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What are the advantages and disadvantages of investing in real estate vs starting an Airbnb business? Look at the best ways to invest your money with the highest ROI.
If you’re looking for tips on the best way to invest your money, this video will give you all the information you need to get started. Traditionally, we’ve all been taught to invest in real estate, but is that the best option for you?
First off, you need to examine your goals. What are you looking to accomplish? If you’re going to be taking money you’d otherwise use to buy a house and instead start a business, there’s definitely some risk attached to that. But there’s also a substantial upside potential as well.
One thing I think a lot of entrepreneurs get wrong is that they don’t tend to be great savers. You don’t need to have a lot of risk associated with your business! Let’s take a sample equation of investing in a property for short term rental, versus doing rental arbitrage. In Toronto, a $500k property with a 20% down payment is going to be an investment of $100k.
If you put that property on short term property and it’s doing well, you can net from $1500 to $2500 a month, not taking into account the mortgage payment which is really going towards equity. So that’s $2k a month on a $100k investment.
Let’s look at rental arbitrage now with the same $100k investment. Some of that is going to go into furniture, which is a depreciating asset. The rent you’re paying on the property is not going to be going towards equity in any way, so you’re probably going to net around $1k a month.
But in this case, with the same investment, you could be managing 10-20 properties a month, which makes you from $10k-$20k. From a cash-flow perspective, you’re making way more through rental arbitrage, but it’s a lot more work, and more risk involved (as you don’t have any equity).
In my personal opinion and experience, I would recommend to invest as little into your business as possible. A lot of people will say you need high risk to get high reward, but I don’t think that’s true. Another recommendation I have is to make sure you are keeping a close eye on your financials, and to look for creative ways to solve problems versus throwing money at them.
So really, you need to look at your personal circumstances and what you’re looking for in your business to see what’s best for you. Do you want to invest your money and be done with it, with as little hands-on work as possible? Are you looking for long-term security or cash flow?
What's up guys? My name is James and in today's video I want to talk about whether you should invest in real estate or whether you should start a business specifically in Airbnb.
So I want to really dissect because a lot of people tend to weigh off the differences that vantages, the pros and cons of, you know, should you buy a real estate, that's a traditional thing that people are taught to do is, you know, you should buy real estate, you should buy a home, should you invest your money into real estate, whether it's for your own home or whether it's for you know, investment property? Or should you start a business? Should you take that money that you would have otherwise spent and start a business with it and invest into something like rental arbitrage, or potentially start another type of business?
And so really one of the core things that you want to ask yourself with respect to this question and how you're going to be investing your money is ultimately just what your goal is. And that's a large determining factor in where you should put your money. There's a lot of different options for a lot of different people that make the most sense. It really is a personal decision.
Because, for example, if you're looking at the opportunity of buying a house for yourself versus continuing to rent one and starting a business, there's very much going to be a trade off. Either way, if you take that money and invest it into starting a business, there's a lot more risk, there's also a lot more upside potential. Because if your business if you're investing essentially into yourself and into your own business, there's a huge amount of upside to that if you invest in real estate, in a best case scenario, it might go up in value a little bit, you know, over the next couple of years, maybe you buy in the best area possible.
And you see a whole lot of appreciation of the property, maybe, you know, does really well, but even then you're probably not going to have that great of a return on your investment. Realistically speaking, if you compare that to the opportunity of getting an ROI on investing into yourself and into your business. But on the other hand, you are getting a lot of peace of mind. You own that property. And so as opposed to renting, you actually have equity in the place you're staying and you're putting more money aside and it's sort of a forced savings.
Now, what you'll realize is that a lot of entrepreneurs are not really big Savers, they tend to be more risk, risk prone, they tend to be more okay with risks than the average person. Now, I do think that investing and saving your money is important. Even as an entrepreneur, I think that's one thing that a lot of entrepreneurs get wrong because you really don't need to have a lot of risk associated with your business.
However, if you're making the decision to buy a home, and that's going to prevent you from starting a business, then you probably value that security and that's not safety net a lot more highly than you value the freedom and the opportunity of having your own business. Now, if we're looking at from purely just a financial standpoint, if you're looking at investing in a property for short term rental, let's say versus doing rental arbitrage with one, there's another whole equation that's going on there.
If you're looking at investing into a property for short term rental, you're gonna want to look at the long term value proposition of that and whether or not you really want to own the property because chances are if you Take that money and you invest it into rental arbitrage, you're gonna get a way better return, you won't own that property long term. And so you're not going to get to reap the rewards of any appreciation on the property.
But if you take a standard downpayment, let's look at a 20% down payment on, let's say, a half million dollar property. In Toronto, that half million dollar property is going to get, you know, one bedroom condo in the city, let's say conservatively, and so you're going to be putting $100,000 down, and that hundred thousand dollars is going to basically get you equity into a property.
So you're actually gonna have that dot value and equity, but then you're only going to be making maybe two to $3,000 a month on average, if you're putting that property on short term rental and it's performing well, then you've got your costs coming out of that figure, you're going to net maybe 1500 to 20 $500 a month on that, if you don't take into account the money that is obviously going into your mortgage payment that is actually contributing to your equity and not just paying off interest.
So You're looking at basically 1500 20 $500 a month in cash flow off of a $100,000 investment. Now, again, you do have that $100,000 set aside equity, whereas if you do rental arbitrage part of that is going to go into furniture, which let's face it, that's not an appreciating asset is a depreciating asset, it's gonna very quickly lose the majority of its value once it becomes used. And then your rent is not going to obviously contribute to equity in any way.
