Most of us have been told that we should work hard, get a degree, climb the corporate ladder, and invest in the stock market along the way to maximize our financial growth. That’s the formula passed down to us by our families, people we admire as successful professionals, and, of course, societal norms.
Why would I question this inherent, traditional advice?
Unfortunately, I toiled away for years in an attempt to discover where my passions for life would intersect with my formal education. I wanted to make an impact, surround myself with intuitive professionals who challenged my assumptions, and create a legacy while also leaving me time to enjoy loved ones and a vacation here or there.
In my early career days, I’d work 60+ hours a week as a sales consultant, traveling every week, then spend nights and weekends trying to figure out the “key” to success in the stock market. It was tough, I was tired, and my money wasn’t making very much money.
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, which prompted me to take a second look at commercial real estate investing.
You see, my parents actively owned an apartment complex when I was a teen. At that time, I was highly inconvenienced by the long hours my parents spent in the management office and, while I could have soaked up some valuable property management knowledge, all I wanted to do was go hang out with my friends.
Now, years later, real estate has won my heart, but don’t just take it from me!
Let’s review and compare the risks of investing in stocks versus real estate. You need to know the four basic risks of investing, how commercial multifamily real estate investments mitigate risk, and why the stock market can be much riskier than real estate.
What Are The Risks Of Investing And How Do You Avoid Them?
With any investment, there’s an unavoidable element of risk involved. Just as you could have spilled your coffee 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 (that doesn’t exist), but to understand the risks thoroughly, determine your threshold for risk, and ensure that you’re doing everything you can to mitigate risk.
When you can confidently walk into an investment strategy, aware of and comfortable with the risks you’re taking, you’re more likely to have a positive experience, understand the results (no matter whether they’re positive or negative), and be resilient enough to bounce back. Some of the most successful investors and professionals in the world learn, try, adjust, and try again, repeating this process over and over until they “crack the code.”
After reading this article, you’ll be more aware than ever of the potential risks of investing in stocks and real estate, and you’ll be able to make informed investment decisions moving forward. With this knowledge, you can ask the right questions, creating the best possible scenario for your money in investments that fit your risk tolerance.
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 of time those products will remain in favor, or predict a companies’ popularity. Blockbuster had a long reign, but when technology and consumer behavior changed, the company stagnated, dragging investors down with it.
We’ve all witnessed flopped IPO’s, iPods fading as cell phones’ functions continually increase, and the inevitable peaks and valleys of the market as the talking heads struggle to explainin it all.
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.
Inner city condo and high-rise living is ever popular as young adults pursue social outlets, active lifestyles, and convenience. Apartment complexes are experiencing higher occupancy than ever as single-family housing hits all-time highs and has become unaffordable to some middle-class families.
No matter their age, social status, or income, people need a place to live, and since apartment communities are considered one of the last options for affordable housing, they’ve proven themselves throughout history to be remarkably durable.
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 high vacancy in well-maintained class B and C apartment buildings is fairly low. Think about it – if you made just $40,000 per year, where could you afford to live? What options would you have?
It’s highly likely that you’ll find your best-case scenario in an apartment community.
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 and for how long 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 (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.
You get an opportunity to (virtually) meet the syndication team, review a carefully crafted business plan, and do your own research into the market, the asset type, and the renovation plan, which gives you every chance to make suggestions, ask questions, and decide if the investment is right for you.
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, with monthly and quarterly updates, you have ongoing transparency into each deal.
Conclusion
There’s certainly no one “right” way to invest. People make money in the stock market, just as people make money in real estate.
Approach your wealth-generation strategy just like any other big goal – do your research, immerse yourself in a like-minded community of high achievers, find a mentor or a mastermind, and expect to achieve better results over time. The key to any investment is to assess your own goals and risk tolerance, then choose the path that will best help you meet those goals.
If you think investing in commercial real estate syndications may best support your financial and time-freedom goals, let’s talk! We’re always interested in getting to know other investors, so Join the Club!
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