WES S01E07: Virtual Properties Vs. Offline Real Estate

Investors often discuss the similarities between buying online businesses and offline real estate, but is that comparison really fair?

In this week’s episode, Justin and Ace dig into both the similarities and differences when it comes to financing, risk/reward, management, and legal protects/restrictions.

It’s easy to compare direct ROI, but you’re not getting the best info if you’re not looking at the whole picture. We do some in-depth comparisons in this episode – hope you enjoy!

Are you digging the podcast? Please leave us a review on iTunes or you can leave us a message (button to the right) and we’ll play your question/comment on the show!

Listen To The Full Interview:

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What You’ll Learn From This Episode:

• Financing comparisons
• Risk/Reward for both
• Cashflow Vs. Capital Gains Investing
• Management (Passivity)
• Legal Protections/Restrictions

 Featured On The Show:

• Realty Shares
• Fund Rise
• OAREX
• Josh Shogren @PiPwebsite mention us on Reddit Thread
• Josh Shogren of Passion into Paychecks

Ace:
No matter what when it comes to these deals, you can’t just sit back and let somebody take care of everything for you.

Speaker 1:
Buying and selling businesses just got a lot easier. Welcome to the Web Equity Show, where thousands of successful entrepreneurs go to learn about buying, growing and selling online businesses. Your hosts, Justin Cook and Ace Chapman, share their real-life advice, examples and expert interviews to help you build and grow your own online portfolio. Now to your hosts, Justin and Ace.

Justin:
Welcome to Web Equity Show, episode number seven. I’m your host, Justin Cooke. My co-host is here as well, Ace Chapman. What’s going on brother?

Ace:
I am glad to be here and excited about today’s episode.

Justin:
Yeah, buddy. We’re talking virtual properties versus offline real estate. I know you’ve been involved in quite a few offline real estate deals. We’ve both done quite a few virtual properties, and I think there are some interesting parallels and some interesting differences between the two.

Ace:
It’s one of those things where I think a lot of people think it’s an either/or, and I think they can be complementary. But, wanted to the take a look at some of the advantages and disadvantages of both because both of them have their share of advantages and disadvantages.

Justin:
What I like is the real estate market is definitely more mature. And so I think the virtual property or online real estate, so to speak, industry can learn a lot. They can learn both what to do and what not to do in terms of growth and how they’re going to continue to grow out and mature.

So I really like this episode. I think our listeners are gonna dig it too. Before we do that, buddy, let’s get into our Listener Love section.

All right buddy. We got three new five-star iTunes reviews. First one is from Brian. He says excellent insight into web businesses buying and selling. Love listening to Justin and Ace perspective on buying and selling. I hadn’t really heard of Ace before the show. Been following Justin for quite a while. These guys know their stuff. I tuned in to find out what I need to do to make sure I have a business that is sellable, but I learned much more than that. Thanks guys for a great show.

Justin:
We just got a five star from Andrew Youderian, our buddy over at eCommerceFuel. He said great content, not dumbed down. Justin and Ace do a killer job of dishing up interesting, not dumbed down, content on buying and selling websites. I have past experience doing M&A in a large corporate setting and I still learn a ton from each episode. Keep it up guys. Awesome work. Appreciate that, Andrew.

Justin:
We’ve also got Brian up in Canada. This is another great podcast from Justin. I’ve been listening to Empire Flippers podcast for a long time and this series is a great extension. Justin and Ace have an incredible amount of knowledge and experience in the industry. It’s amazing that they’re sharing it with us. Well thanks again, Brian, so much. Appreciate it, buddy.

All right, Ace, we got a mention over on Twitter from Josh Showgrant. He said, I mentioned you quite a bit in this post. It would be awesome if you could answer some of their questions. I’m going to link to this in the show notes, but there is a nice, big Reddit thread where he’s talking about how he’s taking money and basically buying up web assets as investments and kind of his process for doing it. And he mentioned the Web Equity Show as a great resource for people to listen to the podcast and find out more about it and kind of more about the industry and how everything works, so I appreciate that, Josh. Thanks for giving us a shout and I’ll send that to you too, Ace, so you can take a look and get involved.

