Anytime investing is brought up, people’s minds flash between images of Warren Buffet, memories of the Great Recession, and those goals filed in their “someday” folder.
Unfortunately, 60% of Americans find investing to be scary. Being afraid leads individuals to put off what they could be doing today to tomorrow. Sixty percent also realize that someday they will need greater financial security than they currently have.
This blog will discuss the four primary risks of investing, how commercial multifamily real estate investments mitigate risk, and why the stock market can be riskier than real estate.
A Primer on Risk
Investment risk is defined as the chance that an outcome or investment’s gains will differ from the expected outcome or return. Risks measure the uncertainty in achieving the returns an investor expects.
An element of risk exists in anything you do in life. There is a risk of getting in the car to drive to work in the morning. Unexpected things happen in life, the stock market, and real estate.
The key is not to look for risk-free investments but to understand the risks thoroughly, determine your threshold for risk, and ensure that you’re doing everything you can to mitigate risk. This blog discusses four risks associated with the stock market and compares them to multifamily investing.
Risk #1 – Market Correction
Stock Market
Raise your hand if your 401k got obliterated during the initial COVID-19 panic. I’m raising two hands!! Thank goodness I did not move to the sidelines during that stressful time.
Fear of a downturn causes investors to remain or move to the sidelines. Investors may exit quickly, which 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 during a downward trend is challenging.
Multifamily Real Estate Investments
Recessions are sometimes good for commercial multifamily real estate investments, especially workforce housing (C-Class assets).
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 and occupancy tends to increase, decreasing the risk. Higher occupancy can help balance the potential lower rent growth seen during recessions.
Risk #2 – Competition
Stock Market
When Netflix stormed the scene, it beat out Blockbuster by targeting the same audience and product (movies) and getting ahead of technology and consumer trends.
Consumers don’t have insight into technology development or company operations. Thus, new competitors can have a significant impact on investment returns.
Multifamily Real Estate Investments
Multifamily competitors can’t just spring up because of limited space, zoning, and permits. When new apartments are built, they’re almost always class A (luxury tier) apartment buildings.
Since the demand for workforce and affordable housing is rising, the risk of having a high vacancy in well-maintained class B and C apartment buildings is relatively low.
Risk #3 – Consumer Behavior
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 term length of those products’ and 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 #4 – Lack of 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 is smooth and exciting. During a correction, a terrible, helpless feeling takes over. The conductor (CEO) is unreachable, and you better buckle up or jump off.
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. You will not get this type of access from the fund manager at fidelity.
Multiple buffers should exist to protect investor capital, such as reserves, insurance, and experienced professionals to handle the unexpected. Each deal should provide ongoing transparency, such as monthly updates and detailed quarterly reporting.
Conclusion
There’s certainly no one “right” way to invest. The key is to invest. Period.
Understand the risks going in and take action. That capital sitting in your savings account is losing value (because of inflation) every passing second.
So get out there and start achieving your “someday” today!
