Creating generational wealth that my family will benefit from for many years to come is the focus of my investing strategy; therefore, I didn’t see investing in the stock market as the best way to meet this goal.
I have researched the best investment methods to grow wealth simply and effectively. We are alike in that you’re also looking for an investment vehicle that provides tax-efficient, stable, and consistent growth; therefore, in this article, we will examine investing in stocks versus real estate and reveal why real estate is one of the most effective ways to build cash flow and wealth.
We’ll look at the four main risks of investing your capital, why commercial multifamily real estate investments mitigate risk, and why investing in the stock market has the potential to be much riskier than investing in real estate.
Understanding Risk
None of us can foresee the future or know what dangers lie ahead in life. Just as unexpected things happen daily, unexpected things can happen in the stock market and real estate; all investments involve an element of risk.
Understanding your personal risk tolerance is key to successful investing. You need to determine how risk averse you are, ensure you’re doing everything possible to mitigate possible risks, and check that any investments you’re interested in fulfil those requirements.
Risk #1 – Companies Fall Out of Favor
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. 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 – Markets Move On
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 – New Competitors Could Appear
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.
Risk #4 – Lack of Control
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 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, such as reserves, insurance, and experienced professionals to handle the unexpected.
Plus, with monthly and quarterly updates, you have ongoing transparency into each deal.
Assess Your Own Goals
No one but you knows the ‘best’ investment option for you and your family. Some people successfully invest in the stock market while others grow their wealth via real estate investing.
Where you put your money depends on your level of risk tolerance.
Investing in commercial real estate is an excellent way to expand and diversify your already robust portfolio.
Before you make any big decisions, assess your goals and be honest with yourself about how comfortable with risk you are. Then you can be confident in selecting the investment opportunity that makes the most sense to you.