My estranged dad left me $420K when he died. I want to make the most of this surprise windfall — should I invest it in stocks or buy my first home?

With no college education and currently working as a waitress, Lena is weighing two options: using the money to buy a home for long-term stability, or investing in the stock market to build wealth for retirement and her son’s future education. She wants to ensure the money lasts.

Here’s how an equal investment in real estate and the stock market can unfold for Lena.

The benefits of the stock market

Historically, stocks have typically outperformed real estate, though there are important caveats Lena should consider when making her decision.

If she invests in a low-cost index fund tracking the S&P 500, she can expect an average inflation-adjusted annual return of 7.66%. By comparison, U.S. residential real estate has appreciated about 5.5% annually over the last 30 years.

At first glance, this may make stocks appear to be the obvious choice. However, there are key differences to keep in mind.

First, stocks tend to be more volatile than the housing market, which generally experiences slower but steadier growth. Second, success in the stock market depends on disciplined investing. Lena should consider sticking to diversified index funds and avoid frequent trading or stock picking, which often underperform and carry greater risk.

Because she’s in her early 30s and her son is still young, Lena has time to weather market ups and downs and benefit from long-term compound growth. Stocks also come with lower capital gains taxes and fewer ongoing costs than real estate.

If she invests her $400,000 in an S&P 500 index fund and lets it grow, she could have around $1.21 million in 15 years — just in time for her son’s college — and roughly $5.3 million in 35 years, when she’s ready to retire.

Even without making additional contributions, this investment could provide Lena with a strong foundation for financial security in retirement.

The benefits of owning real estate

Lena’s desire to buy a home for herself and her son is understandable. Homeownership often represents stability; however, on a modest income, it could pose serious challenges.

While real estate is less volatile than stocks, it comes with ongoing costs: property taxes (typically 1-2% annually), maintenance (around 1%), insurance, and potential HOA fees. For a $300,000 home, these could total around $12,970 per year — a heavy burden on a waitress’s salary.

Unexpected repairs or emergencies could also push Lena into debt if she lacks sufficient reserves. While buying a smaller home under $400,000 and setting aside funds for upkeep may be possible, dipping into that emergency savings when issues arise can be a risk.

Unlike stocks, real estate is illiquid and Lena couldn’t easily access her home’s value in a crisis without selling or going into debt. Additionally, buying a home requires a lot of research, especially in a competitive market where she’ll have to balance location, price, work commute, and school quality.

By contrast, stock index funds typically charge very low fees (between 0.03 and 0.15%) and offer easier access to invested funds if needed.

A middle ground?

Lena may not have to choose between buying a home and saving for retirement. In some U.S. cities, it’s still possible to buy a home for $200,000 or less. (2) If she’s willing to relocate and start fresh with her son, she could potentially manage both homeownership and stock market investing.