Comparing The Risks Of Investing In Stocks To Investing In Real Estate

by | Jun 11, 2022 | Investing Advice | 0 comments

If you’re like us, you’ve been taught your whole life that the key to success is to work hard, advance in your career, and invest in the stock market along the way to maximize your financial growth. 

Early in our medical careers, we worked tirelessly treating patients. We even spent our weekends on-call. While we loved what we did and made a great living, we had very limited control over our schedules, and craved a more independent lifestyle. 

In our quest for financial freedom, we considered trying to build a modest portfolio, but the constant ups and downs of investing in the stock market were too risky. We wanted a more reliable way to build our wealth. 

Fortunately, we discovered real estate investing.

Keep reading as we take a closer 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 company’s 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.

 

Which Type of Investment is Best for You?

As you know, there’s no cookie-cutter, “right” way to invest for everyone. 

There are plenty of investors who make money in the stock market, just as there are investors experiencing success with real estate investments.

The key to investing successfully is to first determine your own personal goals. Once you’ve established what you’d like to accomplish through investing, you can better decide which type of investment best aligns with your lifestyle and your personal tolerance for risk. Then you’re better equipped to choose the path that will ultimately help you meet those goals.

 

0 Comments

Submit a Comment

Your email address will not be published. Required fields are marked *