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For many, the world of real estate and the stock market entail entirely different types of investing that require separate approaches. However, some financial experts believe the two have more in common than the average investor suspects.
The Rich Dad Channel recently shed some light on how stock market investors can use time-honored real estate strategies to their advantage. Co-hosts Andy Tanner, a world-renowned stock expert, and Del Denney, a financial educator, broke down three ways people can adapt their real estate investing strategy to make money from stocks.
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1. Renting Out Property
At their core, the stock and real estate markets share a similar blueprint for making money. Tanner explains that investors can try to buy properties or stocks with a low, undervalued price and then sell them later when the value increases. They can also hold onto their assets for an extended period and earn a passive income.
Both markets allow multiple investors to pool their money together to buy pricier assets that would be difficult for individuals to purchase by themselves. In real estate, syndications are investment structures in which various people chip in to purchase apartment complexes, office buildings or commercial developments and then split the profits generated from their rental income. Likewise, in the stock market, investors pool their money to own companies jointly, and they can generate a passive income from dividend payments.
To Tanner, earning a passive income through rent or dividend payments is a great strategy because it generates a cash flow that investors can use in multiple ways. However, while both renting out properties and investing in dividend stocks can produce a steady cash flow, it’s important to remember that dividends aren’t guaranteed and are subject to change over time.
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2. Understanding Cash Flow
With a passive income from rental properties or dividend stocks, investors can improve their financial health and enjoy more freedom. Some investors may choose not to work anymore. Others may reinvest their income to compound the growth and build more wealth. Whatever you decide to do with your money, Tanner stresses that it’s crucial to understand what cash flow is and how to use it to your advantage.
To teach his children about cash flow, Tanner used “Rich Dad, Poor Dad” author Robert Kiyosaki’s “Cashflow” game. This game mirrors real-life financial situations, including real estate investing, and challenges players to get out of the rat race and onto the fast track.
While playing the “Cashflow” game isn’t a strategy by itself, Tanner emphasizes that improving your financial education is. Using the game to better understand concepts like leveraging investments and distinguishing between assets and liabilities will help you earn more from the stock market.
3. Using Leverage
When you decide to purchase a property, you probably won’t pay the full price upfront. Instead, you’ll likely need to take out a mortgage loan from a bank. In this arrangement, you cover only a percentage of the property’s overall value with a down payment, and the bank pays the rest.
In 2023, 80% of homebuyers financed their purchase. Even though these homebuyers need to pay off their mortgages with interest over the agreed-upon timeline, they enjoy all the benefits of owning that property, such as living in it.
Another major benefit you may enjoy is an increase in the value of your house. Goldman Sachs analysts currently predict that U.S. homes will appreciate by 4.4% next year. If this prediction holds true, your asset will increase in value even though you haven’t fully paid for it yet. However, there is a risk, and if your property drops in value, you still need to pay off your entire mortgage.
Tanner brings up the idea that you can also use leverage in the stock market. Buying an option contract doesn’t give you ownership of a company. Instead, it’s an agreement with another investor that you have the right to buy or sell a stock at a certain price on or before the expiration date.
Like a mortgage, stock options give you a chance to make large amounts of money with a smaller initial investment. If you’re able to correctly predict the increase or decrease in a stock’s price, you’ll make much more than you would by simply buying shares of the stock. However, stock options also come with a large amount of risk. One wrong prediction could mean losing your entire investment.
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This article originally appeared on GOBankingRates.com: 3 Ways You Can Use Real Estate Strategies for Stock Market Success, According to ‘Rich Dad’ Host, Robert Kiyosaki
