Real estate has been touted as a valuable asset for building long-term wealth, but small business expert Codie Sanchez shot down the asset class as overrated.
She explained that you shouldn’t have to invest $400,000 to earn $400 in monthly cash flow until you pay off the mortgage. Sure, you can make the argument that landlords can raise rent to increase cash flow, but expenses also go up. Furthermore, many parts of the U.S. are experiencing sluggish rent growth rates, which isn’t good for new real estate investors.
“Does that sound like a good trade to you?” Sanchez asked her audience.
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Real Estate Is High-Risk For Low Cash Flow
After asking people if they like the idea of taking $400,000 worth of risk for $400 in monthly cash flow, she calls real estate a high-risk asset that produces low cash flow.
Sanchez recommends that people buy small businesses instead to boost their ROI with the same capital. She mentions that it’s possible to earn $4,800 per month with a $400,000 investment once you set up the business and capitalize on growth opportunities.
The potential cash flow is higher for private equity than real estate if you know what you’re doing. Sanchez has expertise in this field and regularly shares her insights with her audience.
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Sweat Equity Has A Low Ceiling With Real Estate
Sweat equity refers to putting in additional effort to increase an asset’s value. For instance, you can make upgrades to a property to enhance its value. It’s a key distinction between real estate and stocks since there is no way to apply sweat equity to a publicly traded corporation that you don’t work for.
However, Sanchez explained that the sweat equity for private equity is much higher than real estate. While sweat equity in real estate can boost your returns by 10% to 20%, Sanchez asserts that some small business owners can double, triple, or even quintuple their returns if they apply sweat equity.
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Real Estate Investing Has Been Normalized
Investors can accumulate a wide range of assets, but most of the focus revolves around stocks and real estate. Buying publicly traded corporations is easy, and you’ll see real estate in any neighborhood. One asset is easily accessible, while you can see clear reminders of the other asset’s value everywhere you go.
There are also a lot more financial experts who talk about stock and real estate investing than there are people like Sanchez who discuss buying small businesses. Part of the reason may be that buying a small business is more difficult in the beginning. You have to know how to grow and manage a business before you can get the type of ROI Sanchez mentions in her presentation.
However, the relative lack of awareness around buying small businesses creates an opportunity for investors in the industry. Fewer investors help people buy small businesses for lower prices. There isn’t as much demand that can push prices higher, such as multiple bidders targeting the same company.
Although stocks and real estate remain the most popular assets, venturing outside of these popular routes can lead to much higher returns.
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This article Codie Sanchez Explains The Pitfalls Of Real Estate And How You Can Grow Your Money Faster: ‘Does That Sound Like A Good Trade To You?’ originally appeared on Benzinga.com
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