Property vs. Index Funds: Which One Will Set You Free?

People LOVE property. You can touch it, paint it, live in it, rent it out, and brag about it at dinner parties. It feels real. Stocks? Index funds? They’re just numbers on a screen, right?

But here’s the million-pound question:

👉 Which one will create better returns for you, with less stress, over the long term?

Let’s dive into the truth behind the bricks and the tickers—with real-life stories, financial breakdowns, and a few cautionary tales that might just save you a fortune.

❤️ Why People Fall in Love with Property

Property has emotional appeal. You’ve lived in one. You know how it works. And the idea of someone else paying your mortgage while you build wealth? YES PLEASE.

Plus:

• You can leverage with a mortgage (Buy-to-Let, baby!)
• Rents and house prices often rise with inflation
• You’re providing homes—there’s social value
• And yes, it can be profitable

But hold up…

😬 Property Is NOT Passive Income

Let’s bust a myth: Rental income is not passive. It’s a part-time job. Sometimes a full-time headache.

The Rebel Ninjas helped to create this article and contribute examples and numbers. Let me introduce you to Rebel Ninja Claire who said this:

“I had one tenant that accidentally set fire to the back of one of the houses that I rent out – he had been smoking in the garden (even though it is a non-smoking house), had put the cigarette in the bin thinking it was out – it wasn’t, the bin caught on fire and set fire to the downstairs bathroom and the roof on the extension, and the whole house was smoke damaged. The tenants had to move out and it took seven months for the repairs to be finished. It was a very stressful experience and not one I would wish on anyone.

I got to the street and saw this….

… and then saw what had happened to my property investment ☹:”

This might seem like an extreme example but the number of people we have met with similar tales is staggering. We will save our tale of how a tenant turned our beautiful Amazingstoke flat into a weed farm for another day!

You’ll deal with:

• Tenants (finding, vetting, managing)
• Repairs (leaky taps, broken boilers, mystery smells)
• Legal stuff (EPCs, gas certs, deposit schemes)
• Tax (complex and often punitive)
• Mortgage rates (they go up, not just down)

Katie and I learnt so much doing this stuff when we were landlords but it was hard work. Spending your Saturdays doing tenancy agreements, showing people around the flat and more!

And if you outsource management? Expect:

• 💸 10–12% agent fees
• 🧰 You still pay for maintenance
• 📞 Friday night calls about broken toilets or leaks whilst you’re on holiday somewhere!

💰 Property: The Financials

Let's talk numbers. Because feelings don't pay the bills.

To assess whether a property is a good investment, compare your net returns (rental income minus all expenses, plus any capital growth) against what you might earn from other options—like index funds.

Costs include:

• Purchase price, legal fees, and stamp duty
  
• Mortgage interest
• Insurance, repairs, void periods
• Annual certificates (gas, electric)
• Agent fees (if used)
• Ground rent and service charges (if leasehold)
• Tax (which can be complex and punitive, especially for higher-rate taxpayers)

We have met so many people who do back of the envelope maths to prove that rental properties are amazingly profitable and they forget so many of the costs that are incurred buying, selling and running a rental!

At this point I am going to hand back to Claire who ran the numbers on her two rentals that she owned just for this article. I am so grateful to Claire and the Ninjas for their work on this article and helping us all learn.

The point of doing these numbers is to help us all make better decisions going forwards.

Real life numbers

Let me introduce Rebel Ninja Claire who did her numbers as an example for us all! Over to Claire:

“I am very new to investing in index funds and have only started investing in them this year. Until I came across Alan and Katie Donegan on YouTube, I had no idea what index funds were or how they worked.

I have gone back and looked at the financial performance of two properties that I bought in 2015, and have compared that to what I would have made if I had put that money into Vanguard’s Developed World Ex UK index fund (one of the funds that the Donegans talk about) instead.

I bought the properties for cash and rented them out as shared houses (houses of multiple occupancy) as this meant that I would make a better return overall and also reduced the cost of void periods as this meant that maybe one room would be empty in the house (and therefore not generating rental income), but it was unlikely that all the rooms would be empty all at the same time.

I manage the houses myself as they are both local to me, and because they are not mortgaged, I have no interest costs (which helps me sleep at night but also means I don’t get the benefits of leverage i.e. using a small amount of money to control a larger asset).

The profit in absolute terms has gone up most years over that time, although I have recently had to redecorate and recarpet one of the houses as it was looking really scruffy.

The value of the properties has also increased over this time, and this capital growth also has value, although I wouldn’t be able to realise that value unless I sold or mortgaged the properties. In total, the two properties have returned £390,585 over the ten years, which is 139% of the original investment:

However, what could I have made if I had invested the money in index funds instead?

