Investment risk, defined as the probability of losses relative to expected returns, is a crucial factor for investors. Despite common warnings like “Past performance is no guarantee of future results,” understanding and managing risks are integral to successful investing. This article delves into the risks associated with stocks and real estate, explores the four basic risks of investing, discusses how commercial multifamily real estate investments mitigate these risks, and highlights why the stock market can be riskier than real estate.
The Four Basic Risks of Investing
Risk #1 – Market Correction
Stock Market: A prevalent fear among investors is a sudden market correction. During a downturn, quick exits by investors can solidify losses, challenging their trust in the market’s historical bounce back.
Multifamily Real Estate Investments: Recessions can benefit multifamily real estate, especially workforce housing. In tough times, demand for affordable housing rises as people downgrade from luxury apartments. This dynamic lowers the risk associated with market corrections.
Risk #2 – Competition
Stock Market: Rapid technological advancements and changing consumer trends can introduce new competitors, impacting investment returns.
Multifamily Real Estate Investments: Limited space, zoning, and permits in real estate constrain new competitors. New apartments are typically in the luxury tier, minimizing competition for well-maintained class B and C apartment buildings.
Risk #3 – Consumer Behavior
Stock Market: Consumer behavior changes can significantly affect companies and their products. Unpredictable shifts in popularity, as seen with Blockbuster, can lead to investment stagnation.
Multifamily Real Estate Investments: Investing in real estate addresses a fundamental human need—shelter. The constant demand for housing provides stability, unlike products susceptible to changing consumer preferences.
Risk #4 – Lack of Control and Transparency
Stock Market: Stock investors lack control and transparency. Market fluctuations create a feeling of helplessness, and investors may feel detached from the decision-making process.
Multifamily Real Estate Investments: Real estate syndications offer transparency and control. Investors know the deal sponsors, can directly engage with them, and benefit from protective measures like reserves and insurance, fostering ongoing transparency.
Conclusion
While there’s no one-size-fits-all investment strategy, the crucial step is to invest wisely. Acknowledge the risks, understand them, and take informed actions. Money sitting in a savings account loses value due to inflation, making strategic investments essential. Be cautious of “Risk-Free” or “Guaranteed” investments, as understanding and managing risks are inherent to successful investing.
