Stocks vs. Real Estate: 4 Risks You Must Know Before You Invest
Talking about investing is often like wielding a double-edged sword. It is simultaneously risky as well as a means towards early retirement.
According to recent market surveys, 60% of Americans find investing to be scary or intimidating.
Coincidentally, 60% also recognize that their future selves will need more financial security than they currently possess.
The best time to start investing is now and learning to do it wisely is the key to achieving your passive income goals. The sooner you understand the nuanced risks associated with each form of investing, the better off you and your future self will be.
So, for the moment, clear your mind of the what-ifs, and let’s go over some of the pros and cons of investing in stocks versus real estate – including four investment risks, how investing in commercial multifamily real estate mitigates risk, and why investing in stocks is the much riskier option.
A Primer on Risk
Just like any significant financial decision, choosing to invest is inherently risky. So is getting on an airplane – turbulence is inevitable in every area of life.
Unfortunately, risk-free investments do not exist, but that should not stop you from understanding the risks, determining your threshold for risk, and doing the best you can to mitigate those risks, and it certainly should not stop you from investing.
Risk #1 – Consumer Behavior Could Change
Stock Market
Stock market investors bet on the success of companies that create products for people to use. Every item that you use day-to-day was manufactured for your consumption and for the profit of that company.
However, it is impossible to foresee how long that company and those products will remain popular and successful. You may remember Kodak and how quickly the tides turned on them. At one time Kodak was so well known they had become a common catchphrase – “It’s a Kodak moment.” Now our phone technology has completely erased Kodak from our society. As technology and trends change, so does the customer demand for those items. Today’s top stock may very well be tomorrow’s bottom performer.
Multifamily Real Estate
When you invest in real estate, you are investing in a guaranteed human need that will never disappear – the need for shelter. Having a roof over your head is a necessity, and the demand for said roofs has only increased over time.
Risk #2 – The Market Could Turn
Stock Market
One of the biggest fears one might have when looking to invest comes from the unpredictability of the stock market and its sudden corrections.
A dip in the stock market could cause investors to exit quickly and take the hit. Other investors will hang on, accepting the short-term loss in exchange for the long-term reward. The market bounces back, but it takes time, and holding on during a downward trend can be disheartening.
Multifamily Real Estate
Recessions are actually beneficial for commercial multifamily real estate investments, especially for middle-income housing.
During good times, when income and savings rates are higher, more people tend to upgrade to class A or luxury apartments. However, during bad times when there are layoffs or pay cuts to face, the demand for affordable apartments increases as homeowners sell and move into apartments or renters of class A apartments downgrade to more affordable class B or C apartments.
Therefore, during a recession, the demand for apartments trends upward, and the risk factor becomes lower.
Risk #3 – Competitors Could Come on the Market
Stock Market
In today’s rapidly changing global economy investing in stock can be a tricky decision. Each emerging brand is quickly challenged by a competitor creating a constantly evolving dilemma of who will be the most successful. With each company targeting the same audience, it can be difficult to analyze consumer trends and technology advancements to identify the best business model. Blue Origin vs. Space X? Tesla vs. GM? Apple vs. Samsung? They each have their pros and cons, with the headlines changing daily on who is winning the race. The rapidly changing story adds more risk to the decision process.
Multifamily Real Estate
Due to the scarcity of space and the need for permits, multifamily competitors are unable to just spring up from the ground. New apartment buildings are almost always high-end, luxury apartments.
Meanwhile, the demand for middle-income and affordable housing is significant and rapidly increasing. With supply chain shortages causing a decrease in construction and the Texas Triangle seeing a steady increase in population growth, well-maintained affordable apartment buildings are in high demand. This demand lowers the risk of high vacancy, mitigating the risk to investors and working to improve the property value.
Risk #4 – Not Having Control and Transparency
Stock Market
Investing in the stock market is similar to gambling. The game will always be going on, whether or not you have decided to join this hand.
And when the game is going well for you, it will be elating, but, when there is a turn of luck, there is nothing you can do, and the casino is too busy to help you.
Multifamily Real Estate
On the other hand, when investing in a real estate syndication, you know who the deal sponsor is, and you can communicate with them directly for updates or with questions.
Likewise, investing in a solid syndication guarantees you some protection in case the unexpected occurs. There are buffers in place such as reserves and insurance. Our experienced team works to protect investor capital, and you can expect the entire process to be open and transparent with regular updates.
Here at REEP Equity, we pride ourselves on being vertically integrated. This means that we can offer even further transparency and communication, as we control the entire process from start to finish. Our management team is on-site within hours of closing and works tirelessly to execute the business plan, providing timely updates throughout the process.
Conclusion
Unfortunately, inflation is causing your savings to lose more value every day. And the key to getting ahead of that and achieving your financial goals is to start investing. Knowing the risks is important, but the most important step is to start making your savings work for you.
We know this process can be intimidating. We are here to help. Please visit our website’s Knowledge Center to learn more about Multifamily Investing, industry terminology, and to explore our co-founder’s podcast library. If you have further questions, please let us know. Our Investor Relations Manager, Rebecca Treanor, is available for a call or at invest@reepequity.com. If you are ready to learn about future Multifamily Investing opportunities, please join our Investor Network.
We hope you found this information helpful, and we value your time. Please let us know if you have any other questions we can help with.