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The Inherent Risks Of Stock Market And Real Estate Investing

I witnessed the power of real estate at a young age and nonetheless took a hard left turn toward becoming the first doctor in my family. I have no regrets and am still very honored to have chosen such a unique profession in which I can directly, positively impact people at moments when they need the most help. 

However, I see how I too got caught up in the traditional method of pursuing degrees, earning income, contributing to my 401K, and investing in the stock market along the way. This is how you achieve the American Dream, right? This is exactly what I subscribed to for years.

Early in my career, I just knew that becoming a partner and owning my own practice was the answer. So, aside from the hours I spent working the ER, I focused on continuing my education and exploring ways to ensure I’d have as much control as possible over my career trajectory. In my free time, I’d research investment opportunities, allocate my retirement money into seemingly promising funds, and attempt to find the most efficient way to make my money work for me.

I worked hard to build a modest portfolio, but the constant ups and downs of the stock market left me feeling exposed and reignited my passion for investing in real estate. 

Let’s take a close look at investing in stocks versus real estate, the four primary risks of investing, and how commercial multifamily real estate investments mitigate risk by providing diversification against your stock-heavy portfolio.

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, in the stock market, and in real estate.

The key is not to look for risk-free investments (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 within your portfolio.

Risk #1 – Consumer Behavior Could Change

Stock Market

Stock market investors bet on the success of companies that create products for people to use. Facebook, iPhones, Happy Meals, and soap are all consumable products. 

However, it’s impossible to predict whether the public will widely accept those products, how long they might be in favor, or if a company will become famous at all. For example, 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.

These days, middle to upper-class Americans are pickier than ever about their living conditions while there’s a shortage of affordable housing for the lower class. So to say housing is in high demand feels like an understatement right now. 

Risk #2 – The Market Could Turn

Stock Market

One of the most common fears and possibly the most significant reason would-be investors remain on the sidelines is fear of a sudden market correction.

During a downturn, investors may exit quickly (which only solidifies their losses). Meanwhile, others aim to accept short-term losses in exchange for long-term gains. Historically, the market bounces back, but clinging to that “trust” can feel like the steep, gut-wrenching, downhill fall of a roller coaster during times of volatility.

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 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 rising, it’s less likely to experience excessive vacancy in well-maintained class B and C apartment buildings.

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 sailing upward, the ride feels smooth and exciting. During a correction, a terrible, helpless feeling takes over. The conductor (CEO) is unreachable, and you better buckle up.

The “protection” you have is entirely based on your diversification strategy and whether you can hang on through the eye of the storm. 

Multifamily Real Estate Investments

When you invest in a real estate syndication, you know precisely who the deal sponsor is, and you can reach out directly to ask questions and provide feedback.

As a passive investor in real estate syndications, your “protection” includes buffers like reserves, insurance, and an experienced, professional syndication team to help mitigate risk against the unexpected. 

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

Investing Risks: Stocks And Real Estate

There’s certainly no one “right” way to invest.

Some people find the stock market to be a profitable endeavor, just as people achieve wealth through real estate. No matter what others are doing, your best investment strategy will be one in which you are comfortable with the risk/reward tradeoff, fully understand your responsibilities and potential liability, and reasonably believe your choices are in support of your lifestyle and financial goals.

The key is first to assess your own goals and risk tolerance, continue to educate yourself about the investment opportunities you find interesting, and finally choose the path that will best help you make strides toward those goals.

There are numerous risks with owning physical real estate via private placements including weather and natural disaster risks, interest rate risk, operator and business risks, and overall real estate market volatility which can effect the performance of the investments. Investing in private placement securities entails a high degree of risk, including illiquidity of the investment and loss of principal. Please read the offering document before investing.

This email message is intended only for the recipient to whom it is addressed and may contain information that is privileged and confidential. Nothing contained in this email constitutes tax, legal, insurance or investment advice, nor does it constitute a solicitation or an offer to buy or sell any security or other financial instrument. If you are not the intended recipient of this message, any use, dissemination, distribution or copying of this communication is strictly prohibited. If you have received this communication in error, please immediately notify the sender and permanently delete all copies that you may have. Securities offered through Growth Capital Services, member FINRA, SIPC, Office of Supervisory Jurisdiction located at 582 Market Street, Suite 300, San Francisco, CA 94104. 

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