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Commercial Real Investing Versus Investing in Stocks

Ted Karsch
3 min read

All investing involves some kind of risk. Generally speaking wise investors will try to ensure that their risk is outweighed by the potential gains. I say potential gains because there really is no such thing as a sure thing investment. And of course there are numerous pro and cons to each investment class.

What surprises me is how much time and energy individual investors allocate to determining the worthiness of a particular company’s stock and how little attention they give to the appropriateness of stocks in general for their overall portfolio. It seems like investing in common stocks is the de facto method of investing here in the United States without many giving the idea much thought or looking to alternative investment strategies such as commercial real estate. Meanwhile, the large banks and brokerage houses would not have it any other way. They make billions of dollars off their clients accounts as they trade themselves into oblivion.

So, let’s take a layman’s look at stocks as an investment class verse commercial real estate investments. In this case we will look at apartment buildings as a representative of commercial real estate because multifamily buildings are readily available for sale at attractive pricing in most major cities in the United States. Below are some common myths about both stock investing and apartment building investing.

Stock Investing Myth 1: “If you buy “blue chip” stocks at least you know that your money will be relatively safe and the stock price won’t go to zero.”

This is a huge misperception about investing in stocks. Many large companies every year close their doors with no money in the bank and no money on the balance sheets. Think about investors in Enron or Freddie Mac and Fannie May. When you buy a stock in any company you are actually risking every dime you have invested. So you better be sure that risk outweighs the gains.

Apartment Investing Myth 1: “Real estate investing is too many headaches. I don’t want to deal with tenants”

Sure, owning an apartment building will require some work but the rewards can come in a solid stream of monthly cash flow. Good luck getting serious cash flow from common stocks. Corporations always seem to find a way to spend their profits somehow and it usually isn’t by paying huge dividends. When you buy an apartment building, as opposed to stocks you are cutting out thousands of middlemen. When GE sells a light bulb for $1.50 in Iowa, that money has to pass through thousands of hands before you even stand a chance of seeing a return on your stock investment. Granted, GE sells a lot of light bulbs but you see my point.

Stock Investing Myth 2: “My stock portfolio will be there for me in retirement”

Not so fast. With inflation rising fast you will need to have a lot more stocks and cash on hand to retire and maintain your current standard of living. If you see a downturn in the stock market at the wrong time then you may actually have to go back to work. Or you may be a greeter at Walmart. Who knows? On the other hand, apartment buildings can supply a steady stream of cash flow that can actually rise during times of inflation.

Apartment Investing Myth 2: “You need a lot of money for the down payment to buy an apartment building.”

If you are purchasing an apartment building with a traditional bank loan you will need to produce a 20% down payment to purchase property. Also, banks will only lend money on an apartment building that is or will shortly become profitable. However, it is very common for apartment building buyers to acquire property from private owners who are ready to retire or move out of state and use some form of owner financing. Many sellers of apartment buildings are happy to hold the note on the property and avoid the tax implications of a cash sale.

There are many more myths associated with investing that just aren’t true when the facts and history are examined more closely. Many investors, in my opinion, could serve themselves very well by examining some of the myths that they hold about investing and money.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.