Weighing The Risks Of Stocks Versus Real Estate Investing

by | Mar 8, 2021

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. Some of us learned the secrets of investing in residential real estate early and taught to preserve wealth that way. I followed those rules for years.

For the past 10 years I’ve invested in single family and small multifamily rental homes in Colombia. These properties were mostly preconstruction and required an all cash purchase since financing is nearly impossible there.  The US market was attractive to me and oozed promises of stability and freedom. 

I worked hard to build a modest portfolio, but the high rates and limited leverage available in Colombia soon encouraged me to explore elsewhere. Most Americans invest in the stock market and most online advice encourages US investors toward stocks and funds. However, considering my comfort level with tangible assets and the little bit of research I did on the volatility of the stock market, I knew there must be a better option. 

Digging deeper led me to discover real estate investing through syndications. 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.

Since this basic need is always in demand, real estate investments are a great way to preserve and grow wealth using tangible assets exhibiting security over the long-haul.

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 and exhibiting stability.

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. So even though it’s a hands-off investment and you aren’t visiting the property for repairs, you still have all the information and connection you need to feel confident in your investment decision.

Conclusion

There’s certainly no one “right” way to invest. What have you learned from family, friends, and your online research? Are you seeking stability, community, and freedom?

There are definitely people who make money in the stock market, just as there are absolutely 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. If you’re looking for a way to scale your investments via steady, tangible assets, and you want to learn more about syndications, we invite you to join the Fincapital Investor Club today. 

We’d love to get to know you, answer your questions, and have the opportunity to share our past and upcoming deals with you!

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