Property vs stocks in the long run: returns, risk and liquidity compared

The question "property or the stock market?" is one of the most common among private investors in Spain and also one of the worst answered. Many debates are held with incomplete data: they compare the yield on a rental without leverage with stock market returns without dividends, or they ignore the tax and running costs of each asset class. This guide tries to make an honest comparison with the full numbers.

Historical returns: the numbers with every factor included

Property without leverage: If you buy a flat outright in Spain and let it, the average historical gross yield has ranged between 4% and 8% depending on the area and the period. Net of costs (IBI, the local property tax; community fees; insurance; average void periods of 5-8%; management; repairs) it's between 3% and 6%. The average long-term appreciation of property prices in Spain (adjusted for inflation) has been 1-2% a year. Total: a real total return without leverage of 4-8% a year. With 80% leverage: The return on your own capital is multiplied significantly. If you buy a €200,000 flat with €40,000 of your own money and a €160,000 mortgage, and the flat generates €8,000 a year in net rent, your return on your own capital (before paying the mortgage) is 20% gross. The real net return depends on the cost of the mortgage, but leverage is the factor that makes property structurally outperform the stock market for many investors.

The stock market (a global index): The MSCI World (a global stock index of developed countries) has had an average annual return of 8-10% in local currency, including reinvested dividends, over the last three decades. The Spanish market (IBEX 35) has had a lower and more volatile average return (5-7% a year including dividends in the best periods). Without reinvested dividends, stock market returns are consistently lower.

The decisive role of leverage in property

A fair comparison between property and the stock market has to include leverage, which is the biggest differentiating factor:

• On the stock market, access to leverage for the private investor is expensive, risky (margin calls) and unusual for long horizons.
• In property, the mortgage is the cheapest and most accessible form of leverage for the private investor. Leverage of 70-80% (the mortgage covers 70-80% of the price) at a cost of 3-5% a year gives you access to a €200,000 asset with only €40,000-60,000 of your own capital.

The effect on the return on your own capital is huge: an asset that generates a 6% gross yield on the total price but was bought with 30% equity and 70% debt has a much higher return on equity (the denominator is 30 instead of 100). That's the central mathematical argument for leveraged property vs. unleveraged stocks.

Tax compared: who pays more

• Property: Rental income is taxed under the IRPF (Spanish personal income tax) as income from property (the general base), at rates of 19% to 47% depending on your total income. There's a reduction on positive net income from letting a tenant's main home (50% as a general rule for contracts signed since 26 May 2023, and up to 90% if certain requirements are met; 60% for earlier ones), which lowers the real effective rate significantly. The capital gain on a sale is taxed at 19-30% (savings income).
• Stocks: Dividends and capital gains are taxed in the savings base at 19-30% (the same as a property gain). Index funds have the advantage of tax deferral: as long as you don't redeem, you don't pay tax on the accumulated gains. That allows compound interest to work on the gross capital (without deducting tax year by year).

In terms of tax efficiency, index funds beat property rentals for investors with high incomes, because letting is taxed in the general base (a higher rate) while funds are taxed only on sale, at the savings rates (lower). But that doesn't include the effect of mortgage leverage.

Liquidity: the difference that matters most in a crisis

• Stocks: Full daily liquidity. You can sell units in 3 seconds if you need the money. That liquidity has a price: the stock market falls 30-50% in crises, and if you need money at that moment, you have to sell at a loss.
• Property: Illiquid by definition. Selling a flat takes between 1 and 6 months even in active markets, and in small markets it can take longer. But that same illiquidity protects the investor from the mistake of panic-selling during a correction: the transaction costs (notary, taxes) make the option of selling on impulse very expensive.

The honest conclusion: there's no universal winner

The investor with enough capital for the deposit, access to bank finance at good rates and time to manage it (or the money to delegate it) usually gets better results with leveraged property than with unleveraged stocks over the long term. The investor without enough capital for the deposit or without tolerance for illiquidity gets better results with stock market index investing. Most sophisticated investors combine both asset classes.

Related resources: For the property-holding SL (sociedad limitada, a Spanish limited company) structure that lets you optimise the tax on rental income vs. retaining profits at the IS rate (Impuesto sobre Sociedades, Spanish corporation tax), the article on investing through an SL has the comparative analysis. For choosing property assets that maximise the yield and justify the leverage, the guide to cash flow in property investment has the method. For high-yield assets that maximise the effect of leverage, the bank repossessions and court auctions portals are the starting point.