How To Convert Active Income To Passive Income

Stop gambling with your and your family’s future. You have to learn how to get your money out of the stock market casino and into assets that can predictably build cash flows and wealth. Most of you already recognize that the stock market is a casino and that it isn’t a predictable way to build real value and wealth. So what is the alternative? 

In my opinion, and what has shown great success over the last 250 years for many, is multifamily real estate (MFRE) investing or apartment building syndication (ABS). Today, we’re going to compare the stock market versus multifamily real estate investing. Afterwards, you should be able to identify the key strengths, pros and cons, and whether this is the right investment class for you based on these five parameters.

Rates of Return

The stock market over the last 15 years from 2004 to 2018 expanded at about roughly 7% a year. And over the last 30 years, the S&P 500 has returned about 9.06% between the years of 1989 and 2018. 9% doesn’t sound too bad, right? But you have to factor in that there is volatility. There’s assets under management fees. Money managers take fees. Whether you lose or make money, they get paid every time. Long-term capital gains taxes. Don’t forget to factor in inflation, you’d find that those rates of return really come down to about 3% or 4% per year. If you try to depend on that to retire, you’re going to be working until you’re 95!

The rates of return in multifamily real estate on the other hand is in the double digits. Multifamily real estate has been returning 10% plus per year for 200 years. The track record speaks for itself. It just wasn’t available for accredited investors to invest until the year 2012. So that’s why you may or may not have heard of that asset class yet. When you compare the stock market to the returns in multifamily real estate, it’s not even close. On top of that, MFRE returns are recession resilient. When the stock market crashes and goes down like it did in 2008, and like it did briefly in 2020 during the pandemic, multifamily real estate does not dip. The returns stay consistently high. 

Risk

The stock market is definitely a riskier asset class than, multifamily real estate. In the stock market, you are at the whims of arcane forces that nobody really understands as to what causes the market to go up and down. And people say, OK, well, if you’re investing in the stock market long term, you avoid a lot of that risk because you’re not worried about the day-to-day fluctuations. I would beg to differ. 

Say that you know that your children are going to be graduating from high school 15 years from now and they’re going to need money for college or you are going to be retiring in 15 years, and you’re going to need money to supplement your lifestyle so that you don’t have to work when you retire. In this scenario, can anybody predict where the stock market will be15 years from now? Where will it be 10 years from now? Where would your wealth be five years from now? In fact, I would ask you the question, how much is your portfolio going to be worth six months from now? 

Is there a crash coming? Think about it, we’ve been riding high for a long time.  Is there a correction coming? The truth is nobody really knows. So if you’re trying to plan around life events and have liquid cash when you need it, investing in the stock market for this is fraught with risk. Let’s compare that on the other hand to multifamily real estate in terms of risk and volatility. 

The truth is volatility just isn’t there in multifamily real estate. Risk is greatly mitigated as well. Why? Because we are providing a basic human need, human shelter. The demand for that is inelastic, which means that no matter what happens in the market, people will still need a place to live and they will pay rent. As long as you are invested in apartment buildings that have a high demand for that asset class, i.e. buying it in good markets, the risk is greatly mitigated to as close to zero as possible. Also, you know predictably around how much wealth you’ll have so that when you retire, in 15 years, and you need cash flow to live on, you know that you will have that available to you due to your  multifamily real estate investments. 

So multifamily real estate on the other hand as compared to the stock market, can disappear into thin air. The market could crash all of a sudden. Multifamily real estate cannot crash anywhere, cannot go anywhere, cannot disappear into thin air. Why? Because it’s a solid physical structure. It’s a building. It’s tangible. And as long as there’s people demanding to live there, the risk remains very low. We can take care of one of the major principles of real estate investing, which is number one, don’t lose your money. Capital preservation. It’s an immutable law of investing in general. With investing in apartment buildings, you are very much preserving your capital. There’s very little room for you can lose all of your money in multifamily real estate, unless there’s egregious errors happening.

Cash Flows

This is the most important thing to me, cash flow.  There are no cash flows in the stock market. It’s all or nothing. Either you have all your money in the stock market and it’s just sitting there or you take it out, and pay taxes on it.

There are stocks that do provide dividends, but the amount of dividends paid are not significant. If you look at the percentage of dividend income to the overall value of the portfolio, the percentage is very small. 

On the other hand, take cash flow from a multifamily real estate investment or apartment building syndication. Apartment buildings are cash flow machines. As a part owner of that apartment building you are privy to your percentage share of those cash flows. This way, you can predictably know how much cash flow you’re going to get. This cash flow is often in a tax advantaged way that you don’t have to pay taxes on it. It provides you passive income that you can live off of. Having that cash flow allows you to rely less on your job as a doctor. It gives you a mechanism to pass on generational wealth. Say you do really well as a real estate investor and you generate a lot of cash flow for yourself and your family. When it’s time for you to pass on to the pearly gates, your children or heirs can inherit this cash flow.

Tax Benefits

The stock market does not allow for tax benefits at all. In this respect, multifamily real estate completely houses the stock market. If you want to use your gains from the stock market, you have to sell it. And when you sell it, you trigger a capital gains event and are subject to long-term capital gains taxes, which you must pay to the IRS. This also greatly reduces returns.

Real estate or multifamily real estate on the other hand, is one of the most tax-advantaged assets that there is. Period. It allows for a thing called depreciation, which is an accounting loss, which helps to offset the obsolescence that happens with use of a property. And that often results in a paper loss, which allows you to not only not pay taxes on the cash flows that you gain, but it may give you excess losses which actually helps to give you a tax shelter against your ordinary active income as a dentist. Also, there’s ways to get into the equity without triggering, again, a tax situation. 

When you refinance and pull equity out of a property, that is also a tax-free way to tap into equity. And it is completely legal. So when it comes to tax benefits, it’s not even a close comparison between stock market versus multifamily real estate investing. 

Inflation

Of course, the biggest buzzword these days is inflation. Inflation is through the roof, supply chain crimps due to the pandemic, as well as printing trillions of dollars and quantitative easing has led to immense liquidity. And as a result, inflation is rampant in our economy today. 

Let’s look at how these asset classes do when inflation occurs. The stock market can get pummeled by high rates of inflation for a long period of time. If you look at the worst recession this country has ever faced in the last 50 years, in the late 1970s, inflation was in the double digits for several years. As a result, the stock market ended up crashing. So inflation is a return killer and can be a stock market killer. 

On the other hand, the best hedge against inflation, the best protection that you can get against inflation is investing in real estate. Why? Because the first thing that goes up when inflation happens is real estate. Rents go up. As you know, rents are sky high around us. And when rents go up, income from the property goes up and the value of the property also goes up. This is how it works in the commercial real estate environment, like apartment buildings, and apartment building or multifamily real estate investing. 

So when it comes to inflation, real estate is where you should put your money because if you park your money during times of bad inflation, you are going to come out laughing on the other side because real estate investors do really well during inflation.