Multifamily Real Estate vs Stocks

A common question we get from passive investors is whether it’s better to invest in multifamily real estate or the stock market. There are many differences between multifamily investing and the stock market, and there isn’t a clear answer to which investment is better.

Each one has its benefits and drawbacks, and they have both been effective at building wealth. A lot of success in either stocks or multifamily has to deal with timing. It’s impossible to know what the future of a particular investment vehicle holds, but understanding how each investment works is the best way to expand your wealth and create more time freedom for yourself.

Below, we’re going to expand on the advantages and disadvantages of multifamily investing versus the stock market. By the end of this article, you’ll have more information so you can decide whether multifamily investing or the stock market is the better investment vehicle to get you to your financial goals.



Cash Flow

Investing in real estate involves the purchase of physical property. There might be some monthly expenses involved to maintain and own the property, such as taxes and maintenance costs. However, real estate offers reliable, consistent cash flow on a regular basis. Apartment buildings generate cash flow. After you pay your expenses, the profit left over is cash flow that goes into the investor’s pockets.

With the stock market, cash comes in once you sell the stock. Investors may also receive dividends, and they can reinvest this to grow their wealth. If you invest your dividends to buy more shares of a company, this allows you to receive more cash dividends.

Volatility

The value of a stock tends to fluctuate in the short term. It can go from being worth $50, to $20, or $100. But, if you have a strong reason to believe in the long term success and growth of the company you invested in, you shouldn’t be concerned with the short term volatility. However, it can be a rollercoaster of emotions to watch your wealth rise and fall. Just because it’s easier to buy and sell stocks than real estate doesn’t necessarily mean it’s a good reason to invest in the stock market.

Real estate prices do not fluctuate as much as the stock market does. Historically, real estate has proven to be a strong inflation hedge, and has protected investor’s purchasing power. Even though real estate may decline for multiple years in certain markets, the majority of investors are able to sell at a profit before they have to take a loss. Also, if you invest for cash flow, not appreciation, the property will continue to put money in your pocket as you wait for the market to recover. During the COVID-19 pandemic, multifamily real estate performed strongly. The stock market crashed during the pandemic, which led to a lot of panic among stock investors.

Liquidity

The stock market is much more liquid than multifamily real estate. Stock investors can sell their entire position in a few minutes or less. Even though it can take a few days to receive your profits, the stock market allows you the flexibility to enter and exit the market within a relatively short period of time. Buying and selling public company shares is typically possible as soon as you make the decision to act. You can also know the exact value of your investment at the present moment more easily than in real estate.

With real estate, your investment can be illiquid for years. Selling a property can take months. If you’re a passive investor in an apartment syndication deal, your money is usually locked into the deal for 3-6 years. Although there are some exceptions, most passive investors should expect to not have access to their capital after they invest in a multifamily deal for a few years. However, this contributes to the reliability of real estate. Investors cannot buy and sell based on emotion as easily as they can in the stock market because of the time it takes to process a real estate transaction. This helps reduce volatility in real estate.

Diversification

Both real estate and stocks have offered investors long term wealth and come with risk. Diversification, the process of distributing capital in a manner that decreases the exposure to any one specific investment or risk, looks different in real estate and the stock market.

Diversifying in the stock market is much easier than in real estate. You can purchase stocks in multiple different companies. If one crashes, you can still be profitable in the other companies you’re invested in.


Investing in real estate typically involves more capital, so it can be harder to diversify. Unless you have access to substantial capital, investing in real estate will allow you to invest in a limited number of properties at a time. However, many real estate investors choose different markets, and general partnership teams, to reduce their risk. So it is possible to diversify your investments in real estate if you have the capital.


Accessibility


Investing in the stock market has a low barrier to entry. If you have $100 to deploy, you can invest in some mutual funds or specific stocks. Certain apps allow you to invest with as little as $25.


Real estate requires much more money in order to invest, particularly in an apartment syndication deal. Most minimum investments in apartment syndications are $50,000 to $100,000.

However, investing in real estate is much easier to understand than the stock market. With apartment syndications, you vet the operator and the market, invest in a deal, and receive cash flow. And when you own a percentage of a physical asset like in real estate, there is more control over the value. In a stock, there are so many factors that go into determining the value of the stock, which can be mysterious at times.


Taxes


When you sell a stock, you are subject to capital gains tax. If you held it for longer than a year, you might be able to pay for this tax at a lower rate. The stock dividends you received during the year may also be subject to taxes.


Real estate investors benefit from depreciation, which can be used to offset your income tax liability, assuming you qualify as a real estate professional. The passive income you receive is not subject to capital gains tax.


Returns

Most stocks produce dividends around 4% or less annually. Most multifamily investment opportunities have an average cash on cash return between 7-10% annually. Multifamily returns are also realized much sooner than the average stock. In a strong real estate market, properties tend to naturally appreciate over time, further increasing investor returns. If an investor can hold onto a stock for many years (e.g. 15 years), then they can see good returns.


Inflation


According to Investopedia, rising inflation is bad for stock investors, because consumers spend less money. This can result in a decline in stock prices. Also, if consumer sentiment is negative, stocks may crash. Economic uncertainty can also cause the stock market to fluctuate.


Real estate values tend to increase when inflation rises. This allows investors to preserve their hard earned money, because their money is parked in a real, tangible asset like real estate.


Value-Add Potential

With real estate, you can force the value of a multifamily property to increase by improving the condition of the property through repairs and upgrades. These changes allow investors to justify increased rents, which increases the income the property produces, and the overall value of the property.


With stocks, you cannot add value to force its price to go up, because you’re usually not in a position of power within the company to influence it.


The Bottom Line


Both real estate and stocks have pros and cons. Investing in the stock market is a popular method people use to save for retirement, especially due to the popularity of 401(k)s and individual retirement accounts (IRA).


But, real estate has proven to stand the test of time. Real estate offers more reliable long term returns than stocks. Real estate also typically offers cash flow sooner than a stock or mutual fund. Stocks do offer dividends, but not many produce dividends over a 4% return. When you compare that to an inflation rate of 8.2%, this isn’t good.


Meanwhile, real estate investors typically look for a 7-10% return on their investment, or even more in cash on cash returns.


Of course, deciding between stocks or real estate is a personal decision that depends on your specific financial situation. There are likely more stock market investors than real estate investors, because it’s easier to buy a stock than it is to invest in real estate. However, it’s often true that the more difficult things in life are the things most worth doing.


Whether you prefer stocks or real estate, the decision is your. However, it is hard to ignore the obvious advantages of investing in real estate. There is a reason why real estate has made more millionaires than any other investment.


We’ll let the facts speak for themselves.


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