Are Online Businesses Riskier Investments Than Real Estate?
Online business is an emerging asset class boasting an equal or higher ROI than real estate.
When you think of investing, real estate is typically one of the first assets that comes to mind. Around 35% of Americans have real estate as their investment asset of choice.
This is likely because, for the most part, it’s one of the safer investments you can make. However, it isn’t without its own risks.
As with all asset classes, it is subject to market shifts like the one we saw in 2020.
This recent market shift has in fact contributed to the boom of the online business market. With a large portion of the world turning to the internet for products, information, and services, we’ve seen astronomical growth in online business.
On our marketplace, we reached our highest-ever sales figures, surpassing $10,000,000 in brokered deals. Even we didn’t expect this result given the volatility of the global economy.
Taking 2020 out of the equation, though, how risky are each of these asset classes?
Real Estate Risks
Real estate can offer highly passive income. With that, however, you have less control over the asset, meaning you are more vulnerable to outside forces such as market shifts affecting your investment.
You should be aware of these risks and how they can affect your investment before committing to this type of investment.
Once you’ve bought a property, you might find yourself having to recoup losses because of these risks.
Bad Location
The location of properties is one of the crucial elements of this type of investment. It influences the type of tenants you can expect to host and the neighborhood locals, who could damage your property or make living in the property undesirable. It can also influence the cost of the investment and expected returns.
Taking these factors into consideration, you can probably imagine how they can affect your investment.
If you buy a property in a lower-class neighborhood, then you’ll pay a lower price, but you should expect a lower monthly income, as your target tenants likely won’t be able to afford a high rent rate.
As for the neighbors, if they’re troublesome or loud, then you might find yourself with a high rate of vacancy due to tenants frequently entering and wanting to leave your property early.
Increasing Rates of Vacancy
Increasing rates of vacancy is, of course, a risk to your investment because if you don’t have tenants, you don’t make income.
There can be delays in finding tenants, especially long-term tenants who are consistent in paying their rent and reliable in keeping your property in shape.
If you find yourself with a high vacancy rate, then you’ll be frequently having to find new tenants. While you can use a real estate agent to do this for you, it’ll come at a cost.
“Bad” Tenants
Getting tenants is one issue, but being stuck with tenants who are troublesome is a whole other issue that will cause you a lot of headaches.
You may have seen horror stories about tenants vandalising properties and not paying their rent. If you’re forced to pay extra for maintenance because your tenants are abusing your property or not telling the landlord about maintenance issues, this can greatly impact your ROI: even if you quickly evict the tenants, the damage is already done.
Late payments can present another hit to your income. In worst-case scenarios, you could find yourself having to take legal action if the tenants refuse to pay anything.
Not as Liquid as Other Assets
The money you invest is tied up in the property. As you are likely aware, it takes time to sell a property, meaning you are not able to “cash out” quickly.
This is one of the reasons real estate is usually considered a long-term investment, as it isn’t as flexible as other types of assets.
If you invest in an undesirable property that struggles to sell, then you could find yourself having to sell for less than you anticipated, which could even result in a loss.
Now that we’ve discussed some of the risks involved with real estate investments, let’s take a look at the risks of online business investments.
Online Business Risks
It’s no secret that online businesses as an asset are more volatile than real estate. This is why when we value a business, we look at the net profit over 12 months to account for fluctuations.
While with the right skills and experience you can mitigate a lot of risks within your control, there are always some risks out of your control.
Algorithm Changes
In the world of online business, you have to work with the giants that rule the roost: Google, Amazon, Microsoft, Shopify, and so on ultimately have control over your business.
Google can update their algorithm and change how websites are ranked on their search engine. If you don’t have a strong search engine optimization (SEO) setup or lack the skills to adapt to these updates, your business will suffer.
If you have an affiliate marketing business (e.g., a blog), then you’re subject to the commission rates set by the affiliate programs your business is associated with.
If you’re an affiliate for a major program like ClickBank or Amazon Associates, then beware that commission rates can change significantly.
The Niche Market
Trends come and go in all types of business, not just online business, and they can change quickly.
Fad products like fidget spinners can be highly profitable to sell or promote when they’re in fashion, but their shelf life is short.
Diminishing demand for products or services means less traffic to your site or store, which means less revenue.
It is difficult to pivot when demand wanes for the product or service you’re selling or promoting, and not all online business models allow for that.
For instance, content sites such as blogs will often struggle in this scenario because the website is indexed by Google as relevant to a particular topic. This means that if your site ranks highly for fidget spinners but no other products, it’ll take time to pivot to another product.
Easy for the Business to Decline
If you leave an online business to run itself, it will eventually deteriorate.
If you don’t update your content on your website, your regular readers will notice and look to another source of information, and your content will become irrelevant because the topics you have written about will have changed.
This will result in you losing your ranking in Google and your traffic declining.
The market is always changing: new information comes out, there are algorithm updates, there are changes in industry laws, and demand for products and services fluctuates, among other external changes.
If you’re not navigating these changes, even just by checking your website for a few hours a week, then your business will decline.
Hard-to-Identify Problems
Small errors can cause major issues in online business.
Adding a ‘/’ character in front of a URL can affect the tracking of your paid ad campaigns, which if left unchecked, can greatly affect the costs of your advertising if you’re investing heavily in it.
Even on your website, which for the most part runs itself, you can have bugs that cost you sales.
Keeping a lid on all of the minor errors that can affect your business and preventing all of them is a confounding task. Nearly all online business owners aren’t able to do this.
The problem with these errors isn’t just that they’re affecting your business; it’s also that they’re difficult to discover. It takes time and effort to uncover these minor issues, and while you’re trying to find them, your business is being negatively affected.
Real Estate vs. Online Business: Which is Riskier?
While it could be argued that online businesses have more risk factors, it could also be argued that you have more control over these risks compared to real estate.
Real estate is a desirable investment because it offers passive income. The problem with that is you give up control over the asset. Most of the risks are environmental and thus more difficult to navigate.
With the right skills or a skilled team, you can significantly mitigate the majority of the risks associated with online businesses. Even external risks, such as Google updates, can be navigated with a solid SEO structure or by expanding into new marketing channels.
The benefit of online businesses as an asset class is that you can gain massive returns very quickly.
An online business making $5,000 net profit per month with a 30x multiple would sell for $150,000. If you bought this business and did nothing except maintain it “as-is,” you would receive a 40% annual ROI.
And this is pretty standard for this industry.
If you’d like to learn more about online businesses as an asset, then head over to our website to gain more information and see what kinds of online businesses we have for sale.
