Investment Return Calculator: Real Estate vs Stocks vs Bonds

The Comparison Problem Most Investors Get Wrong

Investors routinely say real estate "beats" stocks. Others insist index funds win every time. Both groups are usually comparing the wrong numbers.

Gross return is not total return. The correct comparison accounts for four variables: acquisition costs, ongoing costs, tax treatment, and the time value of the capital deployed. Strip those four factors out of any asset class, and the rankings often reverse.

This post walks through each asset class using consistent methodology. Every example uses a $100,000 initial investment, a 10-year holding period, and a federal marginal tax rate of 32%. Adjust those inputs for your situation using the calculator above.

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How to Calculate Investment Return: The Core Formula

The foundation is the total return formula:

Total Return = (End Value - Begin Value + Income Received - Total Costs) / Begin Value

Express that as an annualized figure using the compound annual growth rate formula:

CAGR = (End Value / Begin Value) ^ (1 / Years) - 1

These two numbers tell different stories. Total return shows magnitude. CAGR allows apples-to-apples comparison across different holding periods.

Neither number is useful without the after-tax, after-cost adjustment.

Net Return Formula

Net Annualized Return = CAGR - Annual Cost Rate - Annual Tax Drag

Annual tax drag depends on how income is classified. Ordinary income (bond interest, short-term gains) faces your marginal rate. Qualified dividends and long-term capital gains face 0%, 15%, or 20% depending on income. Depreciation recapture on real estate faces a flat 25%.

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Asset Class 1: Stocks (S&P 500 Index Fund)

Base Return Assumptions

The S&P 500 produced a nominal average annual return of 10.5% from 1957 through 2024. Approximately 1.9 percentage points of that came from dividends. The rest came from price appreciation.

A low-cost index fund charges roughly 0.03% annually in expense ratio. That cost is nearly invisible.

Worked Example: $100,000 in an S&P 500 Index Fund

• Initial investment: $100,000
• Holding period: 10 years
• Gross CAGR assumption: 10.5%
• Expense ratio: 0.03%
• Dividend yield: 1.9% (taxed annually at 15% qualified rate)
• Capital gains tax at exit: 15% on long-term gains

Step 1. Gross ending value before taxes:

$100,000 x (1.105)^10 = $271,264

Step 2. Annual dividend tax drag. Each year, 1.9% x 15% = 0.285% of the portfolio value goes to taxes. Over 10 years with compounding, this reduces ending value by approximately $8,200.

Step 3. Capital gains at exit. The gain is $271,264 - $100,000 - $8,200 (already paid) = $163,064. At 15%, the tax bill is $24,460.

Step 4. Net proceeds: $271,264 - $8,200 (taxes paid annually) - $24,460 = $238,604.

Net 10-year total return: 138.6%. Net CAGR: 9.07%.

This is a clean, low-friction result. Stocks in a taxable account with disciplined buy-and-hold behavior are extraordinarily tax-efficient.

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Asset Class 2: Real Estate (Direct Rental Property)

Real estate is the most complex calculation. Gross appreciation tells almost nothing useful.

Cost Structure

Direct real estate carries costs that most back-of-envelope comparisons omit entirely:

• Acquisition costs (closing, inspection, title): 2% to 5% of purchase price
• Annual property tax: 1.0% to 1.5% of assessed value nationally
• Insurance: 0.5% to 1.0% of value
• Maintenance and capital expenditures: 1.0% to 1.5% of value
• Property management (if used): 8% to 12% of gross rent
• Vacancy drag: 5% to 8% of potential rental income
• Disposition costs (agent commissions, closing): 6% to 8% of sale price

The total annual carrying cost commonly runs 3.0% to 4.5% of property value, excluding mortgage interest.

Worked Example: $100,000 Equity in a $500,000 Rental Property

This example uses leverage, which is how most real estate investors operate. $100,000 down, $400,000 mortgage at 7.0% for 30 years.

• Property value at purchase: $500,000
• Annual appreciation assumption: 4.5% (national average, 2000-2024)
• Annual gross rental income: $36,000 ($3,000/month)
• Annual carrying costs: 3.5% of value = $17,500 in year 1
• Annual mortgage payment: $31,980 (principal + interest)
• Annual depreciation deduction: $500,000 / 27.5 = $18,182

Step 1. Property value after 10 years:

$500,000 x (1.045)^10 = $778,008

Step 2. Mortgage balance after 10 years: approximately $338,600 remaining.

