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How Risky Is That? Stocks Versus Real Estate

by | Mar 30, 2021

Most of us subconsciously bought into the idea that we should work hard, climb the corporate ladder, and invest in the stock market every step of the way, and we believed that’s how you create wealth and enjoy a nice retirement. This is exactly what I subscribed to for years.

Early in my career, I’d work 60+ hours a week in my corporate job, traveling between cities for work, then spend nights and weekends trying to invest any extra penny into the stock market like a good boy. 

I came from a family of educators, so learning about stocks wasn’t an issue (I started investing at 14), but the constant ups and downs made me wish for more stability. At 22 I bought a condo and became intrigued as to how real estate might be the secret to generating wealth. 

With any investment, there’s a direct relationship between risk and reward. In this article, I’ll walk you through 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.

PSA: There’s Risk Everywhere

Just as you could have been hit by a bus this morning, or had something drop on you from the top of a ladder on a jobsite, unexpected things come up in life, in the stock market, and in real estate. Everything we do is risky, in fact, most of us participate in the riskiest activity every single day – transportation via automobile!

The key is not to look for investments that are risk-free (those don’t exist), but to understand the risks thoroughly, determine your personal threshold for risk, and explore what you can do to mitigate risk.

Risk #1 – Ever-Changing Consumer Behavior

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. Think about “hot” products when you were a kid and whether those are still popular or not.

It’s impossible to predict the length of time consumers will continue to value products and thus, boost the company’s popularity. A great example is Blockbuster. They were the top dog for years and years, 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.

These days, the need for housing is higher than ever, and people are more willing to pay for move-in-ready units and all the modern conveniences of an updated property. No matter the stock market activity or political climate, people need a place to live, making real estate investments very recession-resistant. 

Risk #2 – Market Volatility Or A Recession

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.  That’s why a majority of investors in the stock market lose money in any given 10 year period.

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).

Which is why during a recession, demand for apartments actually tends to go up, thereby decreasing the risk.

Risk #3 – Fresh Competition Storming The Scene

Stock Market

When Netflix burst into consumers’ radar, they beat out Blockbuster because they got ahead of technology and consumer trends. People couldn’t help but be attracted to the new, convenient way of renting and buying movies and Netflix won Blockbuster’s audience over by a landslide.

Consumers don’t have insight into technology development or companies’ operations. Thus, new competitors with more advanced tech or more streamlined processes can have a significant impact on investment returns. Stock investors try to mitigate risk by investing in funds instead of single stocks, but fresh competition will always be a factor in the products and services industries.

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. So, with few opportunities for competition and high demand for the existing units, words like reliable, consistent, and predictable easily describe the commercial real estate investing environment..

Risk #4 – Lack Of 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. Plenty of people make money in the stock market and plenty are making money in real estate. Heck, some are doing both!

Your next investing decision will be 100% determined by your ability to educate yourself about your options, the pros and cons of each, and assess your personal investment risk tolerance. 

Then, you’ll be able to confidently select an investment vehicle that will carry you toward your financial goals, creating a life of your own design.