What Gives a Better ROI: Multifamily Real Estate or the Stock Market?

by | Sep 20, 2022 | Accredited Investor, BAM Blog, Multifamily Syndication, Real Estate Investing | 0 comments

Stocks and real estate are two very different types of investments, and investors should choose an investment style that suits their financial situation, goals, investment style, and risk tolerance.

A lot of people go for stock investments because investing in the stock market tends to take less time and money compared to real estate investments. However, more experienced investors realize the value of owning real estate, and so they put aside a substantial amount of money to acquire real estate properties.

Both real estate investments and stock investments have their pros and cons, which we will discuss later on.

If you are buying stocks, it means you are purchasing a small piece of that company. Investors can make money through value appreciation as the company’s stock increases. Another way to earn with stock investments is through dividends.

On the other hand, when an investor buys real estate, they acquire a physical land or property. They can generate income by collecting rent from rental properties, and this can give them a steady income stream. As the property’s value increases, investors can also make income through value appreciation.

As a tangible asset, real estate investments like rental properties appeal to many prospective investors. It even comes with the extra benefit of diversification.

Here we will explore the advantages and disadvantages of both stock investments and real estate investments, so investors can choose which one to put their money into, based on which one is more profitable in the long run.

What’s the Best Place for Positive Returns? Stock Market or Multifamily Housing

Every investor wants positive returns. So most of them do their research and put in their due diligence before investing in real estate or the stock market.

Stocks investing makes sense if you want a positive return on investment (ROI). However, investing in stock markets independently can be quite unpredictable. In some cases, the ROI is lower than expected. [1]

Real estate investments, on the other hand, are tangible but it’s not something that you can easily get into. Investors cannot just casually purchase real estate and then expect immediate returns. It’s also not easily liquidated. Whether you are a home flipper or a landlord, real estate investing requires a lot of preparation and research.

So despite having the potential to be profitable for investors, both real estate and the stock market have their risks. Investors therefore need to consider a lot more factors than just potential ROI. They also need to think about the current market conditions, their financial situation, their investment goals, etc.

In fact, comparing real estate investments and the stock market is like comparing apples to oranges. They have very distinct values, benefits, and returns. The only notable similarity is that both real estate and stock investments can take a hit during recessions. [1]

In 2008, the banking cases and housing bubble brought a decline in value for real estate and stock market investors. But even so, stocks and real estate have very different risks.

This means investors should not compare real estate and stocks solely using market returns. Stocks are not a tangible asset and have no utility beyond serving as a store of value. However, it is a liquid security instrument. A real estate investment, meanwhile, serves actual tangible functions. People can live in rental properties and businesses can operate in commercial real estate properties. Purchasing property gives you value and a lot of residual income, although the property itself is not very liquid. [2]

With that in mind, we can now take a closer look at the benefits of each investment type. We will look at both asset classes and see how they can potentially generate income for investors.

Benefits of Investing in the Stock Market

Over the years, a lot of investors have been able to produce a significant profit through stock investing. Whether you are a beginner or more experienced, you can pave the way to financial freedom through smart investment choices. Stocks investing, despite being occasionally unpredictable, is the choice for many investors because it is easy to get into. And some of them have even achieved financial independence through it.

Despite the unpredictable nature of the stock market, investors recognize that owning stock and being able to sell stocks comes with several major benefits that other investments do not offer. [2]

For example, you cannot just buy property on a whim and expect to make a profit. You have to think about your personal capital, your risk tolerance, the property value, the location of the real estate investment property, etc. Not to mention that real estate properties are very expensive.

Meanwhile, it is much easier to buy stocks. Investors can enjoy smooth and continuous transactions while essentially getting an ownership stake in a specific company. Buying stocks involves the help of a financial planner or broker, but it can also be done online now. It takes just a few minutes to create an account and start trading. In this regard, stocks make for a quicker investment.

