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Stocks Versus Real Estate: The Risks And Rewards Explained

Stocks Versus Real Estate: The Risks And Rewards Explained

You’ve mustered through years of undergrad, perhaps business school or residency, or maybe even passed your boards or completed your internship to begin your corporate position, all with the dream that one day you’d have a successful career that provides a great income. 

Not to mention how you’ve likely saved and invested confidently, providing security for your family and a cush retirement for yourself one day. This is exactly what I subscribed to for years.

I spent years of my life struggling to “balance” my career and family life. I’d work 60+ hours a week on-call and on my feet, then spend nights and weekends (when I wanted to be fully present with my family) trying to figure out how to leverage the stock market, rental properties and other investments to grow my wealth. 

I worked hard to build a modest portfolio, but the constant stock market fluctuations forced my attention toward the very real risks of Wall Street. I was on the hunt for a secure way to grow wealth, not suffer through volatility, and I knew there had to be a better way. Shortly thereafter, I discovered the stability and freedom that comes with investing in real estate. 

Today, I’m taking you on a little tour of the very real possibility you could have of retiring early, releasing the golden handcuffs of practicing medicine, working long hours in a corporate position and allowing more time and more freedom with family and finances than you ever thought was possible.

Below, I’m comparing investing in stocks versus real estate, discussing the four basic risks of investing, sharing how commercial multifamily real estate investments mitigate risk, and explaining why the stock market can be much riskier than real estate.

 

A Primer on Risk

As with any investment, there’s an element of risk. Just as you could have been hit by a bus this morning, unexpected things come up in life, and the same happens 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 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 those products will remain in favor, and a companies’ popularity. 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. Everyone needs a place to live and call home. 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 biggest reason 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). While 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 and feels like anything but freedom during the downward trend.

Multifamily Real Estate Investments

Recessions are actually good for commercial multifamily real estate investments, especially for workforce housing, which is why I believe multifamily is the hidden asset class that no one knows about.

Skeptics often pose that real estate investments are risky, but consider this: 

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 are more likely to downgrade to more affordable apartments (class B or C).

Which is why 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 likely 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. Infact, in most well-kept multifamily properties, it’s fairly likely you’ll have a high rate of occupancy, which results in great ROI (return on investment).

 

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. And who knows, maybe the next terminal could be your last.

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.

Further, when you invest in a solid syndication, you can be assured that there are multiple buffers in place to protect investor capital. Reserves, insurance, and professionals experienced in that exact market and asset class know how to gracefully handle the unexpected and protect you and other investors’ capital.

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

 

Conclusion

There’s certainly no one “right” way to invest.There are people who make money in the stock market, just as there are people making money in real estate.

The key is to assess your own goals and risk tolerance, then choose the path that will best help you meet those goals. I’ve experienced both and while the general rhetoric was to “follow the rules” and invest in your 401K, that wasn’t enough to provide the freedom I dreamed of – financially and professionally. 

Discovering truly passive income through real estate syndications has created a separate income stream for me without requiring more of my time, allowing me to practice medicine the way I want. Even more rewarding is the impact on the environment through green home options for our tenants and creating a great living space for all.

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