You’re probably thinking that a battle between the Stock Market vs Real Estate for passive income is going to be a slam dunk when it comes to monthly risk free dollars. However, what you might find is that everyone’s favorite passive income past time of real estate investing for rental income is not all it may seem. Not only that, but at this point in time, the stock market may afford you greater and more lucrative returns over the long term than the old, rickety real estate market.
There used to be a time, not too long ago, where everyone in the real estate market was getting dummy rich. This was the era right before the great recession of 2008-9. During the run up to the Great Recession, the real estate market in the United States was red hot, as was the labor market. If you had a pulse and a minimum wage job, you would most likely be approved for a 300-500 thousand dollar mortgage. Back in the days of Countrywide Mortgage, where predatory lending was paramount, low to zero rate two year mortgages were originated at an alarming rate. This allowed subprime borrowers to secure multiple times their income’s worth of leveraged loans.
After the recession, the real estate market took a 29% hit across the board, which has taken somewhere in the realm of 10 years to fully recover. What we are seeing now, in cities where STEM jobs have become prevalent, is a massive spike in real estate values, mirroring the demand for these high paying jobs. The cities that come to mind are the Bay Area in California, Austin Texas, Denver, and Boston, to name a few.
Real Estate can be a very difficult market to navigate. For an investor, you have to remember that there are hidden costs around every corner. Whether it be the recommended 4% of the dwelling’s value worth of repairs per year to keep on hand, origination and closing costs, commissions and other home repairs, along with management fees unless you are attempting to manage your own property. This, along with having the headache of managing tenants, is not for the timid.
This is where I would like to extol the greatness of the stock market. At this current point of time, electronic brokers are offering some of the lowest rates, commissions and management fees in history. You can manage your own money, without having to pay any red tape and bureaucratic fees that are such a cancer in the real estate industry, AND earn outsized returns compared with real estate. Have a look at a portfolio consisting of just five stocks, and the overall market:
The stock market has been a layup for more than a decade, outpacing real estate by an enormous margin. Along with the outsized gains, the risk management is far less stressful. By simply adding a hedge in the form of treasuries, we bring the risk to a minimum.
I ask you the question: Would you rather take your chances with real estate vs the stock market for your passive income? I’d like to hear your thoughts.