When speaking with passive investors about participating in one of my syndication deals, I am often asked, “Is a multifamily investment better than buying stocks?” I’ll be honest: There is no easy answer to that question. Each investment vehicle has its pros and cons, and both can help build wealth over time. Frankly, it’s all about the individual investment.
I always like to share some information with potential investors on the advantages and downsides of each one. So here they are for you to consider. Let’s start with some background on real estate versus the stock market:
Real Estate
If you look at the historical investment in real estate, it has been an excellent hedge against inflation. Most everyone is familiar with real estate, unlike the learning curve involved in investing in stocks. Real estate is also tangible — you can look at it and visit your investment if you like. Moreover, you can reinvest your return by either paying down the mortgage or by buying additional properties. It’s all about cash flow and the options that it provides.
Stocks
When it comes to investing in the stock market, you could go back in time over 100 years and despite the crashes, corrections and the ups and downs of the market, buying stocks and reinvesting the dividends is one of the ways to build wealth. On the other side, stock prices and values can fluctuate wildly. Also, most investors use dividends as income rather than reinvesting them, diminishing their overall return.
Choosing between real estate and the stock market depends on what you’re comfortable with in terms of the level of risk you’re willing to take, but I am a firm believer in real estate over investing in the stock market. Real estate is such a unique investment vehicle, with clear advantages over any other avenue out there. Here’s why.
1. Enjoy Income Immediately
Let’s look at stock dividends. Most dividend yields hover around 4% or even less on an annual basis. While that number is certainly better than the current savings account rate of 2%, it’s nothing to write home about. Sure, the stock price could increase over time, but until you sell it that money isn’t realized.
However, when you invest in a multifamily deal, you start receiving income almost right away. Investors are getting distribution checks every month, since the property is making money every month (mainly from tenants’ rents). As a sponsor, I wouldn’t go near a deal that had a 4% return, and neither would my passive investors — not when you consider that we’re looking at an average of 7% cash-on-cash return. Since multifamily return is realized almost immediately, this is a superior investment compared to the stock market. As a bonus, many properties may continue to appreciate in addition to the regular returns.
2. Easy Financing
When buying a multifamily property, you can secure a loan for the purchase at a very low interest rate. In fact, rates are now hovering at historic lows. This is simply not available when buying stocks. In addition, you can refinance the property in order to pull out equity tax-free.
3. Depreciation And Capital Expenditures
Unlike the stock market where you pay capital gains on profits, multifamily properties let you pay little to no tax on capital gains by reducing depreciation and capital expenditures (called CapEx) from the property’s income. This can result in huge profits for investors. CapEx are funds that can be used to acquire, upgrade and maintain a property.
4. Add Value To Your Purchase
Value-add multifamily properties are those you purchase with the intent of making needed repairs or upgrades. Not every sponsor or investor has the ability to do this, but it’s one of the best reasons to consider purchasing a particular property. Adding value helps to justify rent increases, which adds income to your return. It also helps with the property’s appreciation over time.
There are many different ways to add value, from exterior improvements like landscaping and painting, to complete unit upgrades like new kitchens and baths. Adding new technology is another draw for renters, and adding amenities like in-unit washers and dryers is another way to increase rents.
Needless to say, purchasing stocks does not allow you to add any value to it, since you have no control over the company’s management and strategy.
5. Gain Leverage
If you purchase stock on margin, you’ll need about $50,000 in order to buy $100,000 worth of shares. The problem comes in if the stock loses value, which means you’ll have to come up with more cash or the stock will be sold to cover your position.
The beauty of investing in real estate is that you can participate with far less money than stocks. If the property’s value drops, for example, the only time it will be a problem is when the property is actually sold. However, with real estate, you can always buy and hold the property until such time that the value increases.
Summary
The advantages of purchasing real estate over stocks are many. Historically, real estate has helped many people build wealth over time. It’s no surprise, as you can acquire multifamily property with easy financing and at a very low interest rate. Plus, unlike the stock market, you can pay little to no tax on capital gains by reducing your depreciation and CapEx from the property’s income. If you invest with a sponsor who has a successful real estate investment track record, there’s no reason why that shouldn’t continue. Remember, not everyone will want to jump into the fray of buying the latest “hot” IPO in the stock market, but people will always need a place to live. That’s what makes real estate a sound investment.