Podcast Summary: The Side Hustle Show – "Side Hustle Showdown: Buying a Business vs. Investing in Real Estate (Greatest Hits)"
Release Date: December 5, 2024
Host: Nick Loper of Side Hustle Nation | YAP Media
Introduction to the Showdown
In this engaging episode of The Side Hustle Show, host Nick Loper reignites the popular "Side Hustle Showdown" series, presenting a friendly yet insightful debate between two lucrative side hustles: Investing in Real Estate and Buying a Small Business. This episode features two esteemed alumni of the Side Hustle Show who bring their extensive experience and success stories to help listeners determine the best path for their financial growth.
Key Participants:
- Chad Carson: A seasoned real estate investor with over 100 properties and the author of Retire Early with Real Estate.
- Cody Sanchez: A successful entrepreneur who owns multiple "boring businesses," including a laundromat and a podcast production service, and author of Main Street Millionaire.
Real Estate Investing with Chad Carson
Chad Carson shares his extensive journey in real estate, highlighting his diversified portfolio and strategic approaches.
Chad’s Real Estate Portfolio
- Experience: Began real estate investing 18 years ago, initially flipping houses right after college.
- Current Focus: Specializes in student housing in Clemson, South Carolina, leveraging the steady demand from a large university population.
- Diversification: Includes single-family homes, multi-unit properties, mobile homes, land investing, and note investing.
Chad Carson (02:04):
"We screen our tenants and we've had very few problems. I manage it from a higher level and probably spend 30 minutes to a few hours a week doing that, just depending on the time of year."
Management and Remote Operations
Chad emphasizes the importance of a reliable property management team, allowing him to oversee his investments remotely with minimal hands-on involvement. He cites his experience managing properties from Ecuador, demonstrating the scalability and flexibility of real estate investments.
Chad Carson (04:31):
"Real estate is like a startup in the beginning and a true investment in the end. Once you have stable rental properties with good cash flow, it can be very passive."
Financial Metrics and Cash Flow
Chad discusses key financial indicators like cap rates, explaining that properties requiring more work can yield higher returns (9-11%) compared to stabilized properties (6-7%). He highlights the balance between risk and reward, emphasizing the significance of location in determining a property's success.
Chad Carson (18:47):
"A typical unleveraged yield on a multi-unit in my town right now might be 6 to 7%, and if you buy a property that needs work, we can see 9, 10, 11%."
Financing Strategies
Chad explores various financing options, from owner-occupant loans with low down payments to seller financing and private financing. He underscores the importance of leveraging opportunities to maximize returns while mitigating risks.
Chad Carson (22:08):
"Using seller financing and private financing allows me to control large properties with lower down payments and achieve higher returns."
Lessons and Mistakes
Chad reflects on his early mistakes, such as underestimating the importance of location over cash flow. He learned to prioritize desirable locations to ensure consistent tenant demand and minimize unforeseen issues.
Chad Carson (41:54):
"One of my biggest mistakes was underestimating the location and overestimating the cash flow. The desirability of the place to live is paramount."
Buying Small Businesses with Cody Sanchez
Cody Sanchez delves into the art of acquiring small businesses, offering a compelling case for why buying "boring businesses" can be a robust side hustle.
Cody’s Business Portfolio
- Diversity: Owns around 15 businesses ranging from laundromats to podcast production services, generating revenues from hundreds of thousands to millions annually.
- Investment Philosophy: Focuses on arbitrage opportunities where the market underprices assets, ensuring high returns without needing to be the best operator.
Cody Sanchez (05:44):
"I find small and medium businesses fascinating because they are often underpriced, offering high leverage and excellent cash flow opportunities."
Financing and Acquisition Strategies
Cody explains how she utilizes SBA loans and seller financing to acquire businesses with minimal upfront capital. She highlights the advantages of these methods, particularly for those without extensive personal credit histories.
Cody Sanchez (09:33):
"With SBA loans, you can buy a business with as little as 10% down, similar to how you might finance a home."