However, with that same hundred thousand dollars, you could get about 10 to 20 properties depending on which properties you're looking at under rental arbitrage. And you could basically take those properties and be spinning off 10 to $20,000 a month pretty conservatively in income and cash flow off of those. So your cash flow generated from that from that investment is going to be 10 to 20 times as great as what it would be if you invested that money into a property so it's kind of a no brainer from a cash flow perspective.
Now granted, there is a whole lot more risk with rental arbitrage, because you're gonna have different fluctuations that might happen, you don't have that equity in the property to rely on that even if things go south, you still hold the equity and you still can be doing pretty well.
With rental arbitrage. If you have a down month, you're just losing money. And then you also have the little bit of equity you do have is in furniture, that's a depreciating asset, and not really something to even really take into consider when you're looking at the actual equity value of it. So again, two very different equations that you might decide to go into for different reasons. But if you're looking to generate cash flow, if you want income, then rental arbitrage would be the best way to do it.
Whereas if you just want security and you want to just set your money aside and invest it and be a lot more hands off with it, then investing it into a more traditional investment like an index fund or putting it into a property and having noun short term rental would be a good way to get a pretty decent return while having relatively minimal investment of your time. You have to remember as well that if you have 10 to 20 properties, then you're going to be putting in a lot more work. And so there's that to take into account as well.
Now, my overall recommendation is to try to invest as little money into your business as possible. When you're first starting out, there's no reason to take a whole bunch of unnecessary risk. And a lot of people have an idea in their head that if they want to be successful, they have to, you know, get a lot of reward, you've got take a lot of risk. And from my experience in business, that's pretty much the opposite of what's really true.
You know, the best businesses I find have been built all the businesses that I've seen that I've interacted with, and the best businesses that I personally have built have been the ones that have been built in a more scrappy way for lack of a better term. If you approach your business from a standpoint of not just throwing money at the problem, but really throwing resourcefulness at the problem, trying to get creative with how you solve a problem and do it without just throwing money at different problems that you encounter.
You're going to build a far better business. I'll give you a great example is that are business when we started out renting properties on Airbnb? We started out with rental arbitrage. And we encountered a lot of issues. And then we fixed those issues and a lot of the growth period of long that even when we switched over to management fee, when we had more money in the business and we were cash flushed, we actually tend to make more mistakes than when we were scrapping.
We were really trying to make things work. Because, you know, as a, as a one very practical example, I remember in the summer of our first year operating properties, the summertime hit, and it was absolutely bananas. It was crazy. There's bookings everywhere, and we were making easily $10,000 a month in profit on our first summer and we only had a few properties that time and things were going exceptionally well.
What we didn't realize because of all that money coming in, is that we were losing a couple hundred dollars on each property every single month in cleaning fees because we had made the mistake of not accounting for taxes and not accounting for sundries. You know, things like toilet paper, dish soap hand soap, all those consumables when we were figuring out our our cleaning fees and so by not taking account of that not knowing what We're doing, we accidentally ended up setting our cleaning fees lower than they needed to be.
So it cost us more cleaning unit than we were collecting and cleaning fees. Now, because we were making so much money in management fees on these properties, it completely masked those losses. And it wasn't until later on in the wintertime when things started to slow down, that we realized that those losses were quite substantial. But by that time, we had already lost a lot of money throughout the summer, over $10,000 was just lost and thrown away.
And so once we got to a point where we were being more scrappy, we just had a better pulse on the business. And we had a better pulse on the finances because we needed to is that a necessity. And so I find that usually when I see entrepreneurs starting a business by pouring a whole lot of money into it, they're usually not really looking at the finances as closely as they should be, versus the entrepreneurs who start out really scrappy.
They need the money, they need to be really careful and watch every dollar and cent. Those are the entrepreneurs that watch it and therefore optimize it. You know, there's an old saying what gets measured gets managed and one thing that you always want to be managing your business is its finances. And if you're not measuring them, then they're likely to get out of hand. And so my recommendation, if you're looking at the equation of where to put your money, I recommend investing the money somewhere where you aren't necessarily going to be cash flush.
If you want to look at it as money that is really valuable to you, you want to put yourself into that mindset of not having a ton of money. If you have $100,000. To put into a property, I don't think that it makes a lot of sense if you're focusing on cash flow to go and put that into buying a property because as we looked at, you're gonna make a lot more money by doing rental arbitrage.
Now, that being said, you don't want to go and start off by buying 10 properties or renting 10 properties all at once. You don't want to start out by renting 10 or renting one and then not really caring about the finances of the business. You want to come at it from the approach of a scrappier mindset, if you really just want somewhere to put that money, put it away in an index fund and then you have it at your disposal a little bit more liquid than if it's in Real Estate.
So if you want to, you know, strategically deploy that money into your business later on to help it grow, you can do that you don't have to do a cash out refinance, you don't have to sell the property, anything like that. Generally speaking though, if you're looking to get started with no money, then management fee is the best way to do that you can grow your business without renting any properties.
And again, you're going to stay really scrappy, because it's not going to be pouring a bunch of money on problems, you have to get resourceful you have to know the right system. In order to be able to scale your business, it's a lot more challenging than just throwing money at the problem, but it yields a lot better returns because you're not going to be investing you're not going to be kept in your growth. One of the common challenges with rental arbitrage is that you have to invest more money in order to grow the business.
If you want to take on more properties. You have to take your profit and you have to reinvest it into renting and furnishing more properties. With the management fee model. You're not limited by that you can bring on as many properties as you want in a given month, as long as you have the actual bandwidth to set them up and get them listed.
So if you want to learn more about exactly how to do that how to manage other people's properties on Airbnb and short term rental without doing rental arbitrage or buying any properties renting furnishing, and just check out the link down below in the description, there's a free train there that walks you through the step by step process that I use to scale that model of business. So you can check that out down below.
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