Is Investing in Real Estate Risky?

by | Jul 9, 2022 | Investing Advice | 0 comments

You probably remember being in school with everyone around you focused on getting the best grades to get into the best college. After they got their degrees, they continued down the path of getting a good job, climbing the corporate ladder, living comfortably, and investing for the future by investing in the stock market. 

Our ‘why’ in everything we do is our family. We want to be able to spend time with our kids, help them contribute to making their world a better place, and build a legacy of wealth to be able to help others through our work. 

Investing in our retirement accounts, stocks, and single-family investment properties alone just wasn’t going to get us there. 

Keep reading for a deep dive into the pros and cons of investing in stocks versus real estate and to better understand the risks we all face when choosing to invest in real estate and the stock market.

 

A Note on Risk

There are risks in any investment you make. Whether you’re investing with liquid cash or your retirement accounts and putting your funds in real estate or startups or the stock market, nothing we ever do is entirely risk-free. Life can throw unexpected events and challenges at us at any given moment, that includes in the stock market, and in real estate.

So when you’re looking to invest, it’s important to understand that you’re never going to find an opportunity that’s completely risk-free. The key instead is to evaluate and understand the risks involved in your chosen investment, to figure out whether you’re comfortable with the level of risk involved, and to ensure that you’re doing everything you can to mitigate risk.

 

Risk #1 – You’re Gambling on Consumers

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 of time those products will remain in favor and a company’s popularity. Blockbuster had a long reign, but when technology and consumer behavior changed, the company stagnated, dragging uninformed investors down with it.

 
Single Family Rental Real Estate

Owning single-family rental homes is the typical way people begin their real estate investing journey. It seems accessible and most imagine that managing a few rentals is a lucrative way to provide housing to tenants without a huge time commitment. 

Talk to any experienced real estate investor and you’ll find that this is *just* an assumption. When you invest in single-family homes, you’re gambling on your ability to thoroughly screen and select responsible, respectful tenants. Furthermore, as the owner of the property, you’re taking on all liability and fully committing to respond to any and all tenant or property issues – what happened to that time freedom you wanted?

 
Commercial Real Estate Investments

When you invest in commercial multifamily real estate, you’re investing in a basic human need that will never go away: the need for affordable 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.

As society advances, we’re constantly looking for places to go for entertainment, education, medical and personal care, work, dining, and relaxation. Commercial properties house all of those things! As we invest in commercial properties across the US, we’re contributing to the betterment of society at large.

 

Risk #2 – Sudden Market Correction

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.

 
Single Family Rental Real Estate

We all remember the housing crash of ‘08 and ‘09, right? Millions of people lost their homes not only because the economy rendered tenants unable to pay their rent, but also because many landlords had taken leverage too far. 

When you own single-family or even small multifamily homes (fourplex, triplex, and duplexes), you’re fully responsible for paying the mortgage whether or not you have tenants paying rent. As the landlord, of course, you’ve got to respond to complaints and make repairs in a timely manner, but you’re also 100% liable for all debt attached to the renal property. 

It’s true that when done well, small rentals can be very lucrative. However, most rental real estate owners tend to get in over their heads, potentially setting themselves up for panic if there’s a blip in the flow of excellent tenants.

 
Commercial 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 – Impact of New Competitors

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 typically have insight into technology development or companies’ operations. It takes avid research and lots of time to stay up-to-date on all the companies you partially own via stocks. Thus, new competitors can have a significant impact on investment returns.

 
Single Family Rental Real Estate

New homes and new neighborhoods pop up daily, especially now as we’re experiencing a true housing shortage across the US. Many families are choosing to explore apartments or condos or move further away from city centers in search of more space for less money. 

When you own rental real estate, you can’t just pick up your property and move it to a more competitive location. The value of your property is impacted significantly by what consumers think of your neighborhood, your location, and, quite frankly, the properties and businesses immediately surrounding your rental home. 

 
Commercial 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 – Not Having Your Hands on the Wheel

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 for everyone involved. The conductor (CEO) is who you trust to navigate those times.

 
Single Family Rental Real Estate

The most common advice on successfully managing rental real estate typically includes something along the lines of, “just get a property manager!” The trouble is, that the property management you hire may or may not handle things as you would and will probably still call you more often than you prefer. 

When you hire property management (or anyone in any role) to help you manage your property, you’ve got to balance the amount of help they’re actually providing with the cost you’re incurring to obtain the help and the amount of risk you’re taking on by having someone else handle things for you. When it comes to your investments, you want procedures in place to ensure maximum transparency.

 
Commercial 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.

 

Mitigating Risk Using Your Retirement Accounts

For most of us, investing in our retirement accounts was something we were told we had to or should do by our parents or the HR rep at our first “real” job. Typically, those retirement funds are invested in the stock market through mutual funds, ETFs, or single stocks. 

Chances are, you just did what you were told, picked a few funds that sounded okay and never really thought about it again. You might be surprised (and maybe happy) to hear that now you can invest in real estate using your retirement savings.

By choosing to invest a portion of your retirement funds into commercial real estate syndications, you’re electing to diversify your portfolio even further than what’s possible only through the stock market. 

While there are excellent stock market diversification strategies out there that use a combination of funds, stocks, bonds, and more, the ultimate goal is to have a portfolio that’s most aligned with your own personal and financial goals. If contributing to society through creating beautiful, updated communities in which people are happy to live is one of your wishes, it’s time to explore using at least a portion of your retirement savings to invest in multifamily real estate. 

 

The Safest Investment …

Is the one you’re most comfortable with!

We can’t promise to find you the ‘best’ way to invest, because for each person who has a thriving portfolio of stocks there will also be someone who’s making a great return on their real estate investment. 

There’s only one way to determine the right investment vehicle to secure your own financial freedom, and that’s to take stock of your investment goals, assess your risk tolerance, and move toward the type of investment that will support you to meet your long-term financial goals.

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