Real estate investments have been a popular strategy for generating cash flow for a long time, but they come with significant downsides. For instance, each transaction can be expensive, time-consuming, and subject to market fluctuations.
Buying and selling real estate can be difficult, and maintenance and rent collection can be a hassle. With the commercial real estate market still recovering from the COVID-19 pandemic, investing in real estate may not be the best choice for a modern investment strategy.
A Better “Option” — Stock Market Versus Real Estate Investments
We believe the stock market is better than real estate for generating cash flow and preserving wealth. Let’s first look at the hard data to find out why.
Using the graphic above, compare the difference between simply investing in the S&P 500 and investing in real estate. While the average median home price in the US has risen by roughly 100% of the period (significantly less when comparing the CPI adjusted price), the S&P 500 has risen by roughly 500%. All without requiring anywhere near the level of effort or overhead that real estate investments require.
But here’s the thing: The chart of the S&P 500 ETF above represents the value of simply owning shares over the long haul. In other words: Investing like your grandfather used to. Using a little know-how, we can improve this strategy significantly. How? Instead of buying shares, we use stock market “options.”
Options: The Stock Market Swiss Army knife
Options are derivatives of stocks that have been around since 1973. Options are traded every day on the largest exchanges in the world, and transaction costs can be very minimal.
What makes options so special? Options allow buyers to gain leverage worth up to 100 shares of a stock for a fraction of the price. Throughout history, options have lead to some incredible investment opportunities.
Aside from their vast earning potential, options come with a few more advantages over real estate investing. With options, liquidity is usually not a concern. There is also very little interest rate risk.
Essentially, creating a cash flow model with options is similar to real estate, but it can be more lucrative, and you don’t have to worry about evictions or broken appliances.
Options also offer greater flexibility in choosing investments and exiting them when needed. You can choose the options that you think will increase in value, even if other people own them. Unlike real estate, you don’t need loan approval, and you can typically exit at any time if you need capital.
The Bottom Line: Invest Smarter
While real estate investing has its advantages, exploring options trading as a viable investment strategy is well worth considering. With minimal transaction costs, immediate liquidity, and little interest rate risk, options trading can provide a better alternative to real estate investing. At the very least, options are an excellent ingredient inside of any diversified investment portfolio.
Discover more about options trading and how it can help you generate cash flow and build wealth.
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