Apartment Syndications Versus the Stock Market

For today’s episode, we will be discussing the differences between Apartment Syndications and the Traditional Stock Market.

You know, there are a few key factors that will help with deicing who will win. 

We will go over the metrics to compare and contrast these asset types.

We will talk about these things…and more in another episode of Multifamily Investing Made Simple in under 10 minutes.

Tweetable Quotes:

"Generally speaking, in the apartment space where we hang out apartment buildings double in value every 10 years, kind of rough rule of thumb," - Dan Kreuger

"So I think it's safe to say that the real estate deals are going to have a little bit higher yield" - Dan Kreuger

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Transcript

Anthony Vicino: [00:00:14] Hello and welcome to multifamily investing made simple in Under Ten Minutes, this is the podcast where we take the complexity out of real estate investing so that you can take action. Today, I'm your host, Anthony Ticino of Invictus Capital, joined as always by my partner, Dan. And if I say his name long enough, maybe I don't need to come up with a middle name, Krueger has a gut that that works so good, so good.

Dan Kreuger: [00:00:38] That's probably your best nickname yet.

Anthony Vicino: [00:00:41] I thought that was original. And I strive for originality and everything that I do on this podcast, which is why today we're treading into some uncharted territories. Bear with us, dear listeners, because where we're going today, you have never seen us go before. Today, we're going to compare and contrast, market and contrast, compare and contrast the stock market against. Apartments, indications, I know we've never done anything like this before, but we're going to measure we're going to put them into the Thunderdome, we're going to compare and contrast them across five different metrics. Dan, what are our metrics going to be?

Dan Kreuger: [00:01:18] Number one, stability and or volatility, OK, how quickly to something bounce around and move all over the place? Number two, cash flow. To get it or No. Number three, appreciation. Does it go up in value over time? Number four, is it a hedge against inflation? Number five, tax benefits, right?

Anthony Vicino: [00:01:45] I like these, I like these. OK, so let's start at the top with stability or volatility. How much does a thing bounce around in general? Less stability. I helps me sleep better. I'm not going to say it's better to have no like to have high stability, but I certainly feel better knowing that the valuations in real estate don't tend to fluctuate as quickly as they do in the stock market. So let's break that down real quick. Why is that?

Dan Kreuger: [00:02:16] Well, real estate doesn't get marked to market every second of every day, like publicly traded equities, do, so stocks and bonds and all those publicly traded things you can find in your Schwab or Vanguard or Ameritrade account every second of every day. Well, I guess some things just are in regular trading hours. But for the sake of this conversation, which I say constantly, there has been marking to market. So that basically means that the value of the thing you own a share of Apple, whatever it is, is constantly being updated to the most recent price points in the market, whereas in real estate, that's not the case. If you buy a house and then, you know, there's theoretically a value that's that you could derive from that asset, but it doesn't really, truly get revalued again until you've got an appraisal or a sale or refinance or some kind of capital event. So you don't have to deal with these wild fluctuations up and down on a daily basis and watch your portfolio value change while you're sleeping.

Anthony Vicino: [00:03:13] Mm-hmm. And a large portion of that is that with real estate, it takes a long time for transactions to occur. And so prices, they don't move like lightning speeds with the stock market because it is such a liquid vehicle. You can get it in and out of it really quickly. That can also affect the prices really quickly. Whereas with real estate, if you want to sell an apartment building, it's really going to take you four to five months of preparation before you can even take it to market and then another two months until it closes. So it could take six months to sell a property. And so it's not like you can get it in and out of them very quickly. So liquidity, that's actually one of the dings against real estate and one of the pros for the stock market. But it is not one of the arbitrarily chosen metrics that we have decided to measure these against. We have decided on stability and that one is going to go firmly into the column of real estate.

Dan Kreuger: [00:04:04] And I will say that also with the whole liquidity thing, yes, it could be perceived as a negative that you can't just hop out on a whim. But I would also argue that that might be a positive because it prevents any kind of emotional transacting, whereas in the stock market, you might just be having a bad day and you could make a bad decision based on emotion because you have the ability to just click a button and be in or out real estate. It forces you to think about things in a more logical frame of mind.

Anthony Vicino: [00:04:30] I take that long.

Dan Kreuger: [00:04:32] You don't have the emotional component as you do.

Anthony Vicino: [00:04:35] You've got to really adapt that that that long term horizon. All right. Next up, cash flow. Who's winning? Who's winning this? One stock market is coming out swinging with its dividends.

Dan Kreuger: [00:04:44] Yes. Yeah. If you look at the average dividend yield of the S&P 500, not sure what it is right now, but you could Google it at any time and figure out what the average dividend yield is. But usually what you're going to find is about maybe three percent or so, something like that. So there are some stocks that pay dividends, not all of them. A lot of the really popular ones right now, like Facebook, Netflix, Amazon, the FANG stocks, those those those high flyers that everyone's freaking out about. A lot of those guys don't pay dividends. It's really going to be the old-school kind of blue-chip stocks that are very mature. And even those when they do pay a dividend, it's going to be rather low. So there are some stocks where you can get a dividend, but the yield isn't all that impressive. And you look at real estate, the comparison there would be to the quarterly cash flow distributions that you'd be seeing in your deal, those on average, I'd say if you're looking at value, see class or B minus value add type deals. Those are going to range from about five percent of the low end, up to over 10 percent. So I think it's safe to say that the real estate deals are going to have a little bit higher yield as far as that quarterly paycheck concerned.

