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Short question is: if we invest in solid companies' stocks and buy some put options or inverse-index ETF, does it allow us to "let other people run the business for us", and so we can travel, have more "peace of mind", instead of having 3 rental houses and always worry about the maintenance and how the tenants are paying rent, moving out, or possibly some damages to the house?


Details:

Some people proposed, if we have 4 houses, and live in one of them, rent free, and the other 3 houses can get rental income, and since usually, rent is about 1/3 of a person's salary, so that means a person can live in a house rent-free, and get the salary of a usual job, and therefore retire.

But this also involves a lot of maintenance or worrying what if the tenants has water or fire damage to the house, what if the tenant doesn't pay rent, etc. Management companies can handle them, but it'd still would be a lot of things to take care of for 3 houses... let's say even if it is just to replace the roof, or replace the water heater every 8 years. It is just a lot of things to worry about.

So instead of us "running the business", how about if we just invest in companies that runs the business for us. Say, if we are to invest in Apple, Google, GE, or Wells Fargo, just some big companies that have decent business and they should know what they are doing, and then buy some put options or inverse-index ETF such as PSQ to protect against big market drop, wouldn't it be a lot more "peace of mind"? Especially, if the companies give out 2% dividend per year, and the stocks are assumed to even just appreciate modestly 3 to 5% (considering we have the costs of the put options or inverse-index ETF).

So suppose instead of having 4 houses, it is 4 x $750k = $3 million of stock investment, then the $3 million with a 7% return per year would be $210k, or at 5% return, at $150k, would be similar to a decent salary already.

I think this has the effect of: instead of us running the business of 3 houses, we let the companies run the business for us, which they do anyways. And nowadays, some companies run their business 8 hours in USA, and then 8 hours in Europe, and 8 hours in Asia, so then it is like 3 persons running a business 24 hours for us, instead of us just one person running a business and can be wearing us out.

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    Just BTW note that there is (of course) a huge, huge difference between buying rentals for cash, and, buying them leveraged (ie, with a mortgage on each rental). Each approach has pros and cons but they are of course drastically different financially.
    – Fattie
    Jan 22 at 11:11
  • Inverse-index or double-triple index ETFs are for DAILY trades by speculators. They shouldn't be held for investment, ever. Go to the funds' websites and you will see that the funds warn about this. Your ideas about puts and inverse index ETFs should be thrown on the garbage heap. Jan 27 at 7:48
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For most people a properly diversified stock market investment is actually better than buying 4 houses:

  • you can start investing with small amounts of money every month
  • a house is a huge clump investment. This is the exact opposite of a diversified investment. It does not matter if you are a company with thousands of units but if you only have 1 or 2 houses this is an issue
  • buying houses for investment tends to clump risk even more as you are likely to buy something in the region you live. If that region experiences a long term economic downturn, all your properties lose value
  • The calculation of rent=1/3 of income ==> 3 units make a living is discarding maintenance: the heating breaks, the roof leaks after some decades and so on. This is something you need to pay from your rental income. Management of any sorts also draws on this money
  • It is even more flawed as you likely won't be able to afford 3 rental houses at your standard. You are getting 1/3 of someone elses lower income for each unit.
  • Timing issues: Both with buying and selling you have timing issues if you only trading in huge chunks of money. Get it wrong and you will lose a lot of money. Selling shares for 1000$ per month is so much easier than selling a 1000$ share of your house

That said there is nothing wrong with owning a house for yourself. There are other benefits to it than just saving on rent. However, when talking about buying a house for investment, things should be critically evaluated

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  • that's true... like if the area is subject to flood or earthquake, then all houses could be affected... we could buy flood or earthquake insurance, but I heard earthquake insurance is quite expensive in the area that can have earthquake, and that sometimes when there is an earthquake, the insurance company can simply go bankrupt without paying out anything Jan 22 at 9:04
  • I guess in terms of replacing the roof, repainting, etc, might be able to be paid every 15 years, with the house hopefully have appreciated in value... then we can take out some equity loan to do the job if we don't have the reserve Jan 22 at 9:38
  • with "roofs" you just have a sinking fund of 100- a month or whatever to cover replacing roofs ever 20 years. also when you buy a rental property you "glance at the roof" and don't buy it if the roof replacement appears to be "soon", say in 10 years. note that it's common - ie, in many world cities - for a $1m house to be worth $10m or $15m after 20 years which trivializes roof costs. real estate tends to be is either "flat" or "way up", those are the two outcomes, for a given region
    – Fattie
    Jan 22 at 11:05
  • "It is even more flawed as you likely won't be able to afford 3 rental houses at your standard. You are getting 1/3 of someone elses lower income for each unit." I actually know a guy, who when he was about 25, bought a condo for himself, because he had high income as a software engineer and stock options, he could buy another condo. And I think he told me he took out only a 20 year or 15 year loan (I forgot 15 or 20). Then I think after a few years, he got another house, and I am not sure if he got another condo. He said he had a hard time at first paying the mortgage, but ... Jan 27 at 10:23
  • it also helped him more attached to his work (he won't quit on an argument with the manager), and he would not spent money on unnecessary things. So he told me recently he paid it all off. And in San Francisco Bay Area, he could rent out 1 condo for $3000 or even $3500 a month (increased quite a bit from year 2000), or $6000 for two. So if he lives in the house and doesn't pay rent, and have $6000 to spend every month, it is quite ok to live a retired life. Jan 27 at 10:25
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and always worry about the maintenance etc...