As a stock owner, you become a shareholder for that particular company, playing a vital role in the company’s decisions. Shareholders even have the power to vote in decisions taken by the company. [2]

Stock investments also provide diversification for investors who want to put their money into multiple investment types. The stock markets change their value independently of other investments like real estate, mutual funds, and bonds. Thanks to its diversification, and the opportunity to forecast losses, investors can avoid an overly conservative investment style. [2]

Being a stock owner also gives you dividend benefits. This is an additional income given by the company to its investors on a yearly basis. Even if the stock loses its value the dividend payments will arrive. Investors can use their dividend income to build up their retirement fund or pay for another investment, etc. [2]

Of course, if the company’s stock increases in value, the investors have the chance to earn more money. These are investment gains that can help investors build their wealth over time. Many investors put money into different stocks to leverage growth in multiple sectors. This is how they earn a huge profit.

Finally, stock investments are also highly liquid. They are easily converted into cash, which means funds are not tied to a certain property. There are always multiple buyers and sellers looking at a single stock, which means it is easy to sell stocks as needed.

Unlike real estate, stocks are great for short term capital gains because they provide a higher return within a short period of time. Investors have the ability to invest in smaller accounts by purchasing stocks of small-cap or mid-cap companies in smaller units. [2]

The only thing investors should be wary of is the volatile nature of the stock market. This means it is a riskier investment, especially if you panic sell. If you sell stocks, you can get a capital gains tax, which makes your tax burden heavier. Your holdings may not grow as much unless you have a lot of money in the market. [1]

Benefits of Multifamily Real Estate Investments

The real estate market supports many different investment strategies. Investors can purchase rental properties and enjoy a steady income stream from their tenants. Some purchase real estate for the purpose of flipping it and reselling at a higher rate.

There are different types of real estate that you can invest in, when it comes to this asset class. There are commercial real estate properties, residential real estate investment properties, single family homes, multifamily properties—you can even acquire physical land.

Residential real estate is one of the most reliable sources of income in the real estate market. When you buy a multifamily property, you can enjoy low vacancy rates and higher cash flow because there are multiple rentable units.

A multifamily property is a real estate property that has more than one unit. This means more than one family can live in the same building or property. If you want long term capital gains where you have control over a tangible asset, investing in real estate is a good idea. In this regard, multifamily real estate is the better investment compared to stocks investing.

An apartment complex is a sound investment for investors who want a reliable source of passive income. Multifamily housing is viewed as the best and most affordable option when it comes to housing, and therefore there is always demand for it. [3]

Multifamily real estate investors pay property taxes and capital gains taxes, but multifamily real estate also comes with several tax benefits. The government incentivizes investors for providing housing for residents of any given city. They reward them with tax breaks for their effort. Tax incentives and tax breaks add revenues to the investor depending on the type of property they are running. [3]

There is no doubt that multifamily real estate plays a vital role in the real estate industry. They are highly valued among investors who want to expand their real estate portfolio. The multiple number of units, plus the high demand for housing ensures lower vacancy rates unlike real estate properties with single units. When single family real estate properties become vacant, their cash flow comes to a complete halt.

Another reason to go for a multifamily real estate property over a single family home is the fact that you can manage a 12-unit apartment more easily than 12 separate real estate properties in different locations. You also have to secure only one loan for the multifamily property, rather than multiple loans for each single family unit. This makes it easier for the investor to build their portfolio faster. This type of investment can help you build your investment portfolio faster. With multifamily real estate, you can boost your portfolio quickly. [3]

This is why multifamily real estate is the preferred investment vehicle. The only problem is that these real estate properties are also harder to acquire for lone investors because of their high cost of entry. So while it can definitely increase your cash flow, you also have to invest a significantly larger capital to acquire these larger multifamily properties.