Anthony Vicino: [00:05:49] And if you, dear listeners, could hear me typing in the background, I literally went to Google just this minute and typed an average stock market dividend yield. And we are looking at two points two, two percent. That's a beautiful number, two-point to two. Not a very big number. Quite so in terms of inflation. Yeah, in terms of yield. Not great. Not fantastic. And this doesn't take into consideration of the tax benefits, which we're going to get into in a later round. That's for the championship round. But for now, we're going to put this one cash flow. I'm going to put it into the category, into the column of real estate again. So we have to and I know I know guys, we're terribly biased. And this all seems like a rigged fight. But, hey, it's not our fault. The system's rigged real estate. It's just better. OK. OK, back to being unbiased. OK, now let's move on to appreciation.

Dan Kreuger: [00:06:36] This was kind of honestly, they both go up in value on average, if you look historically over a long enough time period, the average return from the S&P 500 is supposed to be about 10 to 12 percent or something like that. And so that's really, by and large, coming from the appreciation of share price. And like Anthony just mentioned, the dividend yields going to be pretty low. So that's a pretty minor component of those returns over the long term. So appreciation is definitely there on the stock market. That's pretty much all it's based on. The real estate's got some good appreciation, too. Generally speaking, in the apartment space where we hang out apartment buildings double in value every 10 years, kind of rough rule of thumb. And really that's going to be helped from inflation and money printing. And basically, everything the Fed's doing right now is really helping the story for real estate. So it's kind of a tie, in my opinion, between real estate in the stock market for appreciation. They both go up with time. They both respond positively to Jerome Powell and his printing press.

Anthony Vicino: [00:07:37] So, yeah, I'll call this one a draw, even though one of the things I really like about multifamily real estate is the ability to go in there and execute value ads, in which case the appreciation conversation gets really skewed. But let's not do that because that would really be unfair to the stock market because they're already getting really walloped here. So let's move on to inflation and specific. We're looking for an inflationary hedge. Where do we stand? Real estate versus apartments,

Dan Kreuger: [00:08:06] Real estate versus the stock market.

Anthony Vicino: [00:08:07] What did I say? Real estate versus an apartment. That doesn't make sense. People focus and focus on Pantani

Dan Kreuger: [00:08:14] Hedge against inflation. Right. So basically what you're looking for is if you've got cash and you're looking to put it somewhere where it's not going to lose value as Jerome is running this printing press and printing more dollars, how do real estate and stock market compare it in from this perspective? Again, I think it's pretty close to a tie here. I give it to real estate just because it's you can't really issue more shares or you can't really, you know, create more land, so to speak. But theoretically, companies could issue more shares and dilute things. And but really, I think if we're going to be fair, the stock market, I would say these are both equally decent hedges against inflation because both are going to respond quite well as that printing presses rolling.

Anthony Vicino: [00:08:57] Mm-hmm. All right. So now we have another drawn round, which means it is two rounds in favor of the real estate, two draws. And so far, the stock market is not pulling ahead in anything. But maybe this in the championship round, they can pull ahead in terms of tax benefits. What do you think?

Dan Kreuger: [00:09:16] Not likely. Mhm. No, it's pretty much around really. Yeah. I mean, I mean there's a few things. Our government loves oil. We all know that. And real estate. Right. So if you're playing in those two spaces you're going to get really favorable treatment in the tax department. So, you know, I don't know where capital gains are going to end up. We're right in the middle of some negotiations right now with the Biden administration trying to do some things and raise those cap gains taxes. But, you know, where have they been historical? I think if you remember that time I had twenty-seven percent

Anthony Vicino: [00:09:51] Sounds about right. Something that and I think they're trying to double it up to like forty-eight or something. Yeah.

Dan Kreuger: [00:09:55] I don't think that's going to happen, but yeah, the low end you could say 20 percent. I think it's pretty safe but for the stock market. So you know, if you hold a stock for more than a year, you're going to get to keep maybe 80 percent of those gains. And that's just for the federal peace, not the state states going to be defended on which state you're in. But generally speaking, you're going to get dinged with a pretty decent-sized tax bill when you trade in the stock market. Whereas with real estate, it's almost the polar opposite. You get treated, you almost get a get-out-of-jail-free card when you're playing in the real estate space, because like I said, the government really likes real estate investors. They provide a valuable service to society by providing housing for people who can't afford to buy their own place or maybe they just don't want to. And so that gives us a very favorable tax treatment come tax time, which I don't think we need to go into detail about in this episode. But the tax is going to be much different. And those tax liabilities are probably single digits or even null depending on your specific situation.

Anthony Vicino: [00:10:54] So let's tally this up. Let's go to the judges. Let's see where we ended because I don't think we've got a definitive knockout blow.

Dan Kreuger: [00:11:00] The judges do.

Anthony Vicino: [00:11:01] Yes. Yeah. So I don't want to hear any, any complaining in the comments of the reviews about us, you know, being biased because we are not. No, here's the thing is I would invest in the stock market if it beat the real estate in terms of stability, capital appreciation, inflation, and tax benefits. But it doesn't just doesn't. And so I put it as three rounds to real estate stability, cash flow, tax benefits, clear winners, and then a bit of a tie when it comes. Appreciation, inflation, a bit of a tie now, grand total, I think when you look at it from a risk-adjusted returns perspective, the real estate apartment syndications, I think, generate a significantly better return profile overall. It's not uncommon to be generating north of 20 percent returns, whereas, in the stock market, you're not touching 20 percent returns. You're maybe conservatively getting six to 10 percent. So I think it's just it's such a clear winner in favor of the real estate and you're going to have a hard time convincing me otherwise. So there you go. All right, guys, that's going to do it for us here at multifamily investing made simple, I think we actually went over at 10 minutes, but that's OK. You'll love us anyway, right? Just for everybody to review. And we'll see you next week.