Real Estate or Stocks: Which is a Better Passive Income Source to Make Money While You Sleep?

Real Estate or Stocks Which Will Make You Richer

You may not know this, but you have thousands, tens of thousands, or even hundreds of thousands of workers eager and ready to go to work for you.  They’re ready to roll up their sleeves and start making you money right away. The only problem? They’re sitting around waiting to be put to work but you haven’t given them anything to do yet.

Sounds crazy right?  Well, not so much…

Every dollar that you have sitting around not being invested is a worker that’s currently idle, waiting to make you money.

If you have money in your checkings account, in your wallet, under your mattress, wherever you keep your money… you have a huge untapped potential income source.

To give some perspective, this year I made just as much net income from my investments as I did through my business.  And my business grosses 8-figures a year. How did I do it? By learning one simple truth…

Work hard to make your money, and then make your money work for you.

You have to get your money working for you.  Work hard to make your money and then make it work for you.  It doesn’t matter if you have $500 to your name or hundreds of thousands of dollars sitting around.  Think of each dollar that you have as a worker that you can employ to increase your income.

You have three main choices of what to do with the money you have: Spend it, save it or invest it (I realize you can give it away, throw it in the air at a nightclub or countless other things, but leaving this out for now).

The worst thing you can do is spend your money because you’re giving away your workers to a merchant to put them to work for him or her instead of you. The next best thing you can do is save your money.  When you save your money, you’re putting your workers on the bench and keeping them waiting wondering whether they’ll be given away or one day put to work. That leaves us with the best option which is investing your money.  Only when you invest are you putting your workers to work so they can start making money for you.

So all this time your family nagging at you to save your money wasn’t necessarily giving you the best advice.  They may have meant well by it, and saving it is definitely better than spending it on useless things, but what they should’ve been preaching (and the advice I wish I would’ve gotten, or maybe I did and was just too hard headed to listen) was to invest it.

Think about it: do you want to work the rest of your life for money?  Or do you want to get your money working for you so you can do the things you really love, such as make money while you sleep?  Like the legendary investor Warren Buffet says,

“If you don’t find a way to make money while you sleep, you will work until you die.”

Believe it or not I earned more profit from my passive investments in real estate and stocks than I did from my 8-figure gross income business in 2017. In this blog post I’m going to focus on comparing real estate and stock passive investment opportunities for you to figure out the best to to get your dollars, or workers, working for you.

Investing in Real Estate

Real estate is the least passive of my 3 favorite options of passive investments with the highest barrier to entry. But, as my dad likes to say, it’s dirt that you can actually feel and grab (if you don’t mind getting your hands dirty).  For me the best argument in favor of investing in real estate is that there’s only so much land in the world, and if you live in areas like Los Angeles or San Francisco like I do, that land is extremely limited and without a doubt will continue to rise in value over time.

If you’re interested in investing in real estate there’s a number of ways of doing so.  The traditional way (the way in which I invest and will talk about in this post) is to buy a property whether it’s commercial, residential or land. There’s new ways of investing such as through Real Estate Investment Trusts (REITs), crowdfunding real estate, etc. but I won’t focus on those here.

Short Run vs. Long Run Strategy

The first decision you have to make when buying real estate is your end-game.  Are you buying to flip (short-term) or are you buying to hold and collect rent (longer-term)? Generally speaking if a property is producing a high net income (or profit after paying all of your property’s expenses) then hold onto it, otherwise flip it.

Most commonly single family residences don’t produce a high net income because you only have one revenue source (rent from the family living there) but lots of expenses (mortgage, tax, insurance, maintenance, etc.).

Multi-families (apartment buildings), commercial and mixed-use (combination of commercial and residential) properties are more likely to have higher net incomes because they have many tenants paying rent. However with the higher rent also comes the higher price tag making these properties less attainable for newer investors. So if you’re just starting out the best real estate investment strategy for you would be buying and flipping single family residences as an entry point. Once you build enough of capital you can invest to own for the longer-term.

How to Make Money in Real Estate

In buying real estate for flipping the profit is almost always made from the purchase and never the sale.  You want to find a good property for a great price. When you buy at a great price it has “built-in equity” in the deal or money that you immediately realize as soon as you close on the purchase.

