Stock Market Vs Real Estate for Passive Income
Investing Passive Income Real Estate

Stock Market Vs Real Estate for Passive Income

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.

4 thoughts on “Stock Market Vs Real Estate for Passive Income”

    1. Are you referring to REITs and the market or physical rental properties and the market? If it’s REITs and the market then I absolutely agree. My feeling is that most people are overestimating the ease at which you are earning “passive” income from a rental property. I think you’re more or less signing yourself up for another full time job, full of very expensive and nearly unavoidable fees and headaches. On the other hand you have highly liquid securities, where, if things aren’t going the way you want, you click a couple of buttons and you’re rid of the problem. With physical properties, offing that investment could take years and countless additional cash. Thanks for the question!

      1. Definitely was referring to REITs. I have very little interest in owning physical income-producing real estate for precisely the reason you note: It’s not actually “passive” income. I have to take tenant calls at 2 a.m. because they clogged the toilet, phone them when the rent is late, phone plumbers when they need to be phoned, pay for repairs and maintenance, make sure the taxes are up to date, take tenants to court when they end up ripping me off, etc. With REITs I can own real property and all I have to do is make a few mouse clicks on TDAmeritrade. (That’s not to say that I will never own rental real estate, but I definitely don’t want to bother with it unless I have enough equity that it doesn’t bother me at all to use a management company.)

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