If you’re looking to add some time-leveraged cash flow to your bottom line, two of the best options are investing in rental real estate and buying small businesses.
Both are viable options, and to help you figure out if either or both of these investment options are right for you, it’s time for another Side Hustle Showdown.
For the debate, I’ve invited back two Side Hustle Show favorites:
(In Chad’s first appearance, we covered several low-cost real estate side hustles. With Codie, we explored how to grow and monetize an email newsletter.)
Tune in the week to learn:
- what kind of portfolios Chad and Codie have built up
- how you can get started buying real estate and small businesses
- some of the creative financing options available
- the mistakes they made along the way
- and more
Chad’s Real Estate Portfolio
To give you an idea of what’s possible in the real estate world, Chad started flipping houses right out of college and has built up a portfolio of more than 100 rentals over the last 18 years.
Chad and his partner started out single-family homes, they moved into small multi-units, have had mobile homes, have done some note investing, and now the bulk of what they do is student rentals.
From a time investment standpoint, Chad said he had to wear a lot of hats when he was starting out and was put in a lot of time.
Today, he has property managers that handle most of the day-to-day work. Chad manages his business from a high level and spends just 30 minutes to a few hours a week overseeing his business.
Chad described real estate as, “a startup in the beginning, and a true investment in the end.”
Related: 71 Passive Income Ideas
Codie’s Business Portfolio
Codie currently has “about 15 businesses” turning over anything from a couple of hundred thousand to millions of dollars in revenue.
Prior to investing directly into small and medium-sized businesses, Codie had been investing in a variety of businesses for a long time.
She had a cannabis business fund in which she invested about $250-300 million into about 68 companies, and prior to that bought asset management firms.
“The common thread through all of this is just looking for the arbitrage opportunity where the market still is underpricing an asset,” Codie told me.
Codie said she likes investing in “boring businesses” — like laundromats, landscaping services, accounting practices — the types of services most of us use on a daily basis.
She said it’s similar to purchasing a house with a mortgage. You can purchase the majority of a business with an SBA loan, and you will only have to put down 10%.
The terms are shorter than a mortgage though, typically 5-10 years. Codie said she usually pays off the loan within 3-5 years and has a cash-flowing asset.
Where to Start Shopping for Businesses
If you wanted to get started buying a business, Codie said two important things are;
- Knowing how to do it right
- Being able to get some capital
She said $25,000-50,000 is enough to get started. As for learning the business, Codie said there are lots of resources online that will help.
For a start, you can sign up for her newsletter for loads of actionable tips. She also recommended a book called Buy Then Build by Walker Deibel.
The next step is to look at what your biggest costs are. Where are you spending money today?
An example Codie shared was her landscaping guy. He couldn’t take credit card payments, and Codie was always having to chase him down to pay him by check.
So, she started asking the owner about his business. He explained that he was doing about $1 million in revenue, and taking home about $300,000 between him and his son.
He was overwhelmed though, and struggling with the operational side of his business. Codie offered to invest in his business and help him out.
She offered to invest $100,000, and show him how to connect subscriptions, automate payments, and streamline some of his processes in return for a cash-flowing percentage of his business.
If you don’t know how to operate a business, Codie said you could start with something similar to this.
To take that first next step, you can look at buying a laundromat, vending machines, and other lower-cost businesses.
If you want to browse businesses for sale near you, Codie recommended looking on BizBuySell and LoopNet. These are the Internet’s largest marketplaces to find businesses for sale.
Criteria When Buying a Business
“When I go to invest in a business, I personally like to see an additional upside,” Codie told me.
What Codie means by this is seeing the opportunity to implement a change that will improve the business.
“Things that are painful for customers can actually be places where you remove friction and thus increase money in and potentially your average order size,” Codie explained.
When you’re first starting out you don’t have to try and completely turn a business around. Codie said you can look for one small differential to start with.
She also said you should ask yourself the following questions to get started:
- How much money do you want to make?
- Where does the business need to be located?
- Do you have the skills to run the business or will you need to hire someone?
The answers to these questions will help you narrow down the types of businesses that are available on sites like BizBuySell.com.
Note: Codie teaches a full course on this topic called Unconventional Acquisitions (use code sidehustle20 for 20% off).
Criteria When Investing in Property
Chad said there are a lot of similarities in how he looks at investing in real estate and how Codie approaches investing in businesses.
This particularly applies to going with something you understand. Chad says he always quotes Warren Buffett when advising people, telling me, “he only buys simple and understandable businesses for himself.”
Chad also said that a lot of what makes a good real estate investment is intuitive. Even if you don’t own property, you’ve lived in an apartment or a house. You also know a lot about the areas you’ve lived in.
So, it makes sense to start by looking in neighborhoods you know to find these arbitrage deals. If you have to look further afield, you can still look for property types you’re familiar with.
