We will be looking at the tax benefits of real estate investing next. T.S. Elliot said April is the cruelest month.
7 Risks you Must Know Before Investing in Stocks vs Real Estate
I was having brunch with a colleague the other day. She’s a successful marketing executive and is ready to start a family and wants to plan for the future. She asked me point-blank,
“Delphine – if you had to choose stocks or real estate, which would it be?”
Easy question, right?
I congratulated her on understanding intuitively that there are risks inherent in both methods, stocks and real estate.
Investing in Stocks vs Real Estate?
Investing in Stocks vs Real Estate: What is in common? They both involve risks and rewards. - Photo by Canva
With so many options out there to invest your money, it can be difficult to determine which one, how much, and when to go for it that you may get cold feet and abandon the idea of becoming a passive investor or buying an investment property altogether.
I want my marketing exec friend - and you - to know the risks. However, this is not by any means “abandon hope all ye who enter here.” This article is intended to nudge you, as well as my friend closer to making a decision on the perfect investment opportunities for you and your comfort level.
Let’s look at 7 of the risks for investing in real estate and stocks.
Risk #1: Stock Market is Volatile
One of the most well-known risks to owning stocks is that stocks can be volatile. Stock prices can experience daily fluctuations. A stock’s value may increase or decrease by varying amounts, or ranges; it’s this range that we call “volatility.”
As you can imagine, volatility is a definite risk. However, some stocks or more volatile than others. A particular stock that varies very little in terms of fluctuations is considered to have low volatility, while a stock price that frequently changes at the drop of a hat, from low-lows to high-highs and everything in-between is considered to have high volatility.
Risk #2: Emotions May Run High
The stock market, by nature, is volatile. - Photo by Pixabay
When investing in stocks, it can be very tempting at times to let your emotions run away from you. Known as “emotional investing,” it can be easy to give way to impulsive buying, particularly if the individual investor is closely monitoring the ups and downs each day, or heaven forbid – happens to glance at the latest doomsday DJIA article online.
There are lots of different ways you can participate in the stock market and minimize your risk to volatility and impulsive buying. One such way to manage your volatility exposure is dollar cost averaging. With dollar cost averaging, you purchase stocks at regular intervals to minimize the risk of buying all your stocks at a particularly high price.
Risk #3: No Such Thing as “Perfect” Timing
Buy low, sell high, right? That sure sounds easy, but it’s rarely as intuitive as it seems. To time the market, that is to buy low and sell high, one would need a crystal ball. Trying to time the market is inherently risky and can make investing in stocks almost a near gambling venture if you’re not careful.
Are you beginning to see a pattern here in terms of risks? Investing in stocks requires a strong stomach and a firm belief in sticking with your plan.
Risk #4: Stock Market is Stressful
Remember that pesky Risk #1, stock market volatility? Yep, well that can be a big contributor to stressed out and frazzled nerves. Although the stock market has averaged 7% since 1900, most of us are in the market for a distinctly shorter amount of time. Moreover, in any given year, the stock market is four times more likely to be less than half or more than double its long-term average. Spooky, yes. Which is why investing in stocks can be risky. Returns are unpredictable. Can you stay in the game when the arrow takes a dive?
Now, Real Estate.
Risk #5: Stocks are Stressful, but so is Being a Landlord!
Stocks are Stressful, but so is Being a Landlord! - Photo by Pixabay
If you’ve never seen the ‘90s flick “Pacific Heights” and you’re contemplating becoming a landlord either in residential or value-add commercial real estate, then see this movie. Only then will you appreciate the risk you take on when you rent out your real estate property. Not only are there the expected hassles, such as maintenance, screening tenants, and collecting rent, but there are the unhappy headaches that can happen if you have a terrible tenant rent your unit.
Risk #6: Lack of Liquidity in Real Estate
Stocks are fairly liquid. For example, if I read a report on lower-than-expected earnings or an issue with the CEO for one of the stocks in my portfolio, I could sell my shares that day. In contrast, if there is some upsetting news about the real estate market where I own a property, such as a company that employs most of the local workers shutting its doors, then I’m in more of a bind.
I can’t simply sell my property and be done with it. Even if I decided to sell my property, I’d have to list it, show it to potential buyers, negotiate a price, and allow time for the close, presuming I find a buyer immediately. Or, I may have to hold onto the property for longer than I’d like before recouping some equity and selling it down the line.
Although my real estate investments have fared far better than my stock portfolio (7% on average for stocks vs. 18% for real estate), this lack of liquidity in real estate is a risk worth mentioning, particularly for real estate investors who may be retiring soon and are relying on the rental property income or appreciation and equity at the sale for your retirement.
Caveat: if you are a passive investor participating in a real estate syndication, then your real estate investment is easier to liquidate. Read my article on real estate syndication and how you can reap the rewards of real estate investing without the barriers of entry that keep many investors out, such as being a landlord.
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Risk #7: Large Down Payment on a House may be Risky
Multifamily investments typically need higher down payments than owner-occupant properties. - Photo by Canva
Granted, putting down 20% for a down payment on a home is considered standard and comes with some benefits. It gives you a smaller mortgage loan balance, a lower mortgage rate, and a reduced mortgage insurance payment. However, there are risks. A large down payment can take many potential buyers years to save up that kind of money before they buy a home. This delay can cause them to miss out on plenty of other investment properties and build real wealth.
Perhaps the riskiest element to a large down payment is that you have less short-term flexibility. Something unexpected always happens when you own a home, that’s the nature of the beast. New home buyers must have a robust emergency fund they can tap to handle home maintenance and repairs. If it was a struggle to save 20% for that down payment, outright home ownership could be a potentially risky venture.
However, there are always other options to take advantage of the real estate marketing, such as real estate syndication, apartment syndication, and other passive real estate investing strategies.
My friend is still mulling over the risks and options (as well as the bloody mary’s we enjoyed at brunch). What about you, have learning these risks helped you come to a decision? If so, share it in the comments!
“Don’t look for the needle in the haystack. Just buy the haystack.” – John Bogle
Delphine Nguyen, Investor
Delphine Nguyen is a real estate investor and a licensed real estate broker in Illinois. She learned to be successful from a variety teachers, including her own mistakes. Real estate investing is her passion. Helping others to achieve their goals is another passion that she has. She does what she knows best, therefore, her focus is solely on multifamily and co-living investment types.
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Here’s What Investing $50K Annually as a Passive Real Estate Investor Would Look Like in 5-10 Years.
What’s your favorite number? Ask any passive real estate investor, and they’ll likely say $50,000.