Investing in Stocks vs. Multifamily Real Estate

Stocks and real estate are two of the most common types of passive investing. Most people invest in stocks as they typically have fewer barriers to entry. In this blog, we will outline the positives and negatives of investing in each one. We will also outline how investing in real estate can be comparable to investing in stocks and better.

Taxes

Profits generated from stocks are taxed as either short-term or long-term capital gains. Short-term gains occur when you cash out in less than a year, and long-term gains happen when you cash out after a year. The tax rate for short-term gains are based on your ordinary income. With stocks, there aren’t significant tax benefits.

 Profits from investing in multifamily real estate generally come in one of two forms.

1.      Rent collected during the ownership of the property

2.      Income that is collected when the property is sold

 Both of these avenues offer significant opportunities to save on taxes and/or defer taxes.

When selling a property, you can defer paying taxes on the gains by completing a 1031 exchange. A 1031 exchange occurs when you use the profits from selling one property to purchase a new property. It must be a like-kind property, and the new property's close must occur within 180 days. In this scenario, you no taxes on your gains.

The tax code allows for rental income to depreciate over 27.5 years to offset income. You can also do a cost segregation study (which we do on our buildings). Cost segregation analyzes all the property systems, such as electrical, plumbing, and roofing. Depending on these systems' condition, the cost segregation will allow you to accelerate your depreciation to 5, 7, or 15 years versus the standard 27.5 years. Therefore, you offset more income in a shorter amount of time, significantly reducing your tax liability. Please keep in mind that if you sell the property and don't do a 1031 exchange, the depreciation will be recaptured. Learn more about this by downloading The Tax Stack Strategy

Liquidity

Stocks are generally more liquid than real estate. If you suddenly need your investment back, you can sell your stock within a day or so. Selling real estate can be a process as you need to get the property ready for a market, list and market the property, and complete the escrow process.

Multifamily syndications work a bit differently. As a passive investor in syndication, you are buying shares of an LLC that owns the property. Therefore, during the investment, you can sell your shares like a stock. As long as the general partner allows it and that you can find a capable buyer.

Leverage

When purchasing Multifamily property, you can typically take out a loan of up to 75-80% of the purchase price. In the current market, we see rates in the 3-4% range. On a recent JB2 Investments purchase, we even locked in a rate of 2.5%! These are historically low rates.

Leverage is not as common in stocks. However, it is possible to buy stocks on margin. This is where brokers will loan you up to 50% on the stocks being purchased. Buying stocks on margin is much less common than real estate loans due to these loans' riskiness.

Returns

The average return historically in stocks has been noted to be in the 7-8% range. You will have great years and also have negative years. You are making this a more volatile investment. On many multifamily real estate investments, we have seen a 15% IRR (Internal Rate of Return). Considering the tax benefits, this return is much higher than the returns on stocks on which you will pay a large chunk of taxes.

To conclude, multifamily real estate investing has much more advantages compared to stocks. The only advantage in stocks that we see, is the liquidity aspect. Multifamily offers more tax advantages, better opportunities for leverage, and a higher return rate on your investment. Please keep in mind that these returns we quoted for multifamily real estate investments do not include the tax savings.

Therefore, making the return even higher when comparing to investments where you will be paying your standard taxes. What we like about Multifamily syndications for investors is that they are easier to invest into then actually buying a property. Avoiding the large down payment, escrow process, finding the property, and managing it. We are currently working on purchasing more assets. If you would like to join our tribe please join the club to get all the info on our latest offering!