Stock Market VS Multi Famil Investing. Which is better?

The Best Kept Secret of Investing

by Casey Purvis

When it comes to investing, most people immediately think of the stock market.

Even though it is a well-known option, it can be a highly risky option.

The stock market is extremely volatile as we have seen in the last 10 years.

Some have watched the value of their 401Ks shoot up - especially in these last 3 years. On the other hand, the market also experienced huge drops and others lost 20% to 30% of their life savings in very short periods.

That level of volatility can be unnerving.

Another pitfall of the stock market is that investing directly can be extremely confusing unless you are willing to spend lots of time studying the markets, doing a proper analysis of the various companies on the market, and learning how to trade.

What most people don’t realize is that real estate - especially multi-family real estate - can be a great alternative to investing in stocks by providing lower risk, yielding higher returns, and offering greater diversification. Not to mention huge tax benefits.

Historically the average return on stock market investments since the 1950s is 7%, whereas typical returns on multifamily investment range between 16% and 25%. Sometimes higher.

But purchasing multifamily real estate can also be very confusing, again without the time to truly learn your market, doing deep market analysis, and finding the right property. Then of course there is the huge cost of owning an apartment complex along with the hassles of property management.

Ready for some good news?

It is possible to have all the benefits of owning multi-family real estate, (High returns, low risk, and passive income) without all the hassles.

It is called “Investing in a Syndication.” A syndication is when a group of investors pool their assets together to purchase larger, more lucrative properties than each would be able to purchase on their own individually. This provides all the associated investors far better returns as well as opportunities.

There are two groups required to form the syndication. The first is the General Partners (the GP) which is the managing group that has the experience in all aspects of the process and handles the business end.

The second group is the Limited Partners (the LP). They are made up of smart individuals that want to invest passively but not deal with the business end of things. Typically syndications are put together to purchase multi-family assets like large apartment complexes. However, they do sometimes invest in other assets like mobile home parks, storage units, and other lucrative assets.

If you are a passive investor in a syndication, you would be buying shares in a limited liability corporation (LLC) that holds the property.

The company that puts together the syndication (the GP) takes care of all the footwork including the deep market analysis, finding and purchasing the right property, guaranteeing the loan, and putting together a business plan to make sure the property performs as a strong asset.

They will also eventually handle the sale of the property and distribute the profits to its investors, as well as distribute quarterly returns to investors during the hold of the property.

As for tax benefits, the advantage goes to multi-family investing.

With stock, when you sell shares of your stocks you have to pay the IRS for the capital gains tax made on the sale. No ifs ands or buts.

With multifamily properties, you pay very little or even zero tax on the profits.

The reason is there are 2 types of profits for multifamily investors.

1. The profits you earn as a shareholder (owner) of the property
2. The profits you earn from the final sale of the property.

During the hold of the property, there is income from the rents that can be offset from the expenses via upgrades, repairs, utilities, salaries. etc. These are considered normal expenses of running the business along with the depreciation of the property (which can be accelerated and passed through to the investors by a process called cost segregation).

And, when the property is sold, you can avoid paying the capital gains tax by reinvesting that money into another property that is equal to or higher than the cost of the original.

This is called a 1031 exchange.

After all, ultimately it’s not how much money you make, it’s how much you keep. We all want to keep the most amount of money, right?

For these reasons and many more, it is clear that investing in multi-family assets is typically a better investment than the stock market for most individuals, although it is always recommended to have a diverse portfolio.