Step 3. Gross equity at sale: $778,008 - $338,600 = $439,408.

Step 4. Disposition costs at 7%: $778,008 x 0.07 = $54,461.

Step 5. Net sale proceeds before tax: $439,408 - $54,461 = $384,947.

Step 6. Depreciation recapture tax. Total depreciation claimed over 10 years: $18,182 x 10 = $181,820. Recapture tax at 25%: $45,455.

Step 7. Remaining capital gain: $778,008 - $500,000 - $181,820 = $96,188. Long-term capital gains tax at 15%: $14,428.

Step 8. Net proceeds at exit: $384,947 - $45,455 - $14,428 = $325,064.

Step 9. Cash flow assessment. Annual rent of $36,000 minus carrying costs of $17,500 minus mortgage interest (year 1 average approximately $27,800) produces negative cash flow of roughly $9,300 in year 1. Over 10 years, the cumulative net cash outflow after tax benefits approximates $28,000.

Step 10. Total capital deployed: $100,000 down payment plus $28,000 net cash outflow = $128,000.

Net 10-year return on capital deployed: ($325,064 - $128,000) / $128,000 = 153.9%. Net CAGR on deployed capital: 9.77%.

Leverage amplifies the return. Without leverage, the same $100,000 invested in the property outright produces a materially lower CAGR once costs and taxes absorb a larger share of a smaller gain.

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Asset Class 3: Bonds (Investment-Grade Corporate Bonds)

Return Structure

A 10-year investment-grade corporate bond ladder currently yields approximately 5.2% to 5.6% annually. That income is taxed as ordinary income each year. There is no appreciation component for bonds held to maturity.

Worked Example: $100,000 in a Bond Ladder at 5.4%

• Annual gross interest income: $5,400
• Federal tax at 32%: $1,728
• Net annual income: $3,672
• Net annual yield: 3.67%

Over 10 years, reinvesting net income at the same after-tax rate:

$100,000 x (1.0367)^10 = $143,490

Net 10-year total return: 43.5%. Net CAGR: 3.67%.

Bonds do not compete with equities or real estate on return. They compete on certainty. The 3.67% net figure is predictable. The 9.07% stock figure is an average with wide annual variance. The distinction matters in portfolio construction, not in raw return comparison.

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Side-by-Side Summary

Real estate edges stocks in this scenario because of leverage. Remove leverage, and the result reverses. Change the local appreciation rate from 4.5% to 2.5%, and real estate underperforms stocks by roughly 180 basis points annually after costs.

The variables that move the outcome most are: leverage ratio, local appreciation rate, carrying cost efficiency, and marginal tax rate at exit.

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What Changes the Calculation Significantly

Holding Period

Stocks benefit enormously from longer holding periods. Tax deferral on unrealized gains compounds silently. A 20-year hold instead of 10 years raises the net CAGR on the stock example from 9.07% to approximately 9.41% due to reduced annual tax drag as a percentage of portfolio value.

Real estate held longer faces larger deferred recapture tax bills unless a 1031 exchange is executed at sale.

Tax-Advantaged Accounts

Moving stock investments into a Roth IRA eliminates all tax drag. The $238,604 net result from the stock example becomes the full $271,264 gross, raising net CAGR to 10.47%. Bonds in a traditional IRA defer ordinary income tax, improving their net CAGR from 3.67% to 5.4% until withdrawal.

Geographic Market Selection

Real estate in Austin, TX appreciated at roughly 8.1% annually from 2014 to 2024. Real estate in Hartford, CT appreciated at roughly 3.2%. That 4.9-percentage-point difference in appreciation completely reverses the asset class comparison. Market selection in real estate is a first-order variable in a way that does not exist for broadly diversified stock index investing.

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Run Your Numbers Before You Allocate

The worked examples above use national averages and standard assumptions. Your situation has different numbers at every step: your marginal rate, your local appreciation rate, your carrying cost efficiency, your mortgage rate.

A 0.5% difference in assumed appreciation compounds to a $21,000 difference in ending value over 10 years on a $500,000 property. That is not a rounding error. It is a decision.

The CalcMoney Investment Return Calculator lets you input your actual figures across all three asset classes and compare net outcomes side by side. Change the holding period. Adjust the tax rate. Toggle leverage on and off. The calculator runs the same methodology shown here, applied to your specific inputs.

Run your comparison before you commit capital, not after.

Use the Investment Return Calculator →

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Results are estimates for informational purposes only. Consult a licensed financial professional before making financial decisions.