Examining The Risks Of Owning Stocks Versus Commercial Real Estate

by | Jul 29, 2021 | Real Estate Syndications | 0 comments

Most of us believed and lived our lives following the traditional paths of education, corporate employment, and achieving milestones that, to the rest of society, insinuate success. Basically, you worked hard, climbed the corporate ladder, and invested faithfully in the stock market along the way with the expectation that these actions would accumulate and eventually provide a cush lifestyle and the retirement of your dreams. 

I too subscribed to this belief, this road commonly travelled to no avail, for years. Unfortunately, even those who seem to have the most successful careers don’t ever accumulate true wealth, when following this playbook. 

The story is all too common. Early in your career, you spend 60+ hours a week traveling, hustling, and trying to prove yourself thinking that one day you’ll get that break and be recognized. For years, this means your daytime hours are fully dedicated to your W-2 earnings, leaving only nights and weekends to figure out how to leverage the stock market. 

Somewhere in all the chaos, you get the bright idea that the extra money earned from a side-hustle is the key to that next level. You work hard to build a modest portfolio, but the volatility (and limits) of the market plus the quickly escalating fear that you’ll never be able to stop working makes passive real estate investing sound very attractive.

Let’s take a close look at investing in stocks versus real estate, 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 You Need To Know About Risk

With every investment, there’s an element of risk. Just as you could have twisted your ankle or tweaked your back getting out of bed 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.


Risk #1 – Consumer Behavior Changes Over Time

Stock Market

Stock market investors bet on the success of companies who create products for people to use: Facebook, iPhones, Peloton bikes, soap, you get the idea.

Unfortunately, it’s impossible to predict how popular these products will be and the length those products will remain in favor. Remember Blockbuster, Radio Shack, and K-mart? They each had a long reign, but when technology and consumer behavior changed, these companies stagnated, dragging investors down with them.

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.

In many areas, the demand for housing is excessive, meaning there are more people who want to live in the area than the number of apartment units and homes available. Whether people retreat to more affordable real estate or are willing to pay pretty pennies for the best neighborhoods, one thing remains constant: Humans will always require shelter.


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. Workforce housing is affordable housing for households with earned income that is insufficient to secure quality housing within reasonable proximity to the workplace. These housing options are typically reserved for teachers, police officers, firefighters, and other essential workers within the community.

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 almost 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.


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 racing upward, the ride is smooth and exciting. During a correction, a terrible, helpless feeling takes over. And to fuel the fire, these companies may be having stellar performance but their stock prices are still swept lower during these downturns. Stock brokers will tell you to buckle up and ride out the storm, which may not work out for those who are within a couple of years from retirement.

The reality is that with the market, even if your company has great performance and we are in a bull market, that may not translate into great stock price performance. There is often a disconnect between the two and no one can explain the reason for that gap…no transparency.

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.

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, with monthly and quarterly updates, you have ongoing transparency into each deal.


Which Is Better For You: Owning Stocks or Owning Real Estate?

There’s certainly no one “right” way to invest. If history has proved anything, it’s that markets generally increase over time (including the stock market and real estate) and that people have made money from them. 

In determining which is right for you, you must assess your personal financial and investing goals, consider your own risk tolerance, decide how much money you’re ready to invest and how long you’d like that money invested, then choose the path that will best help you meet those goals.

The stock market can be fun to tinker with each month or each day (although that sounds highly dangerous), and you can move either a few hundred or a few thousand dollars around willy-nilly. Real estate investments require a minimum of $50,000 (but lower minimums may be accepted) and a hold period of about 5 years. 

As you compare all the metrics and requirements for each type of investment, you’ll gain clarity on which investment strategy will best create your desired financial situation and lifestyle. 

We’ve each experienced both the stock market and various levels of active and passive real estate investing and arrived at real estate syndications being the best tool to help us achieve our investing goals. If you’re vying for a long-term investment opportunity in solid assets independent from the stock market, you’re invited to join the Growability Equity Community today. 

Inside, we’ll share more about how our career and investing experiences contribute to a smoother, more simple, and reliable investment in commercial real estate for you. Plus, you’ll get to share your investing goals directly with us so we can help you find your first or next syndication, paving your path to earning passive income.


Submit a Comment

Your email address will not be published. Required fields are marked *