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Small Business vs. Real Estate: Which is the Better Asset?

4 Mins read

If you’re looking for a place to invest your money, you have several options. Two that have potential for high returns are real estate and small businesses. But which is better?

In this article, we’ll try to answer that question. The answer will depend a lot on your goals and interests. But we’ll help you narrow down the decision by giving you an overall picture of both asset classes. 

Let’s get started!

Investing in Small Businesses

When most people think of investing, they think of investing in the stock market or bonds. And it’s true that these are great places to save for retirement. But investing in small businesses has the potential to grow your wealth faster.

There are all sorts of small businesses out there: laundromats, cleaning services, landscaping businesses, vending machines—you name it!

These days, there are also many small online businesses. The internet has made it possible for anyone to create a website, start a business, and have instant access to a global market. 

Online businesses include blogs, ecommerce stores, online courses, and so much more. Often, they take more time to start but far less capital as well.

Whether it’s completely online or a brick-and-mortar store, you can invest in a small business to add to your assets. 

To do this successfully, it’s important to look for the arbitrage opportunity. That means find small businesses that are currently undervalued, so you can make a profit. You can look for undervalued businesses on online platforms like BizBuySell or Flippa.

Of course, you’ll probably need to take out a loan before you can buy a business. This is similar to taking out a mortgage on a house, except business loans usually only go for 5 to 10 years. And if you get a loan backed by the small business administration (SBA), you could pay as little as 10% for the down payment. To speed up the lending process, look for a lender that uses an automated loan origination platform.

Ultimately, buying a small business isn’t hard, so long as you have good credit and you’re willing to put some energy into the business. At first, it can take a lot of time to get it running like you want. But once you start outsourcing and leveraging technology, there’s no limit to how much income a business could generate for you.

Investing in Real Estate

Now that we’ve covered investing in small businesses, let’s take a look at investing in real estate. 

Many people never invest in real estate because the barrier to entry is too high for them. For example, most mortgage lenders require a 20% down payment. For a $500,000 house, that’s $100,000! 

But even if you can’t manage to save for a down payment, there are other ways to get into real estate for less. For example, you can invest in a real estate investment trust (REIT) for as little as $1,000. Or you could help crowdfund real estate deals on a platform like Fundrise for as little as $10. 

Of course, buying shares in real estate deals leaves you with less control over the asset and you won’t be able to build wealth nearly as fast. 

If you want to invest in real estate the traditional ways, there are different strategies you can take: fix and flip, buy and hold, long-term and short-term rentals, and more.

Take a look at online real estate marketplaces like Zillow and Redfin to find properties you are interested in. Better yet, find a real estate agent who is investor-friendly and have them monitor the multiple listing service (MLS) for properties that meet your criteria. 

Once you find a promising listing, run the numbers to make sure it will cash flow and yield a good cap rate. Then have a team of contractors and a system in place to renovate, repair, maintain, and manage the property as needed. Otherwise, you could lose money or spend more time than you’d like doing the work yourself.

Investing in real estate can have a lot of upfront costs, but once you have tenants and a sustainable system for property management, you could find yourself spending as little as a few hours a month on management—all while generating a great passive income!

Final Verdict

So what’s the verdict? 

Though every property and small business is different, here are some general differences and similarities you can count on:

Differences

  • On average, owning a small business requires more time upfront, while owning real estate requires more capital upfront. 
  • Businesses tend to be riskier investments, but they also have potential for higher returns than real estate. On the flip side, real estate is a pretty safe investment, but you usually have to wait a long time to see the returns.

Similarities

  • Both real estate and small businesses are impacted by markets, government regulations, and environmental factors (real estate especially).
  • Both allow you to take advantage of many tax benefits not available to regular salary workers. 

Finally, if you really can’t choose between the two, why not invest in both? That way, you can diversify your income streams and have your investments feed each other. For example, you could own real estate AND a property management company. The industry knowledge you gain from one investment will supplement the other.

At the end of the day, the choice is up to you. Choose an asset that fits your skills and personality and stick with it. Over time, you can watch the asset generate passive income and grow in value until it gives you some serious wealth.

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