SMB vs. CRE - Which one should an operator pursue first?

My take: SMB first.

Here's why:

First, key assumptions:
-You're using your own capital
-You're "dangerous" enough to feel competent in either realm
-Simple examples: no growth, closing costs, WC, etc.

Ex. A: CRE
Starting cash: $100k
Debt: 80% LTV, 4.5%, 20yr term
Asset Value: $500k
NOI: $40k (8% cap, nice!)
Annual Debt Service: $30k
Annual FCF: $10k

Ex. B: SMB
Starting cash: $100k
Debt: SBA, 90% LTV, 5.5%, 10yr term
SMB Value: $1MM
EBITDA: $250K (4x multiple)
Annual Debt Service: $117k
Annual FCF: $133k

CRE is priced significantly higher relative to its Net Profit than SMB.

CRE Price: ~11-20x
SMB Price: ~1.5-6x

CRE may be more stable and more scalable, but at the start, cash flows are meaningful for your potential.

In our simple example above, SMB FCF > CRE FCF by 13x!

You could probably leave your W-2 for that, but not for the $10k CRE will bring you.

You have to generate surplus cash to move the ball fwd. Period.

This is tough to do in CRE alone. You'll find most of the folks we assoc. w/ CRE here have built their own SMBs around their CRE niche - REPE shops, PM cos, etc.

One positive consideration for CRE:

Much more feasible to purchase CRE while maintaining your day job. Not so for SMB.

I started w/ CRE bc I knew I was locked into my job for two more years at time of purchase.

Once I left my job, I turned to SMB.

Great thing is: You can have both!

Once you've generated sufficient cash via SMB, you can now invest in CRE.

The correct order of operations here will have you growing your portfolio much faster.

Love how these conversations help clarify my thoughts.

It comes down to this:

Don't *invest* before you've begun to really *earn*. The order of operations matters.

The wrong order will lock up your capital before you can deploy it into a high-earning role. The engine ceases.