Every day more investors are getting into entrepreneurship or real estate and you may be wondering if either makes sense for you.
The opportunities from owning a business vs. real estate vary based on 9 factors including time, capital, risk, income potential, wealth building potential, leverage and ease of implementation.
In this post, I’ll share the pros and cons of owning a business vs. real estate based on what I’ve learned after buying and managing a fourplex for about 15 years and starting and running small online businesses over the past 13 years after deciding to create alternative income streams in late midlife along with my husband.
Define Your Goals for Owning a Business Vs Real Estate
Before you even begin comparing owning a business to real estate, spend just 3 minutes penciling out how much time and capital you want to spend, and if your goals are income generation, wealth building or both from this investment.
After you have written out what you want, you’ll find this article much more helpful in deciding whether owning a business vs real estate will be a better fit for you personally.
The pros and cons of owning a business vs real estate will vary greatly depending on what type of business you own, and what type of real estate you own, so let’s make sure we’re comparing apples to apples here.
Real Estate Investing
Owning investment real estate comes in many forms.
In addition to income investing, you can also invest in real estate with the potential for short or long term appreciation. But most people, like the wealth coaching client that inspired this post, was more interested in income generation than appreciation (capital gains) from real estate investments.
This is very common in the low interest rate environment we have been in for years. For this reason, I’ll focus on real estate rentals in this post since the goal of owning them is usually income.
Owning a Business
Much like real estate, the conditions of owning a business vary greatly. Business ownership can be anything from having a local or online business that requires full time work and requires lots of capital, to having a low cost, passive or online business.
The owner’s ability to outsource management and the model he chooses will determine the time and capital required.
Since most Retire Certain readers are more interested in starting an online business instead of incurring the heavy capital investment needed for starting a brick and mortar business, I’ll focus on online business in this article.
Capital Required for Owning a Business Vs Real Estate
Due to leverage, both owning a business and real estate require lower capital than traditional income investments, such as stocks and bonds. This is a big advantage for alternative investors.
Capital Needed for Real Estate
The amount of capital needed to buy real estate will depend on your personal financial situation, investment goals, lending environment, credit score and the financials of the deal.
The more units you want to own, the less you’ll want the down payments to be unless you have plenty of capital that you want to use toward the purchase to avoid financing.
Most people leverage their real estate investments so let’s assume you buy a $300,000 property with a 25% down payment.
This equates to $75,000 capital needed to control a $300,000 rental property, for example.
The fourplex property we bought was used to secure financing, along with a down sizable payment.
Capital Needed for Owning a Business
The capital required for owning a business varies based on the type of business.
For example, a brick and mortar business can have a similar structure to the real estate loan example above, but the lender will need more collateral since small businesses are high risk investments and there are often few if any business assets to secure the loan.
We found that when we considered buying an existing profitable brick and mortar business, most of our stock and bond investments were needed as collateral.
This was far too risky for us at our age, so we decided to test out starting an online business instead of buying an existing business based on our backgrounds, fortunately.
Zero Capital Needed for an Online Business
Starting an online business requires no capital. You can literally start an online business for well under $50 if you build a simple website yourself.
This is not hard nowadays. I built this site, for example, and I am not naturally a techie!
But you can also buy an existing online profitable business anywhere from $100 to millions of dollars.
The decision circles back to your goals and the amount of time and capital you want to invest.
We initially started online businesses for between about $150 and $2,500.
The Amazon store was the much higher $2,500 investment since inventory was required. I imported and branded my own products in this business model.
Since the businesses we have owned are all online businesses, in the rest of this post I will compare owning an online business to real estate rental investing. I tend to write about what I have personally done or invested in here at Retire Certain.
Time Required in Owning a Business Vs. Real Estate
The time required for owning a business vs. real estate will vary based on the business model and the owner’s desire and ability to outsource management of either.
Time Required in Real Estate
Our fourplex real estate rentals require, on average, anywhere from 15 minutes to a very rare six hours a month. There are a few exceptions.
For example, recently I put a rock flower bed on our property with my sons, so I spent longer that particular month.
But this didn’t have to be done, at least not by me. I enjoyed it and I like to involve my sons in our businesses.
Since turnover is low, and I have a reliable team including a handyman, plumber, and such, the real estate rentals usually take little time vs our online businesses. So it requires little time to own and manage this property.
Time Required in Owning a Business
An online business can be almost completely passive or it can require 40 or more hours a week. It depends on the model chosen. Some online business models can’t be delegated.