To find the right deal it’s all about networking with the right brokers, getting to know your local real estate market and consistently making offers on deals. Even if you think there’s no way a seller would accept an offer that low, you never know what the seller’s going through and how desperate they are to sell.  Think of buying real estate like a sales funnel, for every 100 properties you look at, 10 may be worth putting an offer on, and 2 may end up getting accepted, and you may close on 1. So keep making offers.

As you build a reputation in the local real estate market as a serious buyer who closes on deals, it will become easier to find good deals.  You’ll start to see many real estate brokers approaching you trying to get your business. So don’t get frustrated if no one is taking you seriously in the beginning or it’s hard to find good deals, just remember that there are good deals to be found in every market and the more deals you close the easier it becomes to do more business.

What to Avoid in Buying Real Estate

Never invest in real estate outside of your local area.  I can’t tell you how many times I get hit up by friends trying to convince me  that “right now is the best time” to take advantage of an opportunity in another state or another country. It’s a big headache having to manage a property far away from your homebase. The last thing you want to deal with a tenant calling you in the middle of the night with a leaky toilet that lives hundreds of miles away.  Additionally with out of town real estate you’re not in touch with the local market, giving you a disadvantage by not knowing social, political and economics trends that are happening as you would your homebase. So keep it local.

Don’t bite off more than you can chew.  Or in the case of real estate don’t buy more house than you can afford.  Things almost never work out the way you hoped they would on paper. And few things are as stressful as having to make mortgage payments while watching your bank account drain. Whether or not you’re making money the bank, contractor, insurance broker and everyone else will still want theirs.  From experience, cut your projected profits in half, double your construction expenses and triple the timeline you think it will take to complete. And then you might be close. And always, always get multiple bids from multiple contractors, ideally before you complete the purchase.

Summary

Growing up in a real estate family my preference has always been to invest in real estate.  It’s a great investment whereas prices will continue to rise in the long run and if done correctly can also generate some income as a bonus through rents.

The downside is the barrier to entry in real estate is high- you’ll have to put 20%+ cash deposit and qualify for loans requiring decent credit. It’s also a lot of hands-on work managing a property having to deal with contractors, site visits, multiple vendors, tenants with maintenance problems, local government and much more.  Things hardly ever go according to plan, at least when you’re just starting out, and often times you’ll not make nearly as money as you anticipated.

And above all else, my least favorite part about investing in real estate is that it’s not liquid.  If you end up in a bind and need to get out quick, you can’t just sell your property right away like you can with the other 2 passive investments I talk about next, stocks and cryptocurrency.

So overall, real estate in 2018 is my least favorite passive investment.

Investing in Stocks

Imagine your favorite companies in the world.  Amazon, Facebook, Ferrari, Netflix, Nike, Gucci, Starbucks, etc.  Wouldn’t it be great to own a piece of your favorite companies? That’s what purchasing stock allows you to do, owning a small piece of companies that you really love and believe in.

The best part of investing in stocks, besides being able to make massive financial gains?  You don’t have to do any of the work to be able to profit from your favorite companies. I’ve made more money than most employees from Amazon, Boeing and Facebook, and I haven’t had to package any boxes, build any jets, or come solve any algorithm problems with my news feed.

And even better I’ve been able to use my stock profits from my favorite companies to purchase my products I enjoy from them for free.

For example, I’ve made enough money off of my Tesla stock in one year that allowed me to purchase a Model X for free. I’ve made enough profit from my Netflix investment to pay for my subscription for the next 2,000 years. And I’ve purchased all of my girlfriend’s designer presents (and she gets a lot of them) by using my profits from my Gucci stock.

Investing in Stocks On Your Own or Hiring a Broker

To invest in stocks you’ll first have to decide whether you want to invest yourself or you’ll want to hire a financial advisor or broker to do it for you. If you’re not going to listen to anything else I say just listen to this:

LEARN HOW TO INVEST ON YOUR OWN.

I know what you’re probably thinking, I don’t know how to invest in stocks.  I’ve never done it before. What if I lose a bunch of money?

Remember, no one starts off as an expert at anything.  It takes relentless practice and determination to become good at anything.  If you’re serious about having your money work for you and earning meaningful passive income, then learning how to invest in stocks is something you’re going to need to to do.  So start reading books, watching YouTube videos, practicing with small investments on your own and absorbing as much information as you possibly can. This is a marathon not a race- you’ve got to be in this for the long haul.

Should I Pick My Stocks or Invest in Index Funds?

