Real Estate vs Stocks for Passive Income

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I am regularly asked which is better, to invest in stocks or real estate. To me, they are not similar. Following is my opinion on each regarding getting off the daily worker treadmill.

Stocks, Mutual Funds, Bonds, CDs, Etc.

Stocks (mutual funds, bonds, CDs, etc.) are instruments for accumulating capital. The concept with stocks is that you accumulate capital over time, and once you have sufficient capital, draw it down over time. There are some problems with the accumulate and draw-down method, including:

• You must know how much to accumulate before you start to draw down to deal with inflation, recessions, market crashes, etc. Even if you knew, could you accumulate enough post-tax capital?
• You must know how long you will draw down the funds. What happens if you or your spouse live longer than expected?
• You must be able to consistently pick stocks that outperform inflation and handle recessions and market crashes throughout your lifetime. If you could do this, you would already be a billionaire.

Real Estate

Real estate is a combination of income stream and capital accumulation. Some advantages of real estate over pure capital accumulation.

• You buy enough rental properties such that the combined rental income matches your income needs.
• If you buy in the right location, rents will rise faster than inflation, so inflation should not be an issue.
• No need to worry about outliving your accumulated capital. Rental income streams will last longer than you and probably longer than your children. Plus, when the mortgages are paid off, your income will drastically increase.
• You can create dynastic wealth. There are families in Europe and Asia that are living off investment property that ancestors purchased several generations ago. You can give your children a leg up on life.
• You can use cash-out refi to grow your real estate portfolio with limited additional investment. Many of our clients do this to grow their portfolios with limited additional capital.
• 30-year fixed-rate financing. No other investment even comes close to the leverage available for residential investments.

Summary

Capital accumulation and acquiring income streams are entirely different. To me, financial instruments like stocks require far more capital, need constant attention due to rapid market changes, and you have to make the right decisions most if not every time.

Real estate markets move slowly and it is relatively easy to select performing markets. If you want to be successful, you will have a property manager manage your properties, so your involvement will be minimal.