Stocks vs Multifamily Investments

When it comes to investing, information is the key. Making educated decisions about where to invest is of utmost importance. And with the evolution of investment opportunities, decision making becomes challenging. 

Stocks have been highly popular investment choice for a while now. However, investing in multifamily properties has been on the rise in recent years as well. Depending on the investment goals, both can be a great route to take. In fact, many investors have done both and simultaneously. Therefore, when it comes to determining the ultimate strategy, it is best to compare the two and see how they fare face to face. 

Liquidity

If things take a negative turn in a stock market, it is easy to sell the stock pretty much immediately. If the same scenario happens in the multifamily sector, one must wait at least few months. Disposing of a property is a lengthy process as it requires listing the property for sale, hosting buyer tours, and ultimately negotiating the price. So, stocks clearly have advantage in liquidity. 

However, if one is a passive investor in a multifamily property, it can be easier to manage. As a passive investor one simply buys shares in a limited liability corporation (LLC). After holding shares for a year, you are then able to sell them according to SEC regulations. It might not be as easy as selling stocks as you still need to look for buyers, but the exit strategy is less rigorous since you don’t have to deal with the other steps.    

Advantage: Stocks

Leverage

With stocks, you can leverage by purchasing stocks on margin. This means that you can buy a stock using 50% of your own funds and 50% with the borrowed cash from the broker on which you will pay interest. The minimum amount of a margin account is $2000. If the stock goes up there is no risk, but if it goes down you will be required to bring up your account to 50%. If you cannot put cash, the stock will be sold. So, the risk is high.

Multifamily also gives you the leverage option, except you do not have to provide 100% of the equity but rather 70%-80% of the asset cost. This way the risk is not as high, and you also have an option for low interest rates from the governmental agencies. 

Advantage: Multifamily

Tax Benefits

When selling stocks, as an investor you pay 100% of the capital gains, whether you held it long-term or short-term (one year).  Tax on those gains is around 15% for long-term and it’s based on your ordinary income for short-term. 

Selling multifamily properties requires you to pay very little tax, if any in certain case scenarios. This is due to two types of multifamily investments: profits during the hold period and profits from the sale of the property. 

During the hold period you are taxed on the income you make, which can be reduced based on your expenses such as maintenance repairs and capex work. And you can also count in the depreciation.

When selling the property, however, you have an option to buy another one within 180 days, which then voids out tax payments on the profits. This is known as 1031 exchange. 

Advantage: Multifamily