If you’re worried about your ability to pick the right stocks a safe way to enter the stock market without taking much risk is by investing in an index fund.  Instead of picking and choosing the stocks that you want to buy, investing in an index fund allows you to buy all the stocks that are in that particular index.

For instance, if you really like tech stocks like Facebook, Apple, Amazon, Netflix and Google (now Alphabet), instead of purchasing these stocks individually you could invest in the index fund these stocks trade in, or the Standard & Poor’s 500 index (S&P 500).  When you invest in the S&P 500 fund you own small pieces of all the companies that are in that index, including the abovementioned stock.

Even Warren Buffett believes if you’re a new investor you should invest in an index fund instead of giving your money to financial managers.  He famously made a $1 million bet in 2007 that the S&P 500 index would outperform a selection of top investment managers over a 10-year period, and in 2017 he won that bet, donating all proceeds to charity.

The upside of investing in index funds is that they are well diversified with lower risk, but with lower risk also comes less reward.  And while slow and steady wins the race, let’s be honest, if you’re reading this then you’re probably like me and trying to make a lot of money. The best way to do that when investing in stocks is by choosing individual stocks that have the ability to produce massive gains.

To give you an example, from 2011 to 2017, if you had invested in Amazon’s stock you would’ve gained 386%, compared to S&P 500’s return of 76.9%.  From 2012 to 2017 if you had invested in Netflix’s stock you would’ve gained 520% versus a 94% S&P 500 gain. So if you really want to hit your financial goals and crush it through the stock market you’re going to have to choose individual stocks.

Choosing Individual Stocks to Invest In

Initially when I thought about investing in individual stocks when I started I was terrified.  What if I pick the wrong stock? What if the stock tanks right after I invest? What happens if North Korea drops a bomb on us?  Isn’t it too late to invest wasn’t the best time 5 years ago and I missed the boat?

Stop. Doubt kills more opportunity than failure ever will.  I had all these above reservations running through my mind when I started investing and you know what I think about now?  Damn I wish I had put more money in at that time.

When choosing which stocks to invest in you have A LOT more knowledge than you think. When you walk into a Starbucks location and see a long line for a seasonal coffee, you’re doing market research.  When you’re talking to your niece about the new games her and all her friends at school are obsessed with, you’re doing market research. When you’re scrolling through Instagram and see the brands all the influencers are rocking, you’re doing market research!

You get the point.  The best way to pick stocks is just to observe what’s happening all around you.  I’m ALWAYS doing market research by simply talking to people and paying attention to my surroundings.  Something as simple as going into my mail room to pick up my packages and noticing a lot more Amazon boxes than a year before, or talking to a salesperson about store traffic at the Gucci store around Christmas compared to last Holiday season, are all examples of the market research I do to choose my stocks.

To choose your individual stocks to invest in, follow 2 simple steps:

1) Make a list of your favorite brands, and then

2) Look at their stock price graph.

First, Create a list of about 10 brands that you and your friends love and spend a lot of money with.  By doing this you’re getting the most important thing right from the jump: you’re investing in something you love, believe in and already know about.

You don’t want to have too long of a list. If you start with 10 brands I’d invest in no more than 5.  And 75% of your total investment in stock I’d recommend should be in no more than 3 companies.

Second, you have to figure out whether the brand you love is actually a good business to invest in.  The way I do this is shockingly simple. I google “Brand 1 Stock”, “Brand 2 Stock” and start looking at their price charts.

When I say start looking at charts I’m not talking about any sophisticated stock analysis terms.  It may be hard to believe but I made 7-figures in the stock market last year and I have no clue about 90% of the charts and analytic terms that get talked about.  I simply look at the stock price on a line graph to see how consistently the price has been going up over the last 5 years.

This may sound to be easy to be true, but that’s following the KISS method: Keep It Simple, Stupid. Stock picking doesn’t need to be rocket science.  Let me show you a couple charts of companies you probably know about and love and you let me know which you think the better investment is.

Here’s Snapchat’s stock, it was at $24 in March 2017 and is trading at $14 today.

 

Here’s Facebook’s stock, it was at $31 in January 2013 and is trading at $181 today.

Maybe you love Snapchat and Facebook, possibly Snapchat even more.  But doing a simple Google search and looking at these charts, which company would you decide to invest in?

I kid you not this is the simple 2 step process I use in choosing my stocks.  Start by creating a shortlist of brands you love and then look at their charts over the past 3 months, 1 year and 5 years.  If the chart is consistently going up and to the right, odds are you’re in great shape and history is likely to repeat itself!  Using this method, it should be no surprised why my top 3 stock holdings are Facebook, Netflix and Amazon.

