People may or may not know a little bit about the law of risk and return, but it is well-known in the investment world and often talked about related to stocks, bonds, mutual funds, and those kinds of typical investments that all of us are aware of and may be investing in. What people don’t often know about is the risk vs return in multifamily investing.
Stocks and bonds may offer higher return. Higher risk often equals higher return, but in the real estate world, that’s not necessarily the case.
We could assume that if you are considering risk, you typically think that higher risk means you’re going to have a higher return, and that’s not necessarily the case. Risk vs return in multifamily investing is worth reviewing. We reviewed a 20-year risk-return profile put out publicly by Reuters and found, a higher risk does not always mean a higher return when it comes to, guess what, core commercial real estate.
What the Reuters profile pointed out is that an investment in commercial real estate, may yield about a 9% return for about a 5% risk. That is a ballpark with no guaranteed amount of return, but still worth considering. Even ballpark is a pretty big difference from small cap stocks, which offers around an 8% return, but with taking a 25% risk.
Your risk and return balance with commercial real estate is much better than with higher risk stocks and bonds, so that’s something to really think about.
When thinking about investing money, most people think about investing in stocks and bonds through a financial planner. A typical investment may offer up to a 2% return and you also must pay fees to your financial planner.
Those higher high-risk investments could maybe get an 8% return, but what if you lose it all? You think about 2% return on investment for around $9100 is only about $182 earned on an annualized return. You get 182 bucks after a year, so that’s not really all that much. At 10% return, you would be looking at gaining about $1,984. That’s a little bit better for a annualized return. You make an extra almost $2,000, not too bad. BUT 18% return is going to give you $21,270 return on your money, and that is something that you can get through passive real estate investing. You can’t get that kind of annualized return through stocks, bonds, mutual funds, without taking a huge risk, no matter what folks tell you.
So where are we going to put our money? We are looking to put my money into real estate and passively invest in real estate, particularly multifamily. That’s why we are here. We think that folks need to learn and understand this information so that you know where you’re putting your money and what your return is going to be.
If you want to learn more about investing in multifamily real estate, sign up for our newsletter below or give us a call. We love to talk to curious individuals who want to make their money work for them.