Stocks Versus Real Estate: The Risks Present
Most of us have been told that we should work hard, climb the corporate ladder, maximize our 401k, and invest in the stock market along the way to maximize our financial growth. This is exactly what I subscribed to for years. Until I fired my Financial Advisor…
In my time as a high performing sales professional, I worked long hours and did everything I could to perform at the top of my game. Once I was consistent in maxing out my 401k contributions, and my dream home was paid off (yes, by age 25), I started to look for the next “disruptor” in the stock market.
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.
Soon, a friend introduced me to how he was making extra money in real estate.
I saw this new adventure of investing in real estate as a way to build my passive income without worrying about the roller-coaster ride of the stock market. I jumped straight into the deep end and invested in several single-family fix and flips, and later into passive real estate syndications.
Let’s take a closer look at investing in the stock market versus real estate. There are four basic risks of any investment. Plus you’ll learn how commercial multifamily real estate investments mitigate the risks 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 because they don’t exist, but to understand the risk entirely, determine your threshold for risk, and ensure 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 a product will remain in favor by the consumers and how long the popularity will last for the company. Take a look at a highly successful business through several decades, such as Blockbuster, which had a long reign, but when technology and consumer behavior changed at the turn of the century, 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 a 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, and 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 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.
Is Real Estate or the Stock Market Best for You?
There’s certainly no one “right” way to invest.
People make money in the stock market and 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.
If you’ve been following societal expectations thus far and have some frustration around your progress toward financial freedom, it may be time to reevaluate your investment strategy. Starting Point Capital is here to answer all your questions, guide you in your diversification efforts, and ensure you’re on the path toward creating the adventurous, freedom-filled life you’ve always wanted.