For example, while we have a team to do most of the back end work, my husband and I are both very involved in our online information businesses. This is because we share information based on our own experiences.
So, our core content creation can’t be outsourced. This is more time consuming, but it is also very fulfilling.
Content creation has become my art. I like writing on my blog, creating videos and investment education programs.
Many other information type business models can hire writers to create all the content because they are either publishing models with a variety of experts submitting articles, or they hire writers to research and write.
I also run the small Amazon store that is almost completely passive now since my assistant can manage this.
There is no right or wrong. It all goes back to the lifestyle you want, your skills and your financial goals from an online business endeavor that you outlined before you began reading this post.
Wealth Building Potential for Owning a Business Vs Real Estate
You can own a business or invest in real estate with the main goal of income, initially, while building an asset with capital gains potential later.
In other words, income and appreciation are not mutually exclusive as many believe. In fact, having both goals (income and appreciation) is an ideal way to build wealth gradually while also increasing income along the way.
Wealth Building Potential from Real Estate
There is no doubt that real estate has the potential to build wealth.
If building wealth is your main goal, however, it’s important to consider the current trend and economic environment before investing in real estate, especially the older you are.
This is true for all investments based on my experience through several severe stock, bond and real estate market declines over the decades.
The ability to build wealth from real estate is based on the time frame and the purchase price. Both of these factors are heavily influenced by the current trend and the economy.
Sometimes, however, there are anomalies that override the trend, such as estate situations and overlooked real estate assets.
Click here to read my post entitled How to Build Wealth where I expand on finding anomalies for investing.
Wealth Building Potential from Online Business
In the past I thought that real estate had wealth building potential but online businesses didn’t.
Like I say to my family, “Prepare yourself for the words I am about to say: I was wrong”.
Here is what told me that I had been mistaken about the income vs capital gain (appreciation) potential of online businesses. A few years ago I noticed a small online business that was started and run by a former school teacher sell for over a million dollars.
This got my attention.
Then I noticed more bloggers selling websites for seven figures.
Now I know that online businesses are assets that sell for 24 to 30 times net income in general.
The more passive the income is, the higher the multiple. And online businesses in certain sectors sell for more money.
This is a rising trend, the buying and selling of blogs and tiny online businesses.
I think over the next decade or two buying and selling online businesses will continue to evolve and become more mainstream as consolidation happens on the internet.
This presents a good opportunity for individuals who start very small online businesses.
While it may seem like the internet is a crowded market, I still believe online businesses are an incredible opportunity given the low capital and the still fairly early entry into a rapidly expanding evolution.
Leverage for Owning a Business Vs Real Estate
Leverage can expedite wealth creation through both time and money for smart but cautious investors and entrepreneurs. Both owning a business and real estate have leverage potential.
Click here to read my post Wealth Building After 50 with more on this.
Real Estate Leverage
As addressed above, by making a partial down payment, a real estate investor can control a significant amount of real estate worth far more than the down payment.
And since every task related to real estate ownership can be delegated, time can be leveraged, too, with real estate investing.
Small Business Leverage
Online business can leverage in both time and money, too. It’s no longer difficult to hire an outsourced team to run an online business. We use a team of five part time outsourcers and more for special projects, for example.
And the team can be also leveraged across multiple online businesses.
A website also has leverage by being able to easily add additional products and services.
Like real estate, online businesses can be bought with financing. One of my mentors, Roland Frasier, talks about paying the financing note through income from the online property.
(Note: I have not bought an online business yet, but as of this writing, I am talking with one now to potentially buy.)
But online businesses have a powerful type of leverage that real estate doesn’t have. Online small businesses leverage the internet to reach a global market for less than $50.
Think of the magnitude of this reality.
Expansion Opportunities for Business Vs Real Estate
Expansion opportunities exist for both real estate and small business ownership.
Real Estate Expansion Opportunities
Here is an example of real estate expansion for a small investor like us. Our fourplex has room for us to build an additional door or two or add a tiny house.
We have not done this yet because we have been focused on online businesses to be honest:)
Also, shortly after we bought this property, we sold an easement to an unsolicited buyer, so this was an expected form of expansion.
While we have not yet done this, many real estate investors have successfully expanded into short term rentals with AirBnb.
These are real estate expansion opportunity examples that are very doable for smaller investors like us.
Online Business Expansion Opportunities
Online business expansion opportunities are many based on our experience. Some examples for us have been joint ventures, unexpected B to B (Business to Business) opportunities, and proprietary software.
