Entrepreneurs often face a high-class problem when they succeed: excess capital. As you move from the “survival phase” to the “growth phase,” you’ll eventually find yourself in a situation where you have a surplus of cash in your business or personal money market account.
Now comes the million-dollar question: Should you reinvest that money into your company or diversify into real estate to build a secondary source of wealth?
As someone who has worked in the tech sector and built a portfolio of physical assets at the same time, I’ve learned that there is no “correct” answer — only what works for your risk profile and long-term goals. To help you decide where to park your extra cash, I’ve broken the decision down into three parts.
The Case for Reinvesting in Your Business
You are the engine that created the surplus in the first place. In the eyes of many entrepreneurs, their businesses provide a higher Return on Investment (ROI) than the stock market or real estate.
Infinite ROI potential.
An annual return of 10% is considered solid in real estate. In your own business, a $50,000 investment in a new sales hire or a more efficient marketing funnel may double revenue. If you bet on yourself, you are not capped by market trends; instead, you’re only limited by your ability to execute.
Speed of compounding.
Reinvesting in your business allows you to reap the benefits of “velocity of capital.” You can take profits, reinvest them in product development, and see results in months rather than years. As a result of this feedback loop, startups can scale into giants. In an industry currently experiencing a “land grab,” failing to buy a duplex could lead to lost market share.
Intellectual Alpha.
You know your business better than anyone else. You know the risks, the customers, and the competitive landscape. By investing in your own company, you invest in an asset where you have “insider information” (legally) and total control. Interest rates, property taxes, and local legislation are all factors that influence real estate.
The Case for Diversifying into Real Estate
Despite being your largest wealth generator, your business is also one of your biggest risks. You can think of real estate as the “moat” around your financial castle.
Forced diversification.
When your entire net worth is invested in your company, you are just one Google algorithm update, one lawsuit, or one industry disruption away from zero. Unlike other assets, real estate is not correlated with other assets. You can still generate monthly cash flow from your rental properties even if your business goes through a bad year. In high-growth companies, it provides the “sleep well at night” factor.
Tax advantages and depreciation.
In the U.S., the tax code is written for two types of people: business owners and real estate investors. Combined, they make you a tax-efficiency powerhouse. You can often use real estate “losses” on paper to offset your taxable income through depreciation — specifically, accelerated depreciation and cost segregation. It’s one of the few ways to grow your wealth while lowering your taxes.
Passive income vs. active income.
In almost all businesses, income is active. You’re still the captain of the ship, even if you have an excellent team. While real estate is never truly “passive,” once the systems are in place, it becomes significantly less demanding. When an entrepreneur needs an exit strategy, real estate provides the cash flow needed to maintain a lifestyle after the business sells or shuts down.
The “Opportunity Cost” Framework
If you want to decide where your cash should go today, you must consider opportunity cost. Remember, every dollar you put into a down payment for an apartment complex is a dollar that isn’t contributing toward your R&D budget.
Consider these three questions:
What is the “Cap” on my business growth?
Businesses sometimes reach a point of diminishing returns. If spending $100,000 on ads results in a marginal increase in customers because the market is saturated, the money would be better spent elsewhere. If your earnings have plateaued, real estate is a logical next step.
What is my “freedom number”?
How long do you want to run this company for, and do you want to be “work-optional” in five years? Rather than rely on your daily labor to generate income, real estate provides equity and cash flow that are not dependent on you.
Is my business “sellable”?
You might have difficulty selling your service-based agency if it relies entirely on your personal brand. To build a tangible estate, treat your business as a “cash cow” and funnel profits into real estate as quickly as possible. Alternatively, if you’re building a SaaS company with a high valuation multiple, reinvesting every cent into your ARR (Annual Recurring Revenue) will likely lead to a much larger payout once you exit.
Related: You’re Leaving Money on the Table — Here’s the Revenue Opportunity Most Businesses Are Overlooking
The Hybrid Approach: The Owner-Occupier Play
Some of the world’s most successful entrepreneurs choose to buy the real estate where their businesses operate as a middle ground.
Instead of paying rent to a landlord, your business pays you — or an entity you own separately. As a result, you can:
- By using your business’s overhead, you can invest in a physical asset.
- Keep your long-term occupancy costs under control.
- Increase your business growth while appreciating your real estate.
The Bottom Line
If you run a high-growth venture in its early stages and have a return on internal capital of 30% or greater, you should keep your money in the company. Once you have built a repeatable, sustainable engine, don’t get distracted by the “shiny object” of real estate.
You should, however, start investing a percentage of your profits in real estate once your business is stable and producing consistent “excess” cash.
When entrepreneurs put all their eggs in one basket, they often go broke. With real estate, you have the land you are sitting on, even if your basket breaks.
Ultimately, if you want to get rich, invest in your business; if you want to stay rich, invest in real estate.
Image Credit: Tima Miroshnichenko; Pexels