Due Diligence Process
Cody outlines a comprehensive due diligence checklist, emphasizing the importance of understanding financials, operational efficiencies, and potential liabilities. She stresses the need to ensure that financial records are clean and that the business isn’t overly dependent on a single operator.
Cody Sanchez (37:16):
"Due diligence for a business involves analyzing financials, understanding employee dynamics, and assessing market competitiveness to avoid hidden pitfalls."
Common Mistakes and Learnings
She shares insights on avoiding common pitfalls such as buying businesses that are too large or overly reliant on the current owner. Cody advises starting conservatively to build confidence and scaling up gradually.
Cody Sanchez (45:10):
"Don’t buy a business that's too big initially. Start with something manageable to build your confidence and understanding of the process."
Comparative Insights: Real Estate vs. Buying Businesses
Nick Loper facilitates a discussion on the intersections and distinctions between real estate investing and buying small businesses, drawing parallels in financing, risk management, and strategic planning.
Similarities and Complementary Strategies
Both Chad and Cody agree that diversification is key to financial independence. They highlight that real estate and small businesses can complement each other, providing multiple income streams and mitigating risks.
Chad Carson (56:22):
"Real estate and businesses are complementary. Owning both allows for diversified income streams and reduces overall risk."
Risk and Reward Balance
Chad emphasizes that real estate offers more stability with lower risk compared to the higher-risk, higher-reward nature of buying businesses. Cody counters by noting that small businesses can offer substantially higher returns, especially when leveraging financing opportunities.
Cody Sanchez (22:36):
"Private equity through buying businesses can provide asymmetric risk returns, offering higher cash-on-cash returns compared to traditional real estate investments."
Leverage and Financing Options
Both experts discuss the importance of leveraging financing to maximize returns. Chad focuses on various real estate financing techniques, while Cody highlights the prevalence of seller financing in business acquisitions.
Chad Carson (30:51):
"My arbitrage is between the cost of money and the return I can get on the property, using strategies like seller financing and private loans."
Cody Sanchez (29:25):
"In small businesses, seller financing is common, allowing you to acquire businesses with minimal upfront capital."
Lessons Learned and Final Advice
Chad Carson’s Takeaways
Chad underscores the importance of location in real estate and advises investors to focus on properties that offer stable cash flow with manageable risks. He advocates for starting with manageable investments and scaling up as confidence and expertise grow.
Chad Carson (48:55):
"Protect your downside. Get started with something manageable, and don’t be afraid to make mistakes as long as you learn from them."
Cody Sanchez’s Recommendations
Cody encourages listeners to pick themselves by acquiring ownership and diversifying income streams. She emphasizes the moral imperative of achieving financial freedom to avoid reliance on unstable 9-to-5 jobs.
Cody Sanchez (54:02):
"Pick yourself. Learn about buying businesses and real estate to gain financial and personal freedom. Diversify your income streams to safeguard against job instability."
Final Thoughts from Nick Loper
Nick ties together the insights from both guests, reinforcing the message that whether through real estate or small business acquisition, taking proactive steps toward ownership and diversified income is crucial for financial independence.
Nick Loper (58:21):
"Get started today because a year from now, you'll wish you had. Educate yourself, take action, and protect your downside."
Key Takeaways
- Diversification is Crucial: Owning both real estate and small businesses can provide multiple income streams and reduce financial risk.
- Leverage Financing: Utilizing methods like SBA loans and seller financing can maximize investment returns while minimizing upfront capital requirements.
- Due Diligence is Essential: Thoroughly analyze financials, operational efficiencies, and market conditions to make informed investment decisions.
- Start Conservatively: Begin with manageable investments to build confidence and expertise before scaling up.
- Focus on Location and Stability: In real estate, location is paramount. For small businesses, ensure the business model is sustainable and not overly reliant on the current owner.
- Financial Freedom as a Goal: Both real estate and business acquisitions are pathways to achieving financial and personal freedom, enabling greater control over one's life and schedule.
By presenting these comprehensive insights, The Side Hustle Show equips listeners with the knowledge and strategies needed to navigate the dynamic terrains of real estate investing and small business acquisition, empowering them to make informed decisions on their financial journeys.