Choosing Your Investments: Stock Market vs. Business Purchase
If you’ve ever seen Shark Tank, you’ve probably seen Kevin O’Leary (“Mr. Wonderful”) refer to his money as soldiers. The idea is this: send your soldiers out to do battle on your behalf and recruit other soldiers to bring back with them.
When deciding what to invest in, there are active and passive opportunities. Many smart investors have spent time diversifying their portfolios to not only include stock market investments, but also more income-generating methods like business ownership.
When comparing the rates of return, it’s easy to see why. Though a business requires more time and attention than a passive investment in the stock market, the average Dow Jones Industrial Average annual return over the last 100 years is 5.42%. The S&P 500 performs slightly better, around 7.96% since its reformatting in 1957.
However, investing money in a business often shows that through focused acquisitions, the return on your initial investment can be 50% or more in the first year. At The Firm, we helpfully include a Funding Example with our businesses, similar to a mortgage calculator.
Take, for example, this Renovations company near Houston with a 43% Return on Investment the first year:
Offer Price: $1,400,000
12.5% Buyer Cash Down at Closing: $175,000
12.5% Seller Carry Back via Promissory Note: $175,000
5 year term at a rate of 4.5%
25% of Purchase Price secured by Buyer and Seller
Total Bank Loan Need: $1,050,000
75% of Purchase Price
Desired Bank Terms: 8 year term at a rate of 6%
BUYER'S NET OPERATING INCOME (NOI)
The amount of money the Buyer will retain as profit.
2019 Cash Flow: $454,327
Annual Debt Service: -$204,744
BUYER'S RETURN ON INVESTMENT (ROI)
The rate of return on the Buyer's down payment.
Down Payment: $175,000
As you can see, many businesses can offer returns for investors of much higher than the stock market’s average. It may be worth your time, money and energy to take a hands-on approach to investing through business ownership.
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