As we grow up and discuss our life plans with our family and relatives, we often hear “You need to work really hard,” You’ll have to start at the bottom, and work your way up through the ranks,” and “Investing in the stock market is where it’s at.” These nuggets of advice were presented as facts and as if there were no other way to live or achieve financial goals. For years into my 20’s, I followed that path not realizing there could be more to life. When I was starting out, in alignment with the belief that I had to work hard to become successful, I’d work long hours, sometimes 60+ a week at my full-time job. I was constantly consumed with work and spent any free time possible trying to figure out the key to the stock market that would help me become wealthy. I knew that passive income was the goal, but I didn’t quite know how to create it.
All this hard work and focus on investing made me a little money, but I was starting to question if all the stress was worth it. The stock market was constantly spiking and dipping, and I quickly came to terms with the very real risks of investing in that volatile beast. So, I started searching for ways to diversify my portfolio (spreading risk) and stumbled upon real estate investing – specifically, investing in group investments called syndications.
Let’s look at the comparison in risk between investing in stocks versus investing in real estate. We will dive right into the four basic risks of investing, why the stock market is much riskier than real estate, and how commercial multifamily real estate investments reduce risk.
An Introduction To Investment Risk
There is always a certain amount of risk associated with any investment. The amount of risk in an investment often directly correlates with the potential reward.
To put it simply, there are risks you take in your life every single day. You could fall down the stairs tomorrow morning, right? Things happen and real estate and stock market investments are no different. There is risk around every corner.
A true investment is never risk-free, and if it’s advertised as so, there’s probably no real upside either. When thinking about investing in any capacity, you need to understand the risks entirely, decide on your level of comfort with risk as an overall concept, and make sure you are doing everything in your power to reduce risk (like turning the light on before walking down the stairs).
Risk #1 – An Unpredictable Market
Multifamily Real Estate Investments
I am about to use the word that every investor seems to fear: recession. If you are thinking of investing in multifamily real estate, you should no longer fear that word. I mean it’s not a fun word or a word we want to hear, but you don’t have to quiver whenever it pops up. Recessions, surprisingly, are good for commercial multifamily real estate investments. Especially if you are investing in workforce housing.
Here is why…
When the economy is humming and everyone is making money and saving, people often move up. During a bear market, for example, people flock to those brand-new luxury apartments downtown next to the up-and-coming brewery. These types of apartments are known as Class A apartments.
However, when people are facing pay cuts and layoffs, people start looking to cut back and downsize. They sell their homes and decide to downgrade to more affordable apartments. One might move from those fancy Class A units with a view to class B or class C apartments just outside of the downtown area closer to grocery stores and the 7-11.
So, apartment complexes are generally a risk-averse investment since, during a recession, the demand increases and the risk decreases, which results in a really great addition to your investment portfolio!
A sudden market correction is one of the most common fears and probably one of the biggest reasons people who want to invest stay on the sidelines.
When there is a downturn, investors tend to grab their money and get out quickly. Others will accept the short-term losses and look for long-term gains. If you follow the historical trends, the market does bounce back, even if it takes a few years, but I understand how challenging it is to trust that is actually going to happen!
Risk #2 – Changing Consumer Behavior
Multifamily Real Estate Investments
When investing in real estate, you are investing in a basic human need that will not disappear. People need homes, they need shelter. As long as humans have been alive, we’ve required a place to live. As the population rises, the need for housing rises as well.
As the population grows in numbers and in age, the types of housing required is expanding too. Think about the various needs of a single person as they first leave the nest, how their needs change as they find a partner and start a family, and even as they age, their children move out, and they mature through retirement. Real estate investment opportunities offer a wide variety of properties for people across the US that serve each stage of life.
Facebook, Android, PlayStation, and toilet paper are all consumable products. Stock market investors bet on the success of companies who create these types of products by investing in that company’s stock.
If you remember MySpace, you probably have memories of your first friend, Tom. Back when MySpace was popular, you probably thought of it as a new forever-present staple of life, possibly how we feel about Facebook today. However, it is almost impossible to predict how long consumer products will be popular, or how popular a company will stay at the forefront of consumers’ and investors’ minds.
Risk #3 – No Control or Transparency
Multifamily Real Estate Investments
When investing in a real estate syndication, you know exactly who the deal sponsor is and you have the opportunity to research each member of the general partner team. This is incredibly valuable at the front end of an investment because you can reach out to them directly to ask questions or to provide feedback.
When you invest in a well-founded syndication, you can be confident that there are some precautions in place to protect investor money (your money!). Some are insurance, capital reserves, and trained experienced professionals ready to help with the unexpected.
You can use these resources to exert control over your choice to invest and to select a real estate investment opportunity in alignment with your financial goals. In getting to know the sponsor team and vetting the members’ track records upfront, you’ll get a taste for how transparent they are from the information presented on the investment summary and in how clearly they answer your questions.
When you buy a train ticket (or a ticket to anything, for that matter), you probably skip over all that fine print. One, because it is small and hard to read, and two, you hope not to really need any of it. However, in that fine print is a sentence that pretty much says “the train is leaving with or without you and we can’t help you if you miss your departure” Investing in stocks is kinda like buying a train ticket.
When the market is moving upward, the ride is easy and smooth. But during a correction, you get a very tight, helpless feeling because the conductor (CEO) is unreachable and you’re along for the ride no matter what.
Risk #4- Fresh Competition
Multifamily Rest Estate Investments
Competitors don’t just pop up out of nowhere when it comes to investing in multifamily real estate. Zoning, space, and permits are all limited. Typically the new-build apartments are all luxury-style (class A) like we were talking about earlier, which are in demand during a great economy.
Meanwhile, the need and demand for affordable or working-class housing is growing. So, if you’re operating well-maintained class B and C apartments, you probably won’t face challenges with vacancy rates at any point in the economic cycle.
When Mark Zuckerberg created Facemash (what we now know as Facebook) in his Harvard dorm room and turned it into a very lucrative social network, he quickly took over MySpace’s audience by providing more advanced technology and by being more on point with consumer demand.
Consumers do not have an insider giving them information about company operations or technology development. So when new competitors come on the scene this can strongly impact investment returns.
The Top 4 Risks of Investing in Stocks vs. Real Estate
I will be honest here, there is definitely no “right way” to invest.
There will always be people who make good money in the stock market, just as there will be people making good money investing in real estate.
You need to look at your financial goals, assess your comfort with risk, and choose the right path that will help you reach your goals.
In any investment vehicle, you risk:
- An Unpredictable Market
- Changing Consumer Behavior
- No Control or Transparency
- Fresh Competition
Whether you choose to invest in commercial real estate syndications or in the stock market (or both!), I hope this article opened your eyes to possibility. Each investment opportunity has its pros and cons, but it’s up to you to choose a strategy that addresses your concerns while also allowing your finances a decent chance at growth.