In today’s investment world there is a prevalence of online resources, and you don’t have to spend much time searching Google or YouTube before you find a strong opinion on where you should put your money. Whether you come across a stock market sensei or a real estate guru there’s a good chance you’ll become inundated with information in short order. As a professional investor who owns/advises on the management of hundreds of multifamily residences and also manages an investment strategy that holds 9-figures in public equities on behalf of high-net worth individuals and small businesses, I have observed firsthand the similarities and more importantly, the dissimilarities of these assets classes.
In this article I will share with you the main components of each asset class. My hope is that clarifying these components will demystify their utility as investment vehicles and make your decision of choosing an investment, or a professional investor to do it for you, a little bit easier.
Components to Consider in an Investment:
Control — The ability of a management team to influence the performance and value of an asset.
This is a key component of investing, and in some ways encompasses all other components of putting your money to work. No investment can provide certainty but the level to which you can control an investment after deploying capital is directly correlated with the conviction an investor will have throughout the investment process and ultimately determine how satisfied the investor is with the decision they’ve made. In the stock market, the control an investor has is in the structure of a portfolio. The level of diversification or concentration is what is under the investment advisor’s discretion. The underlying assumption is that the management teams of the companies within that portfolio are trustworthy and will execute on the plan they present. In the real estate world, the property is the entirety of the portfolio but the investment operator has total control of that property. Your trust is in that operator and the plan s/he has set forth. A common analogy used is that in the stock market you’re betting on horses, in real estate your betting on the jockey.
Liquidity — the ease with which as asset can be converted to ready cash for spending or consumption.
Many investors, especially people new to the concept of investing enjoy this aspect of the stock market. The mindset is that they can easily access the capital they’ve invested if they need it for other uses or no longer believe in the investment they’ve made. Given the 1-to-1 transaction necessary to execute on a sale of real property and the costs to broker that deal, it is not nearly as liquid as stock market investments. That said, I always advise clients not to invest capital they foresee needing in the near term (this will be discussed further when addressing the Time Horizon component). With regards to a change of investment thesis, successful investors tend to have high conviction on investments they analyze and execute. If you find yourself constantly buying and selling your equity positions, you should consider spending more time learning about the companies you are investing in, in order to solidify your investment thesis. The lack of liquidity in real estate compels you to do your homework on your investments or at least trust that the sponsor investing on your behalf has. This lack of liquidity also deters investors from unwisely selling well-preforming investment property resulting in the vast majority of wealthy people being property owners.
Volatility — the measurement of how large an asset’s price swings around the mean price.
Volatility is one of the more interesting components of stock market investing because some investors seek it out while others avoid it at all costs. Those investors that are drawn towards volatile investments enjoy them because they seek to take advantage of the large periodic swings of an asset price in the short term. For those with minimal aversion to risk, the possibility of catching an investment trend and selling at the right moment for a profit is appealing. The likelihood of success with this investment strategy has historically been correlated with the volatility of the underlying asset. Most wealth built in investing has been created by holding assets for the long-term both with real property and in the stock market. If you maintain the conviction to hold your position your likelihood of success increases. With real estate that conviction is fortified by being able to communicate regularly with your investment sponsor, in the stock market it’s supported by coverage of the stock and trust in the management team.
Time Horizon — the total length of time an investor expects to hold a security or portfolio.
Another way you can solidify your conviction and compel yourself (or investment sponsor) to do proper due diligence on an investment prospect is to set a time horizon or projected hold period for an investment. This phenomenon is much more prevalent in the real estate investment space because of the control a management team has over an investment. In my observation an operator in a real estate investment has much more control over the performance, and ultimately the value, of a property than the management team of a publicly traded company. Economic factors outside the control of management often effect public companies that have broad customer bases and global reach whereas real property deals with more localized factors that are relatively easier to predict. With that being the case the real estate operator can tell investors with relatively greater certainty not only how much the asset will be worth, but when in the future that will occur. This gives the real estate investor the ability to set a time horizon for the investment.
Which is the better investment?
The anticlimactic answer to the question of which of these two investment vehicles is better?…
Neither investment vehicles is superior to the other and the listed components above wouldn’t be considered by many any exhaustive list of factors to consider when making an investment decision. One would also want to consider sub-components such as tax implications, potential cashflow, deal structure and other factors that play a role in the decision-making process. Ultimately the decision is one of suitability. No investor operates in a vacuum. You must consider your active income, risk tolerance, short & long term capital needs and the needs of your loved ones when making the decision as well. My advice to you would be to reach out to someone knowledgeable about both asset classes AND your personal needs and have a substantive conversation with them. If you don’t already have someone in your network that fits the description, feel free to reach out to me. I thoroughly enjoy discussing the topic and guiding people in their investment journey.