Menu
There have been memorable rivalries throughout history. Tesla and Edison. Ford and Ferrari. Ali and Frazier. For sure, the world of passive investing has its fair share of conflicts, with one being the source of divisiveness among people who are hungry for passive wealth.
If you are opting to retire and generate wealth passively, you will have to choose between investing your money in the stock market or buying real estate investment properties like I do.
What’s the best way to grow your wealth exponentially? Which one has lesser risks? How do you know if you picked the right one?
These questions are probably floating in your head right now. So, to help you make sense of it all, let me present to you the tale of the tape between stock marketing investing and real estate investing. Ladies and gentlemen (in my not-so perfect Michael Buffer impression), LET’S GET READY TO RUMBLE!
Often called the traditional way of spending your hard-earned retirement savings, investing in the stock market can be a surefire way to generate massive returns. And that’s because you buy a share of a certain company. If you invest in a company with consistently strong fundamentals, some of the value that the company gains trickles down to your pockets. In other words, the value of your stock investment increases as the company performs well.
You also gain a split of the company’s shares in the form of dividends which are usually distributed quarterly. The most successful investors reinvest their dividends into the stock to buy grow the portfolio quicker.
Not too bad, huh? If you’re seriously looking to grow your wealth with minimal effort, then the stock market would be the best place to get started — assuming things turn out great, that is…
Since the value of your stock investment is tied to the value of the company you invested in, you are in for a wild ride when volatility hits the stock market. As market valuations plunge due to economic disruptions (especially by a certain virus), so will the value of your stocks. You are virtually at the mercy of the economic winds. And even if you think investing in the stock market requires minimal effort, you still need to keep your eyes and ears open for developments that will tell you if it’s the right time to sell your shares to protect yourself from further losses. In other words, you have to do a lot of looking around and upkeep in order to make the right moves over the long term.
Considering the trade-offs of stock investing, you will need to develop an effective strategy. The best way you can stay in the game is to diversify your portfolio by adding other types of securities and assets. This will spread the risk around and help keep your margins intact. Dollar-cost averaging (by investing an amount automatically each month in companies that have a proven track record) is the method this is highly recommended unanimously, but is also a “boring” approach that works best over a very long time frame.
You can also use Warren Buffet’s approach by scouting for undervalued stocks that yield low returns but are stable on a long-term basis. Then again, you still need to spend a great deal of time choosing the best stocks to invest in. For sure, this is anything but ideal if you intend to make serious money.
From the way I look at it, you will have to take a leap of faith and hope the economy is stable enough and has a strong outlook. But in looking at recent trades, there’s always a reason to doubt the supposed benefits of stock investing.
Unlike stocks, this is about acquiring physical assets like homes, apartments, and even office buildings. And unlike stocks, your cash flow comes from tenants who pay monthly rent. It’s a simple concept, but think about acquiring a 150-unit apartment complex in a location with stable rent growth. In apartments, rent growth usually translates directly to the value of the building. In fact, one extra dollar of income in rent on the whole property over a year can translate to anywhere between $10 (in cheaper markets) and $30 (in more expensive markets) in value appreciation.
If you are looking to gain income that’s truly passive in nature, real estate has to be your top choice. That’s because you have total control of your portfolio and you have better opportunities to diversify your investment assets compared to stocks. But here’s the best part: except for the 2008 financial crisis, real estate is better insulated from the effects of a serious economic downturn. The reason for this is that there is always a high demand for housing. In fact, when stock market valuations plunge, investors turn towards the real estate sector to secure their margins. They also enjoy numerous tax benefits.
I’m a bit biased here seeing as I have a large portfolio of assets across state lines, so let me fill you in on the downsides of my world.
The issue with real estate investing is that you need a relatively large amount of capital to get things moving quickly! Since it involves acquiring physical assets, you will need close to quarter million dollars (or even more!) to close an apartment deal, and up to $20,000 for a smaller one, such a single family home in the Midwest. These are for your down payments and closing costs, even if you get help from a lender or mortgage company. There are ways to invest with no money, but that requires more knowledge, skill, and risk that many don’t have when starting out.
And unlike stocks which require minimal effort to manage, you need to be hands-on to make sure all your real estate investments are cash-flowing. The work you have to put in (which includes the creation of value-add components, the renovation of outdated units, and tenant outreach) requires a property management team.
I have to admit, real estate investing can be burdensome for first-time investors. But come to think of it, nothing is ever easy on your first try. You just have to develop a good game plan that guarantees consistent cash flow.
Even though acquiring rental properties seems like it’s too much work or money, it’s still possible to get started even with minimal resources at hand, especially if you use your self-directed IRA or retirement funds (shifting from your stock portfolio to real estate). Another way to get around this is to create (or join in on) a pool of cash from different investors in order to finance the down payment. Known as a real estate syndication, this pool is a great way to build your real estate portfolio from scratch using other people’s money (OPM). As the sponsor of the syndication, you get to have overall control over the growth of your portfolio.
I want to wrap things up by asking you: what are your passive income goals? Indeed, stocks and real estate are two different flavors. You just have to pick the one that’s right for you.
There are analysts out there that claim that real estate investing doesn’t achieve the same level of returns as the stock market does (over the last 50 – 80 years), but keep in mind that they are coming to that conclusion by looking at the values of properties alone, since it’s the easiest measure. Where are the other benefits of real estate counted in this naïve comparison approach?
What about the returns that the investors received on cash flow? How about the tax benefits? And what about the ability to magnify money by leveraging your cash into multiple assets? Doing this allows you to partner with inflation while keeping the underlying purchase debt on the properties constant as you hold your asset and it inflates due to value adds you implement, plus market dynamics leading to increases in demand, plus inflation in rents and property values.
If you are going to ask me, it’s real estate all the way! Surely you knew the answer to that question, already, though…
What do you think? If you would like to share your insights, reach out to us!
