Passive Income Real Estate vs. Stock
What kind of investor are you?
Are you like the millions of investors currently playing the stock market like Las Vegas – one of the growing armies who have helped day trading replace sports betting as America’s favorite pastime? Or are you more interested in long-term financial security?
If you’re more of a speculator and hoping to make it big – Wall Street, Las Vegas, online sports betting – it doesn’t matter. It’s all gambling.
I personally believe they’re all rigged but what isn’t in dispute is that the house always wins. Do you want to stake your financial future on the stock market – banking on your “gut feelings” and hunches? After all, isn’t that what the stock market is? A game of timing? Buying low and selling high?
Timing is a fool’s errand.
No one can consistently outsmart the market long-term – not even professionals. And forget economic fundamentals when it comes to the stock market today. Too many non-economic factors are at work that stack the odds against you. If you’ve been paying attention to the whole Gamestop Reddit controversy you’ll know what I’m talking about and why I think the stock market is rigged.
For the uninitiated, here’s my quick take:
A group of day traders – most of whom trade on the free trading platform Robinhood – that convene on subreddit r/wallstreetbets decided to band together to take down hedge funds of short failing companies like Gamestop (GME).
The argument is that hedge funds fulfill their own prophecies when they short a company because the volume of short sales triggers selling by the public. So r/wallstreetbets decided to get back at the hedge funds by buying up GME stock to put a short squeeze on the hedge funds.
By driving up the price, the hedge funds would have to buy the stock at high prices to cover their shorts – losing money in the process. They only make money when the price goes down. It worked, hedge funds lost more than $13 billion as the price of GME shot up from around $17 at the beginning of January to a high of near $430 last week.
A funny thing happened on the way to the hedge funds losing their shirts. Robinhood stepped in and limited buying of GME stock. GME stock plunged and now sits around $100 – losing more than 80% in value in less than a week. Now, it’s the r/wallstreetbets renegades and everyone else who jumped on the bandwagon losing money.
Do you want to trust your financial future to the market manipulating forces at play in the stock market?
Gamestop, a flailing brick and mortar gaming store ravished by the pandemic, had no reason to be trading at $430. But Gamestop is not alone. There are many other stocks trading at prices that don’t justify that underlie flailing businesses. Stock valuation has less to do these days with actual valuation and more with irrational investor exuberance.
If you are the type of investor more interested in an asset that follows market fundamentals and isn’t easily manipulated, you should consider an asset sophisticated high-net-worth individuals and institutions have long turned to for building long term wealth – passive income real estate.
The pricing of passive income commercial real estate is not influenced by irrational market behavior. It follows traditional supply and demand principles.
Case in point. While demand for Gamestop fell in 2020, its stock rose. Commercial real estate (CRE) for the most part saw declines in rents and occupancies with slightly declining prices reflecting these market conditions.
Certain segments of CRE however fared better than others, including industrial and multifamily. In fact, the affordable housing sector actually saw upticks in rents and occupancies – bucking the CRE trend in 2020. In 2021, multifamily and other segments of CRE are expected to rebound with rents expected to rise accordingly.
Elite investors turn to passive income real estate because of its long-term viability. There may be downturns like in 2020 but, in the long-term, CRE has consistently delivered income and appreciation that fuel the wealth engine through their compounding effect.
One of the current economic trends expected to fuel CRE growth and profits in the coming years is historically low-interest rates. With the Fed’s commitment to keeping these rates low, we can expect borrowing rates to remain low for at least the next few years. Lower interest expenses mean increased profits. Cheap money means increased leveraging opportunities – ideal for compounding wealth. Imagine five streams of passive income vs. one stream.
With reliable and consistent income and growth over time, leverage is risk is minimal; whereas, with stocks, trading on margin can result in compounded losses on money losing trades with investors personally responsible for any debts resulting from margin calls.
With passive income real estate, in the unlikely event of default, the debt will likely be secured by the underlying property – reducing any potential deficiency – and passive investments through a private fund protect investors through limited liability.
With stocks, there is nothing you can do as an investor to force the growth of the asset. It’s completely arbitrary and a crapshoot as to whether the price of your stock will even grow. Investors who think they can actively grow the value of their portfolios are usually in for a rude awakening. Over 90% of professional fund managers fail to beat the market. Individual investors fare even worse.
With passive income real estate, investors have the ability to force growth through a variety of avenues. Through physical and operational improvements, real estate investors are able to force growth through increased rents and reduced expenses.
When you get on a train, you want to know your destination and the time you’ll get there. With stocks, you can get derailed and rerouted and never get to your destination.
Passive income real estate is like that old reliable train that always gets to its destination and usually on time. There may be hiccups here and there but there is no chance that a frenzied mob will ever derail the real estate train like with stocks.
Michael Foley, president and CEO of Humabilt Capital, oversees the entitlement process, funding, and operations for Humabuilt Capital. Mr. Foley has been a full-time real estate investor since 1995 during which time he has developed hundreds of single-family homes, townhomes, condominiums, and apartments. Mr. Foley started his investment ventures in Long Beach, California, and has expanded to Apex and Durham North Carolina. Mr. Foley is a graduate of the University of California at San Diego.