For investors looking for high-potential and entry-level ways to grow wealth, real estate and small businesses are amongst the most popular investment avenues. But which one is right for you, your resources, and your lifestyle?
Today on the blog, we talk about how your investment goals should factor into how and where you invest your money, as well as the pros and cons of investing in real estate versus starting a small business.
Real estate investing: key takeaways
- The main way to make revenue from real estate investing is through rent collection. Additional ways a real estate investor can maximize NOI and produce revenue is through parking fees, laundry services, storage fees, billboard/signage fees, and vending machines.
- Real estate investing can be less time-consuming than running a business. This is especially true if you choose to invest with a partner or a REIG. The barrier to entry is also quite low in terms of the learning curve.
- Real estate investing requires capital upfront, in the form of a down payment and any expenses required to bring the property up to spec. Real estate investing is also contingent on availability, as well as the state of the market. Additionally, initial revenue produced from a real estate investment is typically put towards financing or put back into the investment, so investors might not see profit for upwards of years.
Starting a business: key takeaways
- It can take anywhere from months to years for a business to become profitable and profitability largely depends on the startup costs. To become profitable, the revenue produced by the business must exceed all invested capital and operating expenses, including rent or mortgage, incorporation fees, inventory, marketing, website development, insurance, payroll, and taxes.
- The capital required for starting a business varies based on the nature of business. The ecommerce model is becoming increasingly popular amongst business owners because of the low startup costs. If you choose the ecommerce route, you can start up with very little in terms of upfront investment.
- There’s a lot of variety as far as the types of businesses you can start. Market research is the first step in discovering and filling a gap in the market.
- Starting and running a business can be incredibly time-consuming and the learning curve can be steep. Things like branding, marketing, product development, customer service, and cultivating an online presence are not inherent and may require you to (a) take the time to learn new skills, or (b) hire professionals and employees. Additionally, competitors pose an ongoing threat to any business.
Defining your investment goals
Real estate investing and small business ownership have their upsides and downsides. As such, before you consider investing your time, capital, and energy into either, take a moment to consider your investment goals and what you hope to get out of the venture.
Some questions you can ask yourself include:
- Are you hoping to generate consistent income, accrue wealth, or build a brand?
- How much capital do you have readily available to dedicate to your investment?
- How much time can you allot to building, growing, and maintaining your investment?
Hashing out this kind of information from the outset will help you to choose the investment avenue that suits your future goals, as well as your current lifestyle and financial circumstances.
For example, starting a business is typically more time-consuming than investing in a singular real estate deal. So, if you know that you won’t have a lot of time to dedicate to your investment, you might want to consider investing in real estate over investing in a business.
We get into some more pros and cons of each investment avenue below.
Investing in real estate
How do you turn a profit?
The main way in which investors realize profit from a real estate investment is through regular rent collection. There are also a few secondary ways income property owners can bolster profit, including parking fees, laundry services, storage fees, billboard/signage fees, and vending machines.
For investors that are in the market for an income property, there are a few ways to assess the potential profitability of a prospective real estate investment. One of the most popular metrics is capitalization rate (cap rate), which represents the rate of return on a real estate investment property based on the income that the property is expected to generate. The cap rate metric considers the property’s net operating income (NOI) and its current market value. In general, you want to maximize your property’s NOI, be that through rent revenue or secondary revenue. If your NOI rises, so will your cap rate.
Pros of investing in real estate
As we’ve mentioned above, getting in on a real estate deal tends to be significantly less time-consuming than getting in on the ground floor of a business. This is especially true if you choose to invest with a partner or with a real estate investment group (REIG). In these cases, you have the option to either divvy up the responsibilities or invest as a silent partner, leaving the property management tasks to the REIG.
If you’re running an income property without the help of partners, your responsibilities will vary depending on the needs of the property and your tenants. With that said, outside of collecting rent, the most time-consuming aspects of running an income property would be handling tenant turnover and dealing with expected and unexpected maintenance and repairs.