I have to say IMO this is just a common myth.

You have a service that handles the renting, and once in a blue moon you make a two-minute call to have someone install a new dishwasher or whatever.

It's certainly true that many folks agree with you, "renting is a big chore", I have always found that mystifying. Sometimes on this list someone will comment that they don't want to own a house to live in, they'd rather just rent since home ownership is "so much work". Again I just find this mystifying, the entire process of buying, owning, and ultimately selling a house involves maybe 3 signatures, it's nothing.

But to each his own.

income ...

Unfortunately one makes very little income from rental houses OR from stocks.

The reason to do either is

capital gains ...

Regarding stocks, it's common that over say 20 years you can get a substantial (say 3, 4, 5x) capital gain. Look at the second graph here https://money.stackexchange.com/a/135187/41786

Regarding stocks, it's common that over say 20 years you can get a substantial drop (50, 70%). Look at the first graph here https://money.stackexchange.com/a/135187/41786

With housing markets, it is extremely rare that they drop over decade lengths. It is rare but not unknown that they stay flat. It is usual that they go up. And it is relatively common that they go up very dramatically. Here's an extreme example like San Francisco, https://money.stackexchange.com/a/133985/41786

You could look at the difference like this. Over 20 or 30 years...

  • over 20 years, stock markets often go straight down, and often go straight up.

  • over 20 years, real estate usually goes up, occasionally is flat (and only in extremely rare cases, like Detroit, down)

Regarding income, with rentals you know exactly how much you will get to the dollar, week in, week out, year in, year out, with increases continually over the years. With stocks, income is probably "a bit more" than rentals but is highly erratic.

solid companies ...

This is a dangerous myth, survivorship bias, as often discussed on this site. It's impossible to know which companies will be "solid" from today on. https://money.stackexchange.com/a/127868/41786

It is very hard to "stock pick" and beat just an ordinary index fund.

protect against big market drop...

If you do go with "stock market" it does seem very wise to, as you say, spend some on this type of protection.

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    Servicing and deprecation isn't a 'myth' it's incredibly well know and studied (and charged if you outsource it) by massive real estate companies to death and is typically in the 2-5% range a year (US standard deduction is 3.63% a year). Houses also have huge transaction costs (typically ~5% each trade), so you need its capital gain and yield to beat ~3% a year AND these huge transaction costs to even break even: of course the graphs look great without these included. You're also making the reverse mistake of not including dividends on the Nikkei, which when included make a large difference.
    – Philip
    Jan 22 at 12:30
  • Also worth adding your point about diversification and security on housing is like ultimate survivorship bias as you're only talking urban centres when thinking about chance of loss: there have been huge downswings in rural and mid size communities throughout the last 20 years (how are all those rust belts rentals looking now?) at least on par with Nikkei style stock market performance. Of course the difference with stock is it is easy to buy a slice of the global economy and avoid these local collapses, something impossible for small investors with real estate.
    – Philip
    Jan 22 at 12:38
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    I didn't vote down your answer - it's just highly misleading and biased around an asset class so needs clarification/comment. The point about urban vs rural is just the same as stock markets: no one 20 years ago knew that cities would so rapidly outgrow rural real estate anymore than they knew tech stocks would outgrow the overall market during the same period - it's just pure survivorship bias that you're pitching as evidence of real estate's strengths, while simultaneously cherry picking and misrepresenting evidence around stock performance.
    – Philip
    Jan 22 at 14:30
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    I'm not anti real estate (I own loads), I'm just anti making vast pricing mistakes. Real Estate does not have the risk profile you claim it to and neither does stock, and telling people its just some magic low risk, low cost entity is really bad, especially when you don't seem to have any factual counter to any of the points being made on dividends, deprecation costs and the large numbers of re markets with terrible performance in the last two decades.
    – Philip
    Jan 23 at 10:13
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    Here's the actual overall US index (not that you can even buy this as a small investor so you're true risk is 10x+ as you have to correctly pick not only the right type (urban, rural or suburban etc)), but also the right area as we have many examples of all three of these showing multi decade falls: bit.ly/3sK7JF7 Blended as an entire index it barely beats inflation long run with a huge chunk of variance on top!
    – Philip
    Jan 23 at 10:19

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