Once you do secure a multifamily real estate investment property, the steady cash flow will make your investment worthwhile. Invest in multiple rental units and you can enjoy a real estate investment with a high appreciation rate and lower investment risk. [3]

Unlike stocks, you do not get to enjoy immediate returns on your multifamily property, but they still hold their value, and this value increases over time. With multifamily real estate, the appreciation rate is higher, but take note that it is not guaranteed.

If you want to make sure that your property will appreciate in value, you have to keep it well-maintained. This means investing in repairs and maintenance. You can also have it renovated when necessary. This allows you to maintain the value of your property, as well as its rental price.

Real estate investors are also able to gain leverage on their capital and take advantage of tax benefits. Despite not being as liquid as the stock market, real estate provides passive income and high appreciation potential, which are valuable for investors in the long term.

Investors should be careful about the amount of money they put into real estate investments, however. It is important to be able to secure a down payment if you are not making all-cash deals. [3]

What is Multifamily Syndication?

Comparing stocks and real estate investments is like comparing apples to oranges. They are very different from one another, and the choice should ultimately depend on your financial situation, personal goals, risk tolerance, and many other factors. If you want passive income with a tangible asset that appreciates over the long term, investing in real estate may be the right choice for you, particularly multifamily real estate.

If you want more short term income, try the stock market. Most investors will try both of these options anyway for the sake of diversification.

Some investors who want to try investing in multifamily real estate are intimidated by the idea of property management. Having no experience as a landlord can be tricky for first time investors in multifamily real estate.

You have to deal with tenants and their concerns, emergencies, maintenance, property taxes, repairs, vacancies, and rent collection, among other things. But because multifamily real estate tends to generate a steady cash flow, a lot of investors opt to hire a property manager to take care of these day to day necessities and keep the apartment complex running on their behalf. The cash flow justifies hiring a property management company.

Another approach you can take, especially if you are an accredited investor, is multifamily syndication.

Multifamily syndication is a real estate deal that has multiple investors pooling their resources to fund a single property. A syndicator, also known as the primary sponsor or general partner (GP) locates the deal and coordinates the funding. They then look for investors to participate in this passive investment strategy. These investors will provide most of the capital needed to purchase the multifamily real estate. [4]

The best part is that this is a truly passive investment strategy. Even property management will be handled by the sponsor once the syndication deal is in place. They may take care of the property themselves or hire a property manager. Either way, the investors don’t need to worry about the real estate property.

A syndication deal can be done with any real estate property. But because of their strong cash flow, reduced risk of vacancies, and the fact that they are normally too difficult to acquire for lone investors, multifamily syndication is the most popular.

Multifamily syndication solves two of the biggest problems for real estate investors trying to get into multifamily investing: the high barrier to entry and property management.

Because there are multiple investors funding the multifamily property, you don’t have to secure a huge down payment. You can even avoid property management fees. In return, you get monthly cash flow from the rental revenue and a portion of the equity once the deal is done. [4]

To form a syndication deal, a limited liability company (LLC) or limited partnership (LP) is formed. Limited partners are the passive investors while the sponsor serves as the general partner or manager. [4]

If you want to try multifamily investing but do not want to purchase an entire apartment building all on your own, try multifamily syndication.

Work with BAM Capital for Multifamily Syndication

You can engage in multifamily investing without the headache of becoming a landlord and managing tenants. Work with BAM Capital.

BAM Capital is an Indianapolis-based syndicator with a strong Midwest focus, prioritizing multifamily real estate properties that are Class A, A-, and B++. This syndicator uses an award-winning multifamily investment strategy that allows investors to grow their wealth through syndication. [5]

BAM Capital mitigates investor risk and uses a vertical integration strategy to create forced appreciation. They have a consistent track record of providing a safe and passive investment for their investors.

BAM Capital negotiates the purchasing and financing of high quality multifamily properties on behalf of passive investors. Their vertical integration strategy has worked wonders for the company so far. In fact, BAM Capital currently has $700 million AUM and 5,000 units. [5]

Accredited investors can schedule a call with BAM Capital and invest today.