When you’re an online business, you’re visible to the world and opportunities find you.
Don’t worry. You can choose to be personally hidden as the owner, which is not a bad idea.
Since I wrote a book and Larry teaches options trading based on his 30 year career as a professional trader, we haven’t done that except for one small online business.
Real Estate Vs Small Business Factors Outside Your Control
From investing for almost 40 years now, I have come to really appreciate the impact which factors beyond my control can have on our investments. This includes stock market crashes, real estate crashes, interest rates and political changes.
By having fewer factors beyond my control, I can lower risk and thus increase the probability for wealth building.
Both real estate and small business ownership have factors beyond your control. Let’s look at them.
Real Estate Factors Beyond Your Control
The most common factors beyond the control of real estate investors that can ruin an otherwise smart investment are the economy, commodity pricing, liabilities, weather, competition, and less common governmental initiatives.
Here are some examples.
An economic slowdown can lower rents.
An example of commodity pricing hurting real estate investors is one I have seen twice now after oil prices tanked and Texas property values dropped. (The flip side is when prices subsequently soared along with the price of oil.)
And real estate has many types of liability risk that are factors beyond our control.
Hurricanes, tornadoes and floods can destroy properties.
A nearby shiny new apartment building with all the bells and whistles can steal tenants.
And governments can expand highways than encroach on properties. Land can be seized.
Online Business Factors Beyond Your Control
In owning a business, regulation, technology changes and politics are major factors beyond our control.
For example, even the mention of certain words on your website that have no relevance whatsoever to the actual topic being banned can cause irreparable damage. (I don’t want to even give the example.)
I know of a couple of formerly successful businesses in the survival space that have suffered greatly as a result of this.
Major technology players like Facebook, YouTube and Google can change business policies or models and your own business model stops working. (Diversification is important to guard against this risk for small online businesses.)
And regulatory changes are a fact of life for online business, but this is true for every business.
The Marketplace for Owning a Business Vs Real Estate
There is a big difference for being able to find or start an online business vs finding real estate that meets your investment criteria.
How to Find a Small Business
While the market size and competition will guide you to the right online business to start, there are thousands of possibilities for owning an online business vs real estate.
In addition to many different online business models, there are many different potential small business income streams.
While, realistically, it can take months or years to reach profitability from some of these business models, there are plenty of them. (We have experienced both fast and slow profitability from our online business, another big lesson!)
And if you choose to buy an online business, there are marketplaces that facilitate finding and buying websites based on strict criteria.
Profitability can be fast when you buy an online business.
How to Find Real Estate Rentals
Smart real estate investors have very strict criteria, too. And finding real estate that meets your criteria can take months if not years to find.
Speaking from experience, looking at properties takes a lot of time. While there are easy ways to invest in real estate online, we have had success buying real estate near our back door as opposed to investing in real estate in other areas that we don’t know well.
We learned that by knowing the local market, our risk was reduced.
Of course, after a major real estate price correction, rental properties that cash flow are easy to find almost everywhere.
But overall low valuations from real estate corrections only come along every few years, or decade, or so this doesn’t help an investor ready to purchase property now.
Other Considerations for Owning a Business Vs Real Estate
If you’re weighing owning a business vs real estate, there are two other considerations I’ll share based on my experiences.
Both owning a business and real estate have tax benefits that don’t exist for the employee income model.
Since taxes are the single largest expense for many people, having either small business, real estate investments or both can have a big impact on the ability to build wealth.
Diversification reduces risk. Having both investment diversification and income diversification lowers financial risk even more.
Diversification from owning both a small business and real estate can make sense especially for those who are able to delegate tasks and manage a small team. If you want to do both, I would focus on one at a time.
For example, we bought our rental properties before we started online businesses. While we have considered selling our real estate rentals, we have kept them because we like the diversification and they generate passive income for the most part.
For us, it worked well to begin with real estate rental investments first since they generate passive income. This freed our time to work on our online businesses.
But I believe this diversification issue is almost always overridden by which investment (real estate vs. owning a business) offers the best value based on current cycles and the economy.
In other words, it can be risky to invest heavily in any asset when the price is near the top of the market based on long term valuations.
Summary of Owning a Business Vs Real Estate
As you can see, there are many considerations of owning a small business vs real estate rental investments to generate income while building wealth.
When you start with a clear picture of your net worth, desired lifestyle and wealth goals, you’ll be led to the right choice for you.