Comparing Risks – Stock Market Versus Real Estate Investments

by | Aug 1, 2022 | Investing Advice | 0 comments

During my time working in the corporate world, I was overworked and had little job security to show for it. I knew I needed to start generating passive income if I ever wanted to live an independent lifestyle. For me, that independence came through achieving financial freedom by investing in real estate. 

At first, I tried my hand at the stock market, quickly discovering it wasn’t for me. I then spent several years buying single family rental properties. Once I built my portfolio, I had the confidence to scale to commercial real estate investments. 

Since then, I’ve traveled to over 30 countries and enjoy the freedom to work how and when I want, a luxury I wouldn’t have been afforded had I continued working for someone else. For me, investing in real estate was the missing piece I needed to meet my financial goals and live an independent lifestyle. 

When considering where to invest your hard earned money, most people initially think of the stock market. Let’s take a deeper look at how investing in the stock market compares with investing in real estate. Keep reading to discover the four basic risks of investing, how commercial real estate syndications mitigate risk, and why the stock market is typically much riskier than real estate.

Let’s Talk Risk

With every investment, there’s some degree of risk involved. As evidenced by our current financial climate, investments can be impacted by several factors such as, fluctuations in the market, world events, politics and more.

You’ll never find investments that are completely risk-free. The key is to thoroughly understand the risks, determine your threshold for risk, look for opportunities that are recession-resistant, and ensure that you or your sponsor team are doing everything possible to mitigate risk.

 

Risk #1 – Fluctuations in Consumer Behavior

Stock Market

Those investing in stocks, are relying on the success of companies who create and provide products for the masses. As we know, the latest and greatest products seem to change drastically over time. Take the social media platform My Space for instance, at one time it was a cutting edge concept. However after Facebook entered the scene, My Space became virtually nonexistent. 

Even for the most savvy business person it’s impossible to predict the length of time that companies and products will remain popular. When a company loses relevance or consumer favor, the investors are unfortunately taken down with the ship. 

Consumers change their priorities and preferences over time. As tastes change, so do lifestyle-related commodities. Think of cell phones, most people upgrade every two years or so!

Real Estate Investments

When you’re investing in real estate on the other hand, you’re investing in the basic human need of shelter. Humans have and always will require a roof over their heads, a need that has only increased over time, with rising population trends.

Currently, the need for affordable housing is greater than ever. For cost-conscious renters, apartments, RV parks, and mobile home parks are among the best options. People also need storage units, restaurants and shopping centers. 

 

Risk #2 – The Market Is Unreliable

Stock Market

For those considering investing in the stock market, the biggest fear is never knowing when the market will turn. Many remain on the sidelines not willing to risk a loss during a downward turn.

At low points, some investors may panic and jump ship, solidifying their losses. While others, who are more willing to ride out the storm, accept short-term losses in hopes of an upward turn and long-term gains. Historically speaking, the market does bounce back, but that’s a stress-inducing prospect during volatile times. 

Real Estate Investments

Contradictory to the stock market, real estate investments actually thrive during periods of recession, particularly multifamily and workforce housing.

In a good financial climate, incomes and savings rates are higher, allowing more people to move up to class A luxury apartments.

When the population is experiencing a less promising economy, homeowners may sell, and renters of class A apartments may downgrade to more affordable apartments, class B or C. we also see an increase in demand for RV and mobile home parks, storage units, and more.

during these times. 

In a nutshell, the properties we syndicate during a recession exhibit stability, thereby decreasing risk of our investors.

 

Risk #3 – New Competitors Could Surface

Stock Market

New competitors can have a significant impact on investment returns in the stock market. As consumers, we don’t have the inside scoop into companies’ operations or technology. 

Take Blockbuster for instance, for decades they were the leading movie rental giant. However, 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. Unfortunately, investors likely never saw that shift coming. 

Real Estate Investments

Most metropolitan areas are quite developed, meaning new properties won’t spring up unexpectedly and existing properties are already in the most valuable locations. 

Opportunities to build, zoning, and permits are limited. When new apartments, retail centers, or storage units are built, they’re always class A luxury apartment buildings and not in competition with our syndication deals.

In the case of multifamily housing, as demand for workforce and affordable housing is on the rise, the risk of having vacant units in well-maintained class B and C apartment buildings is fairly low. For investors, there will always be a need for improving and breathing fresh life into prior-built commercial retail structures.

 

Risk #4 – Decreased Control and Transparency

Stock Market

When investing in stocks, the market goes on with or without you. When the market is on an upward swing, the process is smooth and exciting. During a downward turn however, investors may feel helpless and fearful with no access to information to give them direction or to help ease their fears. 

Real Estate Investments

When investing in a real estate syndication, you’re part of a team. You know exactly who the deal sponsor is, and you can reach out directly to ask questions and provide feedback.

In a solid syndication deal, you can rest assured that there’s a risk mitigation plan in place with several buffers to protect investor capital. With capital preservation a top priority, you’ll see reserves, insurance and multiple exit plans in place to mitigate risk. 

In addition, investors receive monthly and quarterly updates, for ongoing transparency with each syndication deal.

 

Choosing The Best Fit For You

There’s no risk-free way to invest and unfortunately, no cookie cutter method that’s a good fit for everyone. 

Some investors make money and do very well in the stock market, just as there are investors whose capital is thriving in real estate. There are some investors who dabble in it all, seeking diversification across many asset classes and markets. 

The key to finding the best fit for you is to determine your own financial goals and your risk tolerance, then choose the path that will best help you meet those goals. In fact, I’d love to talk more about your investing goals and share more details about risk, returns, and upcoming deals with you. 

My goal is to find the best opportunities across all markets while partnering with quality operators, and savvy, busy professionals like yourself so that we can all scale our investments, enjoy the cash flow, and build our net worth.

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