Is it Better to Invest in real estate or a Small business?
Last Updated on August 23, 2022 by Mark Ferguson
I have been a real estate investor for many years and recently a small business owner as well. Now technically, I owned small businesses if you count my real estate brokerage and flipping business, and online business but I recently bought brick-and-mortar businesses. I own a small grocery store, liquor store, and bar. I am also working on starting another small business. Of course, all of these businesses rent their space from me! What are the pros and cons of investing in real estate verse owning the business? I will go over my experiences.
How did I end up owning a small business?
I have invested in real estate for many years but just recently started investing in businesses. I have always wanted a brick-and-mortar business to go with my real estate holdings. The opportunity came up a year or so ago when a bar came up for sale. I decided to buy it and run it but things did not go as planned.
We decided to move the bar around a little too much and the city required us to get an engineer and architect involved. We were moving forward with the process but it was taking forever. While we were working on that deal, a building came up for sale with 3 apartments on the second floor and a liquor store and mini-mart/grocery store on the main floor. The building came with the businesses!
I was interested in the building but thought it was a little overpriced at $795,000. I watched it but never went to see it or made an offer. The building never sold but the price was lowered a few times to below $700,000. I was starting to get interested in the building when it went under contract with another buyer. I had a hunch it would come back onto the market and I was right. The buyers backed out and I had the chance to buy the property, so I made an offer of $605,000 which was accepted!
I bought the building which came with the business and ended up paying another $59,000 for the inventory that came with the stores.
What is the biggest difference between a business and real estate?
Technically a real estate investor owns a business as well. Their real estate is a business but I always wanted a business that sells a product and operates on a day-to-day basis. Real estate has been amazing to me but I loved my entrepreneur class in college where I was able to run a factory and make widgets. I loved figuring out prices, how many to build, etc. I was able to experience that when I bought the liquor store and mini-mart.
There are many differences between real estate and brick-and-mortar businesses. The biggest difference is the frequency of sales. When I flip houses, I will sell from 15 to 25 a year which is a lot in the house flipping industry. I may need to sign 10 to 20 leases a year for my rental properties. At my store, we will have hundreds of orders each day, and it is a small store!
We also have thousands of products in the store. I can manage my real estate with a whiteboard and maybe some Excel spreadsheets. I need a specialized system to manage everything at the store. I use Clover Point of Sale (POS) and it has been great to keep track of everything and to be able to use it virtually when I am not at the store. When I bought the store the previous owner was using Quickbooks POS and it was very difficult to use and I could not hook up to it virtually.
With all the inventory we have, we also have a lot of vendors who we talk to and order from. We also have employees and a manager as well. There is a lot going on but I think it is a lot of fun as well!
Does real estate or a store make more money?
It is really hard to say which business makes more money because they are all so different. Real estate makes me much more money but I have also been investing for many years and just started a store this year. If I look at one rental property compared to one store, the store does make more money but takes more time and management as well.
We have been making a lot of changes to the store but it brings in about $18,000 in sales a week and a couple thousand of that is profit (even after paying myself rent). My rental properties that are similar in value make nowhere close to that but the real estate has some other advantages we will talk about later. It is also possible to lose money with a store as well. I know the previous owner was not doing nearly as well as we are. She had not invested as much into inventory or systems as we have. We have reinvested almost all of the profits back into more inventory.
While the store makes more money than real estate, real estate can go up in value without me doing anything. Over time, real estate has always appreciated in value. A rental property may make me $500 a month in cash flow (income after expenses), but it also may be going up 5 to 10 percent a year in value. I can also use leverage with that rental property which means I used a loan to buy it and have much less invested into the property than what it is worth. You can also finance a small business but it can be a little tougher and those financing costs eat into your profit. With most rental properties, it is assumed most people will use financing and those costs are built into the cash flow.
Is it harder to set up a small business or real estate?
It can take time to set up a store or real estate. There are also many other types of businesses that can be set up much more easily. An accountant could start a business very easily without any inventory. If you are starting a store from scratch it will take a lot of time and a lot of money! You will need to pick a location, find staff, build out the interior, and set up all the systems (POS, security, utilities, internet, vendors, etc). You will have to buy inventory and market the business as well.
Real estate is much easier to set up as you can buy a house or a commercial property, and it may already be rented. I buy distressed properties all the time and they need repairs which takes work and time, but it is still much easier than setting up a store.
If you want a small business, you do not have to start from scratch. You can buy one like I did and it will most likely save you a ton of time and money. If you happen to want a restaurant they are for sale all of the time and are usually a bargain compared to what it took to set them up. It still takes time to learn the business but many times when you buy an existing business the old owner will offer training to help the new owners learn the ropes.
Which is easier to sell or value?
Real estate can be much easier to sell and value than a business. If you are buying houses, they are simple to value and you can sell to investors or owner occupants which makes them relatively liquid. You can also see similar houses that have been sold to get a great idea of what your house is worth. If you own commercial real estate or multifamily apartments it can be a little trickier to value the property. Those values are based on CAP rates and can vary a lot. It is not easy to find another commercial property that sold just like yours. Commercial properties are also harder to sell and take much longer to sell.
A business is set up much like a commercial property in that it is usually valued based on the income it generates. Many businesses are sold at 3 times the net income it brings in. If a business makes $100,000 a year, it is worth $300,000. The type of business and work needed from the owner can change this number significantly as well. In addition to the business price, inventory and equipment are often sold separately. If you make $100,000 a year but also have $100,000 in inventory and $100,000 in equipment you may be able to sell the business for $500,000 ($300,000 + $100,000 + $100,000).
The better the business performs the more money it will be worth. The better the business is set up and the less work that is needed from the owner, the more it will be worth as well.
Real estate and small business both can make money and be a lot of fun. They are also very different from each other. I like to do both and love it when my small business occupies a building I own! It is tough to go over all the ins and outs in an article but my YouTube channel goes over the good and bad of real estate and my other businesses.