The risks of investing in Stocks VS Real Estate
Why Passive Investors Love Multifamily Syndication
May 22, 2021
3 Reasons to invest in Multi-Family Real Estate
April 19, 2022
Most of us have been told that we should work hard, climb the corporate ladder, and invest in the stock market along the way to maximize our financial growth. This is exactly what I subscribed to for years.
Early in my career, I’d work 60+ hours a week as a consultant, traveling every week, then spend nights and weekends trying to figure out how to leverage the stock market and other investments to grow my wealth.
I worked hard to build a modest portfolio, but the constant ups and downs made me realize the very real risks of investing in the stock market, which led me on a path to eventually discover real estate investing.
Let’s take a close look at investing in stocks versus real estate, the four basic risks of investing, how commercial multifamily real estate investments mitigate risk, and why the stock market can be much riskier than real estate.
A PRIMER ON RISK
As with any investment, there’s an element of risk. Just as you could have been hit by a bus this morning, unexpected things come up in life, in the stock market, and in real estate. The key is not to look for investments that are risk-free (that doesn’t exist), but to understand the risks thoroughly, determine your threshold for risk, and ensure that you’re doing everything you can to mitigate risk. RISK #1 – CONSUMER BEHAVIOR COULD CHANGE
Stock Market
Stock market investors bet on the success of companies who create products for people to use. Facebook, iPhones, Happy Meals, and soap are all consumable products. However, it’s impossible to predict the length those products will remain in favor, and a companies’ popularity. Blockbuster had a long reign, but when technology and consumer behavior changed, the company stagnated, dragging investors down with it. Multifamily Real Estate Investments. When you invest in real estate, you’re investing in a basic human need that will never go away: the need for shelter. As long as humans have existed, we’ve required a roof over our heads, and that need has only strengthened over time, especially with rising population trends. RISK #2 – THE MARKET COULD TURN
Stock Market
One of the most common fears and possibly the biggest reason would-be investors remain on the sidelines is for fear of a sudden market correction. During a downturn, investors may exit quickly (which only solidifies their losses). Others aim to accept short-term losses in exchange for long-term gains. Historically, the market bounces back, but clinging to that “trust” is challenging during the downward trend. Multifamily Real Estate Investments
Recessions are actually good for commercial multifamily real estate investments, especially for workforce housing. In good times, incomes and savings rates are higher, which means more people tend to move up to class A (luxury) apartments. When faced with layoffs or pay cuts, homeowners may sell, and renters of class A apartments may downgrade to more affordable apartments (class B or C). Hence, during a recession, demand for apartments actually tends to go up, thereby decreasing the risk. RISK #3 – COMPETITORS COULD COME ON THE MARKET
Stock Market
When Netflix stormed the scene, they beat out Blockbuster because not only did they target the same audience, but they also got ahead of the technology and consumer trends. Consumers don’t have insight into technology development or companies’ operations. Thus, new competitors can have a significant impact on investment returns. Multifamily Real Estate Investments
Multifamily competitors don’t just spring up out of nowhere, because space, zoning, and permits are limited. When new apartments are built, they’re always class A (i.e. newer luxury tier) apartment buildings.
Since the demand for workforce and affordable housing is on the rise, the risk of having high vacancy in well-maintained class B and C apartment buildings is fairly low. RISK #4 – NOT HAVING CONTROL AND TRANSPARENCY
Stock Market
Investing in stocks is like buying a train ticket. The train is leaving, with or without you. Whether you’re on board or not is up to you. When the market is sailing upward, the ride is smooth and exciting. During a correction, a terrible, helpless feeling takes over. The conductor (CEO) is unreachable and you better buckle up. Multifamily Real Estate Investments
When you invest in a real estate syndication, you know exactly who the deal sponsor is, and you can reach out directly to ask questions and provide feedback. Further, when you invest in a solid syndication, you can be assured that there are multiple buffers in place to protect investor capital, such as reserves, insurance, and experienced professionals to handle the unexpected. Plus, with monthly and quarterly updates, you have ongoing transparency into each deal.
CONCLUSION
There’s certainly no one “right” way to invest. There are people who make money in the stock market, just as there are people making money in real estate. The key is to assess your own goals and risk tolerance, then choose the path that will best help you meet those goals.
As with any investment, there’s an element of risk. Just as you could have been hit by a bus this morning, unexpected things come up in life, in the stock market, and in real estate. The key is not to look for investments that are risk-free (that doesn’t exist), but to understand the risks thoroughly, determine your threshold for risk, and ensure that you’re doing everything you can to mitigate risk. RISK #1 – CONSUMER BEHAVIOR COULD CHANGE
Stock Market
Stock market investors bet on the success of companies who create products for people to use. Facebook, iPhones, Happy Meals, and soap are all consumable products. However, it’s impossible to predict the length those products will remain in favor, and a companies’ popularity. Blockbuster had a long reign, but when technology and consumer behavior changed, the company stagnated, dragging investors down with it. Multifamily Real Estate Investments. When you invest in real estate, you’re investing in a basic human need that will never go away: the need for shelter. As long as humans have existed, we’ve required a roof over our heads, and that need has only strengthened over time, especially with rising population trends. RISK #2 – THE MARKET COULD TURN
Stock Market
One of the most common fears and possibly the biggest reason would-be investors remain on the sidelines is for fear of a sudden market correction. During a downturn, investors may exit quickly (which only solidifies their losses). Others aim to accept short-term losses in exchange for long-term gains. Historically, the market bounces back, but clinging to that “trust” is challenging during the downward trend. Multifamily Real Estate Investments
Recessions are actually good for commercial multifamily real estate investments, especially for workforce housing. In good times, incomes and savings rates are higher, which means more people tend to move up to class A (luxury) apartments. When faced with layoffs or pay cuts, homeowners may sell, and renters of class A apartments may downgrade to more affordable apartments (class B or C). Hence, during a recession, demand for apartments actually tends to go up, thereby decreasing the risk. RISK #3 – COMPETITORS COULD COME ON THE MARKET
Stock Market
When Netflix stormed the scene, they beat out Blockbuster because not only did they target the same audience, but they also got ahead of the technology and consumer trends. Consumers don’t have insight into technology development or companies’ operations. Thus, new competitors can have a significant impact on investment returns. Multifamily Real Estate Investments
Multifamily competitors don’t just spring up out of nowhere, because space, zoning, and permits are limited. When new apartments are built, they’re always class A (i.e. newer luxury tier) apartment buildings.
Since the demand for workforce and affordable housing is on the rise, the risk of having high vacancy in well-maintained class B and C apartment buildings is fairly low. RISK #4 – NOT HAVING CONTROL AND TRANSPARENCY
Stock Market
Investing in stocks is like buying a train ticket. The train is leaving, with or without you. Whether you’re on board or not is up to you. When the market is sailing upward, the ride is smooth and exciting. During a correction, a terrible, helpless feeling takes over. The conductor (CEO) is unreachable and you better buckle up. Multifamily Real Estate Investments
When you invest in a real estate syndication, you know exactly who the deal sponsor is, and you can reach out directly to ask questions and provide feedback. Further, when you invest in a solid syndication, you can be assured that there are multiple buffers in place to protect investor capital, such as reserves, insurance, and experienced professionals to handle the unexpected. Plus, with monthly and quarterly updates, you have ongoing transparency into each deal.
There’s certainly no one “right” way to invest. There are people who make money in the stock market, just as there are people making money in real estate. The key is to assess your own goals and risk tolerance, then choose the path that will best help you meet those goals.
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