices drop or interest rates are high

BUILDING A DIVERSIFIED GENERATIONAL WEALTH PORTFOLIO

We believe that to build wealth, your portfolio should be diversified both within an asset class (like real estate) and broadly among asset classes.

While an allocation to real estate can be right for many investors, the lower costs and ease of investing in diversified real estate-focused funds, rather than direct ownership of properties, make them a better option for the majority of people.

Of course, you may choose to own multiple homes for other reasons, like a gathering place for your family or a seasonal retreat. But don’t confuse those with investments meant to make money. They may not, and you’re paying an opportunity cost to have them.

COMMON MISTAKES FAMILIES MAKE WITH REAL ESTATE

RELYING TOO MUCH ON REAL ESTATE AS AN INVESTMENT

Less diversification means more risk. And real estate isn’t any more guaranteed to go up in value than anything else.

LOCKING UP LIQUIDITY

If you invest in real estate via direct (or some indirect) ownership, you’ll tie up your money so it may not be there when you need it. Even if you don’t need it for spending, remember that you won’t have it available to invest in other opportunities either.

FAILING TO PLAN FOR ESTATE TRANSFERS AND TAXES

Investing directly in real estate or even via an REIT has tax implications that are more complex than investing in stock or bond funds. And handing down houses as an inheritance can be tricky too, especially if you have multiple heirs.

IS REAL ESTATE ONE OF THE BEST ASSETS FOR GENERATIONAL WEALTH?

To recap: Owning a home can be a step on the path to generational wealth, as it helps you build your net worth over time and benefit from housing price appreciation.

Buying properties to rent out, on the other hand – or buying multiple homes for your family to use – has a lot of drawbacks and we generally don’t recommend it as an investment strategy.

That said, incorporating real estate investments as one part of a portfolio – that also could include stocks, bonds and alternative asset classes – can give you increased diversification. A financial advisor can help you explore what an allocation to real estate might look like for you and review potential long-term wealth preservation strategies for your family.