Another enticing aspect of real estate investing is that the barrier to entry is quite low. Even if you’re completely new to the world of real estate investing, the learning curve is approachable and there is plenty of information available online and through books and podcasts. Additionally, real estate agents can provide plenty of invaluable guidance and leasing agents and property managers can be hired to handle some of the more tedious and time-consuming aspects of running a commercial property.
Cons of investing in real estate
While it’s a misconception that real estate investing is reserved for the wealthy, it’s true that it does tend to require some degree of capital up front. How much capital depends on your investment strategy, the lending environment, your credit score, and the financial particulars of the deal. In any event, if you’re purchasing an income property, you should expect to pay at least a 20 percent down payment. With that said, if you plan to live in one of the units, you can put down less. How much less depends on the number of units in the property.
Another potential drawback of real estate investing is that it’s contingent on availability, as well as the state of the market. For instance, an economic downturn can negatively affect occupancy and put downward pressure on rents. Meanwhile, an economic boom can lead to an oversaturated and competitive market.
Finally, with real estate investing, initial revenue is typically put towards financing or put back into the investment. In other words, the investment might not become profitable for upwards of years.
Starting a business
How do you turn a profit?
It can take anywhere from months to years for a business to become profitable and profitability largely depends on the startup costs. So, if you’re operating out of a storefront, it will take much longer to become profitable compared to running an ecommerce business.
To become profitable, the revenue produced by the business must exceed all invested capital and operating expenses. Again, it can take some time to overcome startup and ongoing expenses such as rent or mortgage, incorporation fees, inventory, marketing, website development, insurance, payroll, and taxes, amongst more.
Pros of investing in a business
The capital required for starting a business varies based on the nature of business. For instance, a brick and mortar business can require significant capital upfront, either in the form of monthly rent or a down payment. If your strategy involves purchasing a storefront rather than renting, the financing structure would resemble that of a real estate purchase. With that said, the ecommerce model is becoming increasingly popular amongst business owners. If you’re going the ecommerce route, you can start up with very little in terms of upfront investment.
There’s also a lot of variety as far as the types of businesses you can start. The market is flush with undiscovered and undersupplied niches, so as long as you do your market research, it’s completely possible to discover and fill a gap in the market.
Cons of investing in a business
Starting and running a business of any size and type can be incredibly time-consuming. And while it’s completely possible to run a passive online business, the time you put into things like branding, marketing, product development, customer service, and your online presence can end up correlating to the success and growth potential of the business.
There can also be a pretty significant learning curve involved with starting and running a business. Things like branding, marketing, product development, customer service, and cultivating an online presence are typically not inherent and may require you to (a) take the time to learn new skills, or (b) hire professionals and employees.
Finally, competitors pose an ongoing threat to any business. Even if you have cornered the market, there’s no guarantee that new competitors won’t pop up and deplete your market share. Because of this, the longevity of a business often has a lot to do with how quickly and strategically a business can adapt to the evolving needs of consumers.
The bottom line: do your due diligence and invest smart
Differences aside, there are also many advantageous similarities between investing in real estate and investing in a small business. If done pragmatically, with a foundation derived from thorough market research and analysis, both investment avenues can lead to opportunities for expansion and growth.
If you’re investing in real estate, your market research should involve assessment of the economic, employment, and educational health of the areas in which you’re shopping for property. This kind of information can be found anecdotally, by networking with professionals with similar investment goals, and via resources such as the Canadian Real Estate Association (CREA).
If you’re investing in a small business, it’s important to know about your competitors, market share, sales channels, consumer demographics, industry trends, and branding and advertising concepts.
And for both investment avenues, it’s critical to take into account your risks and factor them into your strategic and financial plans. If you don’t consider and manage possible risks from the outset, one hurdle can end up derailing all of your hard work and future plans.
Invest in Real Estate with Crescendo Equity
The great thing about real estate investing is that anyone can get their foot in the door. That said, it helps to be backed by an experienced team of investors. So, get in touch to find out how you can get in on the action and invest through Crescendo Equity. Crescendo Equity is made up of a team of dedicated senior real estate investors committed to identifying high potential assets, repositioning them for maximum cash flow, and offering exceptional investment returns to partnered investors. Find out more about how Crescendo Equity makes real estate investing simple by visiting our website.