Ace:
Absolutely. Yeah, I will definitely jump in and check it out.

Justin:
All right, man. You ready to get into the show?

Ace:
Let’s do it.

Justin:
Let’s do it.

Today, we’re talking about some of the interesting differences and similarities between virtual property and offline real estate. This is something that both Ace and I have some experience in. I was in the mortgage industry for years. You’ve done some physical real estate deals. When we’re talking not on the show, these are some of the things we discuss. Some of the similarities I think are, us in terms of online deal-making and businesses, we see kind of where real estate is and we see the future of online businesses kind of heading in that direction. And so there are some comparisons and I think some things we can look at in terms of making deals that make it really interesting.

Ace:
Yeah. When it comes to physical real estate, obviously one of the big things that I take from that space is doing some deals. I love how real estate investors think creatively about how to buy a piece of real estate, how to go out and finance it and those things. So I would say we take a lot of ideas from that. But the other part of it is there’s some really innovative things that are going on in that space, and you consider things like crowdfunding and how it’s really exploding. I was reading in the Wharton Business Review, they expect it to be $1 billion industry here in the next couple of years. To see stuff that go from infancy to billion-dollar industry is pretty amazing. But I think we can take some ideas and some concepts for some of the things that are happening in that space, especially some of the innovation that’s going on leveraging the internet now.

Justin:
I totally get what you’re saying regarding crowdfunding. I’m a big fan of, there are two companies, RealtyShares, I think is one of them, and the other one is Fundrise. And they’re basically in crowdfunding, commercial real estate deals, a bunch of rental properties, condos, single-family residences and it is really exciting. Now, I have been on their list for a while so I get the deals they’re bringing out. But I can kind of see where our industry with these online businesses could head in that direction at some point. It’s just that we’re so early, right? It’s way-

Ace:
[crosstalk 00:05:20]Yeah.

Justin:
… earlier then real estate. I see the promise. You set up a billion dollar industry and I absolutely believe it. That’s absolutely going to happen. You know, with my experience in the mortgage industry, I’ve also seen the crash too. So hopefully we can avoid some of the real estate problems they’ve had over the last few years, in terms of online businesses and seeing those businesses go to crap.

Ace:
Yeah, yeah. I think in everything they’re going to be cycles. I mean quite honestly, I think in our space we’ll start to see some things change over the next few years and it’s a part of becoming a mature marketplace, which real estate is. But I think we’ll see some fallout and some of that. And I think one of the big benefits to being in the position that we’re in is getting that kind of true diversification. And that’s the best answer to some of those things that happened.

But I did get fortunate on one of the businesses I bought. Actually, it’s been about 10 years ago, was a HomeVestor franchise business. And you know, we grew that business from buying and selling about 30 houses a year when we bought it, to buying and selling 75 houses a year. And I really sold it on a humbug. Somebody just came to me and wanted to buy it. So I sold that business and it was about a year and a half later that we had 2008 hit and all the madness in the real estate space. And I spend a lot of time with that buyer, just helping him maneuver through everything that was going on. But it was a nightmare for a lot of folks.

Justin:
Yeah. All the guys that were liquid and that weren’t heavily involved in real estate were like, “Yep, this is fantastic for me. Yes, I’ll take this home. I’ll take this foreclosure. I’ll buy this house, no problem.” There’s always opportunities no matter which side of the coin you’re on, right? As long as you’re in the right position. We’re going to get into this. We’re going to get into five different sections and the first is financing. So we’re talking about financing, you know, websites, we’re gonna be talking about financing online businesses and the differences that are there with real estate.

Ace:
Yeah. You know, financing has loosened up a lot overall. I mean, you know, I deal in offline businesses as well as online businesses. I got a lot of friends still who are in the HomeVestor business and real estate investors. And across the board, everybody is starting to experience a lot more liquidity when it comes to going out and getting access to funds from banks and financial institutions and investors. And I’ve been surprised that just this year we’ve done several deals where we’ve been able to get SBA financing on, one was a [inaudible 00:07:57] SAS business, there’s an e-commerce business. And so these internet-based businesses SBA is starting to be open to. And so you know, one of the things about real estate is that I think the values are propped up by the mortgage industry. And if we ended up in a situation where mortgages wanna wait, real estate value in America but would go way down. And so it’s neat opportunity to think about how access to financing will increase the value of our web equity deals.

