Stocks Versus Real Estate: Understanding Your Investment Risks

by | Jul 14, 2022 | Investing Advice, Risk Averse, Stocks, Syndication Basics | 0 comments

It’s a classic story. We start our careers, progress in our field, and invest in the stock market. We all seem to have the misconception that this is the best way to secure our financial future. I had this story too.

As a doctor, I worked long, last-minute shifts. I had little time left over to research stocks, study market fluctuations, and figure out how to make the stock market work to meet my financial goals. 

My investment portfolio was slowly improving but was modest at best. Watching the stock market volatility, I felt I needed to find a new investment option. I needed a new plan that didn’t revolve around Wall Street. That thinking led me to real estate investing.

Let’s get up close and personal with stocks and real estate investments. First, I’ll break down the four most basic risks of investing. Then, we’ll talk about how commercial multifamily real estate investments have less risk, and why real estate is the wiser investment option over the stock market.


Introduction to Investment and Risk

Any investment is going to involve risk. Just like in life, unexpected things happen. The stock market and real estate are no different.

The big takeaway here is that you’re not going to find risk-free investments. Risk-free investing doesn’t exist. Instead, you need to accept that there will always be a risk factor, have a defined limit on what you’re willing to risk, and do what you can to minimize those risks.


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 the length those products will remain in favor and a companies’ popularity. For example, 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 good for commercial multifamily real estate investments, especially 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, demand for apartments tends to go up during a recession, 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 rising, the risk of having a high vacancy rate in well-maintained class B and C apartment buildings is relatively 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. Then, 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 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, you have ongoing transparency into each deal with monthly and quarterly updates.


The Bottom Line on Risk in Real Estate and the Stock Market

Everyone has their own opinion when it comes to investing. Your friend might make money in the stock market while your neighbor makes money in real estate. Both are making money.

Your key to success is having a clear and concise plan. Set your goals, know your risk limits, and start the journey that will help you obtain your financial freedom by meeting those goals. 

If the volatility of the market and the mediocre returns are comfortable for you, that’s great. You can keep the money you’ve already invested there where it is. However, I encourage you to use other money you’ve saved to explore how various real estate investment strategies might move you closer to your goal of achieving financial independence faster. Your freedom awaits!


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