Why buying a business can be a great investment
"There are some great reasons why you should look at investing your money in a business rather than property."
There is the potential to make a much higher return on your money and to spread your financial risk. You also get to become involved in something you're passionate about, and to be part of growing our economy.
With current low interest rates at just over 2 percent, it has made it cheap to borrow money. This coupled with residential property demand out stripping supply, has created an overly-active property market providing high short-term returns. This activity is unlikely to be sustainable.
New Zealanders have always had an active interest in property ownership and renovation, investment and trading. This, unfortunately, has done very little for our economy, and has added to the fire and made home ownership less affordable for many. Our housing has now become a national issue, and the NZ government has taken steps to slow this down, implementing tools to tax this activity (recently NZ has removed tax deductibility on interest costs and an extended bright-line test).
With bank returns so low, investors are seeking other options and investing in shares is one of them. More recently we have seen a shift in accessing shares, with digital platforms such as “Sharesies” reducing barriers and making share investment easier and more mainstream. Another option for investing your money is to buy a business. This can be a great option and the returns can be several times that of owning an investment property. Of course, with greater returns comes greater risk.
The benefits of owning a business are many.Personal fulfilment and financial gain are among the very attractive benefits of owning a business. And when you sell there is no tax on the intangible asset component. Owning (and potentially running) a business will take some skill and serious effort. It can also be hugely rewarding if it’s something you really believe in and are passionate about.
In a business, you will need to be involved. If you have a business manager it’s likely to be a more costly business acquisition and will still need to have some input. With smaller investments you are likely to be working in the business, and will be busy with operations, sales and marketing, and staff. This then becomes a “job” plus an “investment”. As with any investment, it is imperative that you do your homework and purchase a business that will work well for you.
A property investment is a more passive option that generally requires less skill and risk, and provides a lesser return. A well-run business has more potential - it better supports the economy, provides employment opportunities - and can provide investors with pre-tax returns up to several times higher than property investment.
If you were looking to invest $750,000, a small business costing $750,000 might well return $200,000 to $250,000 pa before tax. A similar residential property could return around $37,500 pa (after expenses and before tax). A business may also be scalable and can grow, adding further to the value of your investment.
If you are after higher returns and a more diverse investment portfolio, buying a business can be a great investment when compared to investing in property. Make sure you do your homework, understand the numbers, and enjoy exploring the possibilities.
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