Short Run vs. Long Run, How to Make Money in Stocks

What I realized from my early mistakes in investing in stocks, unlike my advice in real estate for newer investors, is you HAVE TO THINK LONG-TERM.  Do not go into it trying to make a quick buck. At any given day you have about a 50/50 chance of your favorite stocks making money, but if you look at the long-term averages the market (and probably a lot of your favorite companies) have done very well over time.

In the last section I talked about the relative simplicity when it comes down to picking stocks.  Picking the right stocks is NOT the hard part. Holding onto the right stocks is.

One of the most basic fundamentals of investing is buy high, sell low.  Seems so obvious- doesn’t it? But unless you’re a seasoned investor, it is unbelievably difficult to practice.  Keeping discipline and not selling in a panic when the market declines, your favorite company suddenly starts facing a hardship, or your family is telling you you should quit while you’re ahead is extremely difficult.

When I first started investing in stocks I’ll never forget my first $40k in profit.  I was so excited I couldn’t stop talking about it to my brother. All of a sudden my excitement turned to anxiety when he told me I should pull out now while still ahead.  I debated back and forth for weeks but then eventually decided to hold out for the long run. In less than a year later, right before the end of 2017, I sent a screenshot to my brother showing over a million dollars in profit, so thankful I decided to hold on.

Choose your stocks, and then stick to them.

Don’t second guess your decisions over and over.

Don’t panic if the stock price drops or remains the same for a few months.

Don’t freak out if the other stock you were strongly considering outperformed the stock you chose.

It doesn’t matter what happens on a moment-to-moment, day-to-day, week-to-week or even month-to-month basis.  You have to think over the course of many years or you’ll never be able to make massive profits.

Warren Buffet suggests having no less than a 10-year investment time frame.  In his 2014 letter to his Berkshire Hathway shareholders, he wrote “I recommend that you purchase Berkshire shares only if you expect them to hold them for at least five years.  Those who seek short-term profits should look elsewhere.”

Trying to time the stock market is a losing battle.  While there are a lot of people who have lost money in the stock market, there have been very few times throughout history that the overall stock market hasn’t increased over a 10-year period, and there has never been a 15-year period in which the market has gone done.

The best motto when investing in your favorite stock is “set it and forget it.”

Summary

If you’ve made it this far into the post (first I applaud you), second the choice should be clear as to which my favorite passive investment is: stocks.  I choose stocks because they allow you to get paid from your favorite companies without doing any of the work and they’re highly liquid allowing you to take your money out of your investment really quickly.

The difficult part for investing in stocks is maintaining the self-discipline necessary to think long-term and not sell in a panic during a downturn.  Based on my own experience it’s much easier to preach it than it is to practice it.

When planning for the future we don’t think about the stresses and anxieties that arrive in the moment, such as when you made that New Years resolution to eat better but then suddenly get overwhelmed by the doughnut you just passed by in the window. You will have many, many moments when you first start investing in stock that you’ll start to panic, but maintain steady hands and focus on the long-run and you should do very well for yourself.

Bottom line, stocks in 2018 is my preferred passive investment.

The Bottom Line

You don’t have to choose to invest in real estate OR stock, but if you are going to choose one (or don’t have the capital to do both) I’d start with investing in stock.  As your capital grows, the formula that I follow for making my passive income bets is 50 / 30 / 10 / 10, or invest 50% of your money in stocks, 30% in real estate, 10% in high risk (such as cryptocurrency) and keep 10% as a cash reserve.  

This is an aggressive investment strategy with such a small cash reserve that has played out really well for me.  Once you begin to think of your money in your bank account as idle workers that you employ but are not making you money, you’ll want to put them to work by quickly transferring those extra funds into investment opportunities.

If you haven’t started investing yet a good place to start before you begin is creating some investment principles, or guidelines to help you make your decisions.  When you have guidelines in place it helps you make less emotionally-charged decisions (which are usually the wrong decisions) and helps you be decisive when uncertainty arises (and without a doubt will).

It is important to be open-minded to account for changing markets and opportunities, but as a rule of thumb I only consider changing my investment principles once every year at the most. I hope this post was helpful in getting you thinking about starting to invest, or if you’ve already started, gives you more information to consider when investing in real estate and stocks.

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