Stocks vs. Real Estate: The 4 Risks to Know Before You Invest

by | Aug 29, 2020 | Financial Freedom, Real Estate Investing 101 | 0 comments

Whenever investing comes up in conversation, peoples’ minds flash between images of Warren Buffet, the Great Recession, and those goals filed in their “someday” folder.

Unfortunately, 60 percent of Americans recognize that at some point in the future, they’ll need greater financial security than what they currently have, according to an independent market survey.

However, 60 percent also find investing scary or intimidating. Too many Americans respond to that fear by putting off investing or ignoring it until “someday” in the future, even though starting early in life is the best way to ensure financial security later in life.

For the next few minutes, set aside any preconceived notions you may have while we take an honest look at the risks associated with investing.

Let’s look at the four basic risks of investing, compare them when investing in stocks versus real estate, how commercial multifamily real estate investments mitigate risk, and why the stock market can be much riskier than real estate.

Related article:  6 Reasons You’ll Love Investing Passively in Real Estate Syndications

A Primer on Risk

There’s an element of risk in any investment. Just as you could have been in a car accident this morning, unexpected things come up in life, the stock market, and real estate.

The key is not to look for investments that are risk-free (they don’t exist), but to understand the risks thoroughly, determine your risk threshold, 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 or services for people to use. Facebook, iPhones, gasoline, soap, and your favorite Starbucks coffee drink are all consumable products.

However, it’s impossible to predict how long those products and companies will remain popular and viable. Blockbuster Video had a long reign, but when technology and consumer behavior changed, the company stagnated, dragging investors down with it.

We’re seeing major changes in consumer behavior in 2020 due to the COVID-19 pandemic. For example, fewer people shopping in brick and mortar stores and the shift in demand to online retail providers have caused many brick and mortar retail stores to close, while businesses like Amazon thrived. Nobody would have predicted this change in behavior even a year earlier.

 

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 people have existed, we’ve required shelter, 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 people remain on the sidelines instead of investing is the fear of a sudden market correction.

During a downturn, many investors panic and exit the market 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 can actually be good for commercial multifamily real estate investments, especially for class B and C workforce housing.

In good times, people’s incomes and savings tend to be higher, which means more people tend to move up to class A (luxury) apartments or buy homes or condos.

When faced with layoffs or pay cuts, homeowners may have to 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.

That’s not to say a recession would be a welcome event, however. It could also cause rent growth to stagnate or even slightly decline, cap rates to rise (i.e., values to drop), and increase delinquent rents and evictions. But if the purchase was structured well and the demand for apartments remains strong, property owners can outlast these conditions until times are good again.

Risk #3 – Competitors Could Come on the Market

Stock Market

When Netflix first hit the scene, they beat out Blockbuster Video because not only did they target the same audience, but they 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 appear out of thin air, because space, zoning, and permits are limited, and construction takes time. 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 general risk of having 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. The conductor (i.e., the CEO) is unreachable, and you’d better buckle up for the ride.

 

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.

Furthermore, when you invest in a solid deal, you can be assured that there are multiple buffers in place to protect investor capital and handle the unexpected, such as reserves, insurance, and experienced professionals at the helm.

Plus, with regular updates, you have ongoing transparency into each deal.

Conclusion

There’s certainly no one “right” way to invest. The key is to invest…period.

Understand the risks going in, and like Nike says, “just do it.” Because that money you see sitting in your savings account? It’s losing purchasing power with every passing day (due to inflation) — just look at the illustration below.

So get out there, and start building toward your “someday” today. And if you’re not sure where to start, join our BluSky Investor Club, and we can help you get your money working for your future.

Further reading:  Exploring Projected Returns in a Real Estate Syndication