Investing Risks: The Stock Market Versus Real Estate

by | May 21, 2021 | 0 comments

Work hard!  Climb the corporate ladder!  Invest in the stock market to maximize financial growth!  Most of us have been told this, and precisely what I subscribed to for years.

As a psychologist, I’d work 60+ hours a week listening to peoples’ experiences and trying to help them, then spend nights and weekends trying to figure out how to leverage the stock market to best position myself for a decent retirement. 

I worked hard to build a modest portfolio, but the constant ups and downs made me realize the genuine risks of investing in the stock market. Meanwhile, Warren worked hard for his next Navy promotion and planned on mitigating his fixed income in retirement with residential rental properties. 

Luckily, when we met, we were both in search of a better way, which led me on a path to eventually discover multifamily real estate syndications.

Let’s take a close look at investing in stocks versus real estate, the four primary 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 risk-free investments (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 that create products for people to use. Facebook, iPhones, Happy Meals, and soap are all consumable products. 

However, it’s impossible to predict how long those products will remain in favor or the duration of 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 most significant reason would-be investors remain on the sidelines is 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 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. Developers only build class A (i.e., newer luxury tier) apartment buildings. 

Since the demand for workforce and affordable housing is rising, the risk of high vacancy in well-maintained class B and C apartment buildings is reasonably 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 precisely who the deal sponsor is, and you can reach out directly to ask questions and provide feedback.

Further, when you invest in solid syndication, you can be assured that multiple buffers are 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 Is Better, The Stock Market Or Real Estate?

There’s certainly no one “right” way to invest.

Some people make money in the stock market, just as people make 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. 

Some people will be best suited for an active role in real estate and will enjoy interacting with tenants, fixing burst faucets, and single-handedly renovating kitchens. Others are best to invest their capital and stay out of the way because all of that hands-on work stresses them out. 

It’s also important to understand your financial situation deeply.  You should know how much capital you want to tie up, how long you want to be invested, and what you want your investment to do for you.

I want to personally invite you to join me and other investors like us inside the Starboard Equity Club because I’d love to talk with you about your investment goals. As a lead sponsor, I love to help investors find deals that align with their desires and provide connections that might help you along your journey. 

 

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