Bridging the Gap Between Real Estate and Stocks

There’s something to be said for focusing on what you’re good at.  Trying to focus on too many things at once often leaves you excelling at nothing.  But once you become proficient at one area of investing, it can be a great foundation to enter into another realm where many of the same principals hold true.  I don’t like to take the stance that real estate is better than the stock market, or vice versa.  Instead we believe in equipping our audience with ability to spot opportunity where ever it may arise.

Investing in many ways is like fishing.  You tend to load up your cooler far more consistently when you have a full tackle box.  If one fish isn’t biting, perhaps it can be beneficial to change your quarry.  Or it can make sense to change your location, or even the lure you’re using.  A full tackle box, and an extensive knowledge of different fishing grounds makes for a better fisherman.

The same can be said for investing.  If you’re a traditional real estate investor, you will probably experience fast and slow periods.  In slow periods it can be tough to put capital to work, or find deals that keep your revenue flowing.  Even if you can find deals, real estate is generally an illiquid investment vehicle where it can be difficult to put spare capital to work, and even harder to spread out over many deals.

In contrast, the stock market is highly liquid.  The stock market is a more efficient vehicle when it comes to speed, execution, identifying deals, and keeping your transaction costs incredibly low.  It’s also far more practical to spread out over many assets, and even design one’s portfolio to be hedged for further risk reduction.  Unfortunately, mainstream investment advice has led many real estate investors to believe that stock investing isn’t all that lucrative, often thinking of mediocre performance associated with mutual funds or buy-and-hold investing.


Why aren’t stocks sexy…..


When I first started off in stocks, I myself was left a little underwhelmed with what it meant to be a successful stock market investor.  Even the greats like Warren Buffet generally demonstrated outperformance by merely generating annualized ROI between 15% and 30%.  Not particularly exciting for property flippers looking to double to triple their cash investment over a 6 to 9 month period.

But it was my journey into real estate that led me right back to stocks.  The reason real estate investors tend to make more than most stock investors isn’t because the asset is superior to the stock market.  In fact, the average performance of real estate tends to slightly outpace inflation while the stock market has shown to significantly outpace it.  However, real estate typically has a major advantage through the various strategies available to the investor.

Unlike stocks, real estate generally has far more options when it comes to leverage and financing.  You can also demand superior terms in your negotiated contracts.  And of course, you can rent out a property creating cash flow and leveraged equity building.  There are more advantages that we won’t even get into.  But the general theme is that your edge comes from how you position yourself around the asset, rather than the asset itself.


What the financial industry doesn’t want you to know….


This is just my opinion.  But the financial industry is an extremely profitable sector for one very simple reason.  It focuses on keeping investors confused and overwhelmed such that they turn their money over to the “experts”.  That’s why most financial advisers will caution you away from trying to value stocks like Warren Buffet, or negotiate better terms through the use of stock options.  It’s considered far less “risky” to dollar cost average into mutual funds.

Unfortunately, most mutual funds have been shown to incur costs in the form of disclosed fees, hidden fees, and inefficiencies detrimental to the long-term performance of a portfolio.  Periodically, traditional measures to diversify portfolios have proven limited in reducing risk during severe market selloffs.  For example, during the 2008 stock market crash both stocks and bonds experienced drastic sell-offs which took years to recover.  In such a case, spreading out over stocks and bonds did little to protect investors from such an extreme portfolio fluctuation.  This was disastrous for many retirees and pre-retirees who thought their investments were managed to greatly reduce risk.  If you’re force to live on “damaged” money, that money will never have the chance to recover.

In contrast, even a basic knowledge of certain options strategies could have been a more effective means to reducing risk, and creating faster recovery.  For example, many stock market investors already seek to put their mind at ease through dividend paying stocks.  Afterall, if your stock portfolio is sending you paychecks each month, fluctuations in market price are less concerning.

However, the yields of most blue-chip stocks are dismally mediocre.  A yield of 2% to 3% is considered decent.  This means a multi-million dollar portfolio would be needed to produce even a modest equivalent to a middle-class salary.  In contrast, selling call options against your held stock creates to no additional risk for loss, and typically generates cash flow 5X to over 10X typical dividend yields.  Identical downside risk combined with exponentially higher cash flow is a no brainer in my book.  And yet most financial advisers never even mention this as a possibility for your portfolio.


Real Estate Investors already have what it takes….


The financial industry fears two things.  They fear that you’re competent enough to manage your own money.  They also fear that you develop a track record which blows them out of the water.  Afterall, how can they justify their own existence when the average joe around the block is generating ten times the annual return of mutual funds consistently?

Most real estate investors already reached the conclusion long ago that mediocre returns are simply insufficient for meeting their goals.  They are confident enough to gain the knowledge and skillsets for themselves.  They don’t subscribe to the almost zero-sum mentality preached as “managing expectations”, and believe that deals of a lifetime are out there waiting.

Which brings me back to why real estate investors should consider reentering the stock market.  But not with the passive ignorant mentality typical of the industry.  Rather they should strive to gain the technical skill necessary implement historically superior strategies.  Strategies almost identical to those already used in traditional real estate.


Options Traders are the Real Estate Investors of the Stock Market World…..


When I trade options, I think like a real estate investor.  Options are contracts that add a negotiating aspect to stock investing.  They also allow investors to take on different roles in the stock market besides just being a buyer or seller.  For example, selling a put option to another investor is very similar to taking the role of a private money lender.  Just like a lender, you can structure a deal to either make cash flow, or you “foreclose” on the collateral your loan is secured by.  Call options are essentially “lease with option to buy” agreements.  Selling a call means you either keep the cash flow, or sell the property at an agreed profit if the market price increases.

Options can also be used to limit risk, implement affordable leverage, and hedge your overall portfolio.  You can structure options strategies to closely mimic wholesaling, flipping, and even subletting strategies.  And very often, transactions generate double digit ROI in a matter-weeks or even days.  Meanwhile, most buy and hold real estate investors are considered successful if they cover costs and generate 8% to 12% positive cash flow.


The Bottom Line…..


If you’re already passionate about the strategies found in real estate, I encourage you to explore extremely similar strategies made possible through options.  You can potentially negotiate better terms, generate cash flow, limit risk, and find affordable leverage.  Simultaneously, your deals won’t come at the expense of heavy marketing costs, holding costs, and transaction costs.  Think like a real estate investor, and expand your arsenal by learning about an entirely new asset class.

About The Author


I am a college drop out who found my passion as an investor. I love the many facets of finance, investing, and business. But even more than that, I love sharing what I learn with others.

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