Any thoughts on real estate investing vs search?

September 06, 2024

by a searcher from Georgia Institute of Technology in Milwaukee, WI, USA

Any thoughts on real estate investing vs ETA? I have seen a few opportunities recently for real estate investment with 18-30% IRR. It seems less risky to split my money across a few of these rather than getting the SBA loan and putting all my eggs in one basket. Plus I could keep my day job (and health insurance). How often do real-estate developers hit their target IRR? Any advice on where to get some more education on this subject?

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

I have been lending to businesses and real estate for almost 30 years. Real estate can be a great passive investment. It can also be a big huge pain in the ass if you have the wrong tenants. Most of the returns on real estate are all generated by buying right. Even if values fluctuate up and down, if you buy right you should always be able to maintain cash flow and retain value. However, there are many things that impact real estate from interest rates, leasing trends, property trends, etc. I have seen way more real estate clients and investors file for bankruptcy over the years then I have business operators. Business operators usually have more control over their businesses and can change and adjust their business on the fly. It is hard to change much with real estate. Again, both are good asset classes. You just need to understand what you are getting into with both and decide what you are ultimately looking to do. Good luck.

Reply by a searcher
from Yeshiva University in Boca Raton, FL, USA

RE developers miss their targets all the time, especially in down/sideways markets. Anecdotally, I know lots of CRE investors/investments which have gone south in the last year bc tenants have failed or are on the verge. Refis are extremely difficult. On the residential side (in case that's the development you're considering) new home sales in many markets have slowed. Driving around my markets, lots of residential construction has just been paused, like the contractors quit and walked away or something.

In a nutshell, you only make really big money in RE if you can sell for a lot more than you paid. And you're guessing. Otherwise, if you're holding long term, returns are not markedly above other investment classes.

If you're really considering buying a business and being active - with an SBA loan, it sounds like, returns should blow 30% IRR out of the water.

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