Justin:
Yeah. You mentioned financing, you mentioned SBA. What’s interesting here, you’ve got a couple of SBA deals done. We’ve had a couple of SBA guys come in and we just weren’t able to get the deal done. We still haven’t done an SBA deal. But when you mentioned finance for, you know, online businesses, think about the opportunity there for the finance companies, right? I mean, There’s a whole bunch of money that’s changing hands that they can dip their beaks into, right? And so, you know, that’s not something that I’m going to solve, not something you’re going to solve, but someone will as soon as they come in with the financing for these deals. And I realized, yeah, there are some opportunities here to fund the deals. So yeah, I think once that opens up, I think there’ll be a lot more people in the space, too. There are some companies right now that do some sorts of financing.

Like there’s an interesting company, I talked to the owner there, they’re new, they’re called OREX and they will front you money on future earnings from AdSense or Amazon or that kind of thing, and that’s interesting. I think you can find some deals that way. There are a couple of other competitors they have. But yeah, the best type of financing you’re going to get when you’re buying an online business, and you know I’ve talked about this, but the best deal you’re gonna get is from the seller. In great situations, you’re going to get zero interest rates where the seller just wants to get the deal done. So now, of course they’d prefer the cash, but if it requires them to finance it, they’ll finance the deal. Especially if it’s $100,000, $150,000 deals. Sometimes you get a zero-interest rate. For the much larger deals, they’ll probably put a rate on it, but even then it’s really minimal.

Ace:
Yeah, that is, you know, Justin, I am a big fan of having some portion of seller financing, not only because it helps you get into the deal and increases your ROI, but more importantly for us it’s a really a due diligence check. So it tells us that, you know, at some level this seller believes two things. Number one, that the business is going to continue. And number two that you’re the right guy to buy the business, and you want to pay attention to both of those things because if they don’t feel they know the business, they’ve grown it from scratch, maybe they’re misguided. But if they don’t feel like you’re going to be able to run that business, you want to pay attention to that. The other neat thing is there are a lot of investors who want to invest in this space, and it’s even a lot more interest in offline businesses.

So when it comes to raising capital from financial institutions, I think web equity deals have a little bit tougher go at it. The banks and financial institutions aren’t readily trying to finance those deals like they will with an offline business. But on the other side, when it comes to raising capital from investors, there are a lot of investors who just aren’t interested in investing in an offline business because there’s only so much scalability, there’s only so much growth and all those things.

But there are a ton of investors that are interested in that space. And so we’ve been getting a lot of access and it’s really neat, you know. I work with clowns who come in and they’re like, “Yeah, I could never go and pitch an investor and that kind of thing.” And, “It’s just not my personality.” And then by the end of it, they’ve raised some capital from some coworkers or some people that we introduced them to and they’re like, man, this, this is actually a lot of fun. I enjoy going out and raising capital. And so the environment we’re in right now, there are a lot of investors that are looking for some ways to increase their returns.

Justin:
Yeah, we’ve seen this in real estate, right? Where someone will be able to bring on a couple of investors and maybe they’re the, you know, the active partner if they’re the ones that are sourcing the deals and they’re the ones that are working on the properties and that kind of thing. And I think there’s a huge opportunity for that with online businesses. We’re finding that there are a ton of people out there that would love to get involved but don’t have the time to figure out WordPress, they don’t have the time to figure out how to source content and do SEO. They don’t really want to deal with that, but they want a piece of the action, right? And so these investors would love to get involved, and if someone with the skills and the know-how to, you know, build and run and these online businesses comes up and says, “Look, I have these opportunities, I want to take them over. You can be my investor and here’s how to do it,” I think there’s just a ton of opportunity for people to do that.