In the example below, I have assumed that I invested the original investment in Vanguard’s Developed World ex UK index fund instead for the closest ten-year period where Vanguard returns data is available. The results are shocking!

I would have been over a quarter of a million pounds better off if I had put the money into Vanguard instead and would have made £642,869 rather than £390,585.

UMMMMMM Fascinating!

Now some readers might be thinking what if I had used that money and put down deposits on more properties and therefore benefitted from leverage i.e. using the money I had available to control and benefit from the growth in more houses?

Below are the results from some simplified analysis I did based on the performance of the houses that I have, using an assumption that I could get interest only mortgages at 5% interest and that I would have to use a letting agent to manage more properties.

If I had bought four houses with a 50% deposit on each, I still would have been worse off than if I had put the money into Vanguard’s index fund:

I then tested this to the max and ran a scenario using the money to buy eight houses with a deposit of 25% on each.

This scenario did generate a better return than the Vanguard index fund but was heavily dependent on capital growth (UK property price growth has been very strong over the last ten years and might not be repeated over the next ten years).

It also assumes that I would have been comfortable with taking out mortgages totalling £841,350, which I think would have worried me:

So based on my experience (which is 2 properties in one location), I would have been much better off investing in index funds.

Property can generate better returns than index funds if you are willing and able to mortgage the properties, but you might have to be relatively heavily geared (i.e. have a high loan to value ratio with the mortgages on the properties) to beat the performance of index funds, and even then, you could be relying heavily on capital growth, as well as mortgage interest rates not increasing significantly from current rates, neither of which are a given.

UMMMMM Fascinating.”

🧠 Alan’s Quick Take on Claire’s Property vs. Index Fund Experiment

Claire ran the numbers—and the results were 🔥.

Her two rental properties made £390k over 10 years.

But if she’d put that same money into a Vanguard index fund?

💥 She’d have made £643k—with zero tenants, zero stress, and zero fire damage.

She would have been quarter of a million better off.

Claire you are amazing for sharing your real numbers. THANK YOU. If you like the real case studies with real numbers then please write a thank you to Claire for putting this all together in the comments below.

A couple of other things to think about:

🌍 Diversification: Don’t Put All Your Bricks in One Basket

Property is concentrated risk.
One town. One street. One tenant.

Aberdeen is a town in Scotland where we have friends that have investment properties. Property in Aberdeen has been in freefall since the oil industry moved out. This is concentration risk in reality.

Index funds?
You own thousands of companies across the globe.
Tech, healthcare, energy, consumer goods—real businesses making real money.

If Aberdeen tanks, your property tanks.
If Apple dips, Amazon might soar.
Diversification = resilience.

💧 Liquidity: How Fast Can You Get Your Money?

Property:

• Takes months to sell (depending on your country. The Donegans were unlucky for many reasons and their properties took 2 and a half years to sell!)
• Costs thousands in fees
• Might sit empty

Index funds:

• Sell in seconds
• Low fees
• Instant access to cash

Liquidity is an important consideration.

🧠 Property Is a Business—Not a Hobby

Let’s be crystal clear: property is a business.
If you’re not willing to run it like one, you probably shouldn’t be in it.

That means:

• 📞 Chasing tenants who don’t pay—fast
• 🧾 Knowing your numbers inside out
• 🏦 Using leverage strategically (yes, that means debt!)
• 💼 Maximising profit like a CEO
• 🧰 Managing maintenance, compliance, and risk

If you’re not ready to treat property like a serious, profit-driven enterprise—with systems, spreadsheets, and stress tolerance—then it’s not an investment. It’s a liability in disguise.

There’s no shame in that. But don’t kid yourself:
🏡 Property isn’t passive. It’s a business.

🏖️ Final Thoughts

Property is romantic. You can renovate it, decorate it, and show it off.

Before diving into property, ask yourself:

• Am I willing to handle the real (and sometimes messy) work of being a landlord?
• Do I have the upfront cash for deposits, void periods, and ongoing costs?
• How comfortable am I with debt?
• Am I chasing a romantic idea—or a sound investment?

Index funds are boring:

• But they grow while you sleep.
• They don’t call you at midnight.
• They let you enjoy that beach in Bali without worrying about Steve and his broken toilet.

Choose what fits your life, your goals, and your stress threshold.
Or mix both, Katie is shouting “It’s not BINARY!” in the background right now! Just know the trade-offs and do the maths.

So many people get into property without even being able to do the maths behind the investments. The Donegans aren’t anti-property we are pro-maths.

Need help doing the maths on your property? Katie created a spreadsheet to help you. Download the Return on Equity Calculator here and read the guide to working out the real return on your properties!

We would love to know what you think. Do you have a rental property? Have you done the numbers? Are you thinking of getting into property? Let us know your thoughts below!