Note: If investing out of state, a platform like Roofstock makes it easy to shop for and compare properties.
Then there are properties that have more risk attached, the turnaround projects. Similar to what Codie talked about when finding a business where you can implement meaningful changes, you can also find properties in need of fixing up.
These are the types of properties Chad typically buys. He looks for a “cap rate”, which is an unleveraged rental yield, of around 9-11% on a property in need of fixing up. This would be closer to 6-7% on an average multi-unit in a better condition.
Cash on Cash Return on Real Estate vs Small Businesses
The cash on cash return on real estate vs. small business is very different, as is the risk involved.
On real estate, Chad said in the student accommodation he’s working with he expects a cash on cash return of around 8-20%.
With small businesses, on the other hand, Codie said she’s not doing a deal unless she’s making at least 100% cash on cash. A lot of her deals even have up to 600% cash on cash returns.
The reason being that you can put down 10% using a government loan, add seller financing, and have 20-30% to put down depending on what the business is.
The way businesses are valued is on 2-3 times their profit. So, if you have a business making $100,000, that business is worth 2-3 times that amount on average. Codie said with these numbers she expects to break even on a business within 2-3 years.
So, the bottom line is that the risk is much higher investing in businesses over real estate, but the returns are a lot higher too.
Financing Options When Buying Real Estate
There is a spectrum of financing options for buying real estate. However, Chad said the perfect startup for most people is to get started with house hacking.
House hacking is when you move into a fourplex or a duplex, so you have a place to live. You then get an owner-occupant loan either subsidized or insured by the government so you can get a 3.5-5% down payment and a 3.5% 30-year loan.
“That’s cheap money, long-term fixed interest, and a three and a half or 5% down payment,” Chad explained.
That’s one end of the spectrum where you can get started fairly cheaply. On the other end of the spectrum are commercial financing, hard money loans, and other forms of financing that you can use to raise more funds, but have a higher interest rate.
Chad does a lot of seller and private financing. He finds individuals who are happy for a 4-6% return, borrows money from them, and then buys a property producing a 10-12% return.
Financing Options When Buying Small Businesses
Codie explained that about 66% of small businesses on platforms like BizBuySell and LoopNet are sold with seller financing.
This form of financing is hard to get for real estate, but it is very normal for small businesses. Codie also said that your credit rating is not as important when buying a business.
If you’re not making a lot of money, even if you’ve had bankruptcies, you can still buy a business. This is because lenders are underwriting the business, they’re not underwriting your personal credit.
You will have to have a personal guarantee though, and make sure to factor in hiring an operator to run or work in your business.
Surprises, Mistakes, and Headaches Running Rentals
Chad said some of the mistakes he’s made revolve around buying properties that required a lot of his time. Things like underestimating the location and overestimating the cash flow.
He also said he was enamored with spreadsheets and the numbers early on in his business. He forgot the human side of renting out property, such as making sure the properties are desirable places for people to live.
Chad has since built a more thorough due diligence checklist when buying properties. It covers all of the core business fundamentals, as well as taking a look at the tenants and how much they like living in the property.
Surprises, Mistakes, and Headaches Owning Small Businesses
Codie said there are two things she always preaches to help people avoid some common pitfalls when buying a business:
- Don’t bite off a bigger first deal than you can chew, and
- Be careful about buying a job not a business
She said you want to find a middle ground. You want to buy a business with enough of a cushion where you can afford to bring in an operator or put people from inside the business into the role.
Codie also said you should also be conservative with your first business. This will help you gain confidence, and then you can start to scale up and do bigger deals.
She’s never had a business go under or lose money, but Codie has bought businesses that were too small. They became a time suck to oversee, so she had to divest those businesses.
Codie said the biggest mistake she has made in this space is not executing. It’s difficult buying businesses — there are a lot of moving parts and you need to do your due diligence.
But there is an upside to this: “Anytime there’s that friction, that’s where the arbitrage is, that’s where all the money’s made,” Codie explained.
Looking back, Codie’s only wish was that she had started sooner. Her advice to anyone interested in investing in businesses is, “Take conservative bets, but start now.”
Buying a Business vs. Investing in Real Estate Closing Arguments
Codie’s closing argument was, “pick yourself.” She did add that she thinks small businesses have the best valuation today, at the lowest price level with the most leverage allowable.
Her best advice is to develop diversified income streams if you’re currently working a 9-5 to safeguard yourself. Anyone can start learning about real estate or buying businesses, and no one is going to regret learning about either of these businesses.
Chad agreed with Codie, saying “you gotta own something.”
He said that not everything to do with real estate is going to make sense, but a lot of it is intuitive, and there are so many creative ways with financing there is no excuse not to get started.
Links and Resources from this Episode
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