There is nothing wrong with either investment option, whether real estate or index funds, as a strategy to accumulate wealth and build a passive income stream. Many investors are rather biased in either direction, borderline dogmatic. Investments, on the other hand, don’t give a fuck about you or your biases. They will go on to perform in an unpredictable yet reliably fashion.
As an investor you will either add value to the investment or simply invest in it along with others and realize a small passive profit. That’s how I separate investments in my bald head.
When you are day-trading stocks then you are, supposedly, adding value because you are choosing a stock which you believe to be undervalued. You will hold it until you can get a good profit from it. You’ll do the opposite by shorting an overvalued stock.
Real Estate Investing
When you’re investing in rental real estate then you are adding value by managing that portfolio. You choose which home to purchase, how to renovate it. You negotiate the price and optimize your marketing strategy. All of these are factors which can help you extract a higher return from your investment.
Real estate is a hands-on investment which is both the drawback of it but also the benefit of it.
If it’s a rental income property then there is a decent learning curve to master before you can have that portfolio idling on cruise control.
Commercial real estate will have its own learning curve even though it tends to be less hands-on. But the upfront investment might have to be larger in order to get into a good commercial real estate. Lending on commercial property is different from residential mortgages.
A buddy who sold his software company for $30m decided to invest the majority of his money in commercial real estate. He hired a property managed and it has been rather hands-off for him. Sure, there are units which are sitting empty but there are other units which have 15-year leases negotiated.
Even if you invest in crowdfunded real estate investments, you will need to choose which platform to invest in, which particular project to go for, and learn how to best diversify that portfolio. For some, this amount of decision making can be exhausting. I’m annoyed some mornings when I can’t pick which shirt to wear.
Index Fund Investing
There is less of a learning curve when it comes to index funds. The research is out there and the funds are rather streamlined. The toughest part is to stick with the investment even when it isn’t performing well.
Index funds have the added advantage of requiring less babysitting. Their returns are often lower than that of real estate, accordingly. And it’s hard to inject any value into an index fund.
Sure, you can choose a very unique and complicated asset allocation, betting that perhaps international or emerging market funds will outperform US indexes. However, the extra profit you’ll derive from this likely won’t be impressive.
Your Flavor of Passive Income
Perhaps it comes down to the flavor of passive income you enjoy. Maybe you want to pursue a lot of projects in retirement or once you’re financially independent. That will likely leave little room for you to learn real estate investing.
Then again, maybe you enjoy real estate and want your passive income in retirement to be a little more hands-on. Giving you something to do in retirement and allowing you a little more control over your passive income flow.
I recently invested in a buddy’s project where he buys undervalued tickets and flips them for a profit. I suspect a 10% return on my investment and it’s rather hands-off. Risky, but passive. And hard to grow into anything large. But, it’s unique and interesting. To each their own.
Everyone says that my analogies suck. Well, let me toss this feculence your way. Passive income investing is like choosing your medical specialty. Anyone…?
Many medical students try to figure out which specialty is best to go into. But that’s the wrong question. You cannot predict the future and you cannot standardize the selection criteria for a specialty in medicine. Bring an ENT is totally different from being a Pediatrician.
Being an Orthopedic surgeon is miles from being a Family Medicine doctor. Sure, they earn more money, have more prestige, have higher exam scores, usually are taller, more handsome, are smarter, have nicer cars, and bigger homes … but … you know… Family Medicine doctors can … we can usually tell the difference between a viral and a bacterial cold. I mean we’ll still give antibiotics to everyone but we have the diagnostic criteria for each licked.
Chances are that whichever specialty you choose, you’ll be happy if you’re the easy going type. It has to fit your personality, lifestyle, and your income requirements.
I have a tenant in my Portland condo as of this writing. She is great, pays on time, and waters my plants. But I still worry about her and her comfort and what I would do if something broke down in the condo. I’m probably worrying excessively, but that’s me.
My index funds, on the other hand, they are passive and worry-free. I don’t care if they tank. I don’t care whether I receive a statement from Vanguard or not. I don’t care what the market reports say and I don’t even care if Vanguard goes under.
I invest in index funds to have a relatively low-risk and stable base. I plan to still trade some of my time for money, just not in medicine. My healthcare consulting, my digital product sales, my coaching, and all of the other random shit I do are all things I really enjoy.
The other day I was walking back from my favorite cafe here in Santiago de Compostela. It was a sunny day, mid-day, so most Spaniards were home having their ciesta. I had finished my work for my healthcare consulting project and had nothing else to do for the entire rest of the day. Heaven.
It’s really hard to describe this feeling of freedom. Having it even for a single day makes an entire lifetime worth living. I could have gone to the library to read, or gone to watch a movie, or I could have walked over to the gym – whatever I wanted, without any worry.
So I think that’s what I like. I like having that headspace and clarity without needing to worry about my investments. Maybe my personality at this stage in my life isn’t right for becoming a mainstream real estate investor. But I’m open to it and always evaluate my options.