Stock Market vs. Real Estate

There is a reason the stock market is called, legalized gambling. You get excited when the market is up, but when the market is down…. boy oh boy, the excitement disappears in an instant. Diversifying your portfolio is something a lot of people talk about but do not take action on. Why do you think that is? A lot of research goes into an investment and people want to see great returns. It’s almost impossible to know what will happen in a volatile market. Below are a few reasons why we prefer real estate over the stock market.

#1: Control & Volatilty

Something as simple as a negative headline can determine the drop of a stock price. True or false doesn’t matter, headlines have the power to move stocks quickly. Poor leadership is something that we also cannot control. Bad decisions can steer a company down the wrong path and hurt the price of that companies stock. Black swan events or an economic recession also take away control. I hope that the year you decide to retire and pull from your 401k, that the market isn’t experiencing one of those two events.

You know we can control? The human basic need of shelter. People will always need a safe place to live. We can also control how we treat and interact with the families who live in the apartments. We can create a safe and enjoyable living situation when we choose to be actively involved. Yes, there are times when someone cannot pay rent but we work with those people. We provide them with options like payment plans and help the person apply for assistance. We are proactive in our approach and want to make sure we serve the people the best we can. When a recession or a black swan event does occur, some people move out of their homes and into apartments. Apartments will always have a place in any market.

#2: Transparency

The average expense ratio for actively managed mutual funds is between 0.5% and 1.0% and can go as high as 2.5% or even more. Some passive index funds (ETFs) have a typical ratio of about 0.2%.

Below is an example of how fees change an initial investment drastically. This data was pulled from Four Oaks Capital and that team has created a great e-book that discusses the stock market versus real estate.

“Most investors have a blended portfolio of ETFs and mutual funds, so let’s assume the average fee is 1.0% per year. After taking out a 1% fee each year, instead of being worth $225,425, your $100K invested fifteen years ago is now only worth $193,879 – a mere 4.5% compounded return.”

The diagram above does not even include inflation but that is something you can learn more about in the e-book mentioned.

As a limited partner in a syndication deal, you are aware of the fees that are included in the deal. You get a copy of the private placement memorandum (PPM) and this legal document discloses all the fees involved. The PPM should also include verbiage that allows a limited partner to review the asset’s financials if they want to. You can also request the PPM before you invest any money. Make sure you have completed due diligence on the general partnership team. This allows you to understand who you are investing with and helps you align yourself better with a team that has the same values you do.

#3: Leverage & Tax Benefits

With stocks, you can borrow shares of a stock from your broker. Say you have $1,000 to invest. You could invest in 10 shares of Company X stock that trades for $100 per share. But to increase leverage, you could invest the $1,000 in five options contracts. You’d then control 500 shares instead of just 10. When it is time to sell, you will have to pay back your broker. Whatever’s left is your profit, minus your initial investment. That profit is now subject to short-term or long-term capital gains. You’ll pay short-term capital gains tax based on your ordinary income. And if you have a long-term gain, you’ll pay approximately 15% tax.

In multifamily investing, you can use leverage as well. You don’t have to come up with 100% of the equity, and you can leverage up to 75-82% of the cost of the asset. In our last purchase, our asset was leverage at 82% with 4.1% interest! During the hold period, the general partnership team will have a cost segregation study completed. This study makes it so some investors pay little to no taxes when profit is generated. Profits are normally distributed during the hold period, due to the cash flow, and at the time of sale. Cost segregation studies examine all of the various parts in the property, including the doors, roofs, floors — in fact, just about everything. Most properties depreciate over 27.5 years, but with cost segregation, assets can be depreciated a lot faster, and you can use that depreciation to offset income.

Another way to defer taxes is to participate in a 1031 exchange. In a 1031 exchange, you can defer paying capital gains taxes on the sale as long as another “like-kind property” is purchased with the profits from the sale of the property and the purchase is completed within 180 days.

#4: Return on Impact

Something Michael and I constantly thinking about is Return on Impact. The main reason we choose real estate over the stock market is that we want to change the lives of the families in the apartment communities. We want to be able to help them with one of their basic needs, shelter. At some point, we decided that we wanted to use our wealth as a tool to serve others and we leverage real estate investing to do that.

Summary

Spend some time truly thinking about your options and deciding how to best allocate your wealth. Our personal experience is that over time, building wealth by investing in multifamily properties is much better than playing the stock market. Also, please hire someone if you do not feel you have the knowledge or expertise. At Adventurous Real Estate Investors, we can offer you opportunities but we cannot give advice on how to best allocate your wealth. Please reach out if you want to discuss those opportunities or have any questions.

Until next time…

Explore more. Adventure awaits.

Disclaimer: The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.