I think we’re going to see a lot more of that in the near future. And, and since we’ve opened the doors to investors that are looking for those opportunities, like we didn’t know how much there was that was out there. And now we’re starting to realize, there are a ton of people that have the money, want to put it into this, but just don’t have the time or the skillsets to get involved.

Ace:
Yeah, I think that it’s one of the biggest opportunities that exists right now because the returns and our space are so huge, you know? If you learn how to communicate what you’re doing and kind of learned the skill, I feel like, you know, raising capital is a skillset, and if you master that skillset there’s a huge opportunity to go out and raise capital in this space.

Justin:
Well, let’s get into the next section ’cause you talked about the huge returns, right? With those returns come some risk, buddy. So in the risk rewards section, I think, you know, I get this question a lot, like how risky is it to buy an online business? And you know, I’d say buying these virtual online businesses, buying these websites, you know, it’s not as safe as you know, blue chip stocks. It’s just not as safe as those. But it’s not as risky as angel investing either. You’re not investing in 20, hoping one hits, right? It’s somewhere in between that, so it’s not the really, really safe and it’s not the really, really aggressive and it’s somewhere in between, and how in between comes down to deal selection, comes down to making sure you’re picking the right sites, the right businesses for you, that kind of thing.

Ace:
Yeah. You know, I think that that’s a huge aspect of it. Like obviously being a day trader is a very risky, risky thing. But there’s some people that have the experience, they’ve mastered the skillset, they’re doing it every day, but for the average person that just jumps in and tries to do day-trading on their own, it’s a lot more risky. So it’s tough to say because we’re not just dealing with something like a mutual fund where you’re saying, “All right, I’m going to either put my money in a REIT or a tech mutual fund.” Okay, we know that a mutual fund is slightly more risky and that kind of thing. When you’re doing these deals, there’s the owner effect and the owner has a bigger impact on the risk than just somebody going out and putting their money into a deal. So you’ve got that aspect of risk, and then you do have the risk of these deals themselves. And a real estate deal, it’s not very likely that 80% of the money’s just going to disappear.

80% of the value or that one day you’re gonna wake up and it’s just worth zero, which is possible in this space. And I’ve talked to people who don’t gain that skillset of doing due diligence and valuation, and they come to us afterwards, they’re like, “Oh, I got scammed on this deal.” It’s like, man, you really didn’t get scammed. All the signs were there and you decided to take that risk and lost. If you go and put money on black in Roulette and it turns up red, then that’s not a scam.

Justin:
Yeah.

Ace:
So the skillset is crucial, especially when you’re dealing with the asset that can be as volatile as a web equity deal versus a real estate deal.

Justin:
So one of the things that’s interesting too, and you talked about leverage, right? Or we were talking about financing. In the real estate space, you can definitely use leverage, there are just a ton of options available to you so you can, you know, do much larger deals than you would on a straight cash basis. When you don’t have that kind of financial backing, you just don’t have that kind of leverage. You’re basically doing smaller deals, but they’re all you.

So in a leverage situation, if you lose value, you’re probably going to lose all of your, everything you put into it, right? Because the banks, they’re going to get their piece. Whereas with this, you’re not getting banks, but you’re still all at risk, all of your money’s at risk. And there’s a higher chance, I think, that you’re going to go to zero with a website than there is with some blue chip. But there’s also a higher chance that you’re going to double or triple that investment. And what I like about it is the fact that you have direct input into the success or failure of that website or online business, and you just don’t have that with, you know, Amazon, right?

Ace:
Yeah, that is. That’s one of the really exciting things is that literally you can control it. I mean there’s only so much you can do with a piece of real estate even. I mean, even though you’re in control of that half of the investment, based on the comparables, I mean, you can only do so much to improve the value or you hit that glass ceiling where it’s just not gonna go any higher no matter what you do. And with these deals, it’s really the sky is the limit and the better you get or kind of master a skillset, the more you can leverage it in a deal and grow it, and you know, the sky’s the limit, which is pretty awesome.

Justin:
Ace, what do you think about this? So I was talking to you and my business partner the other day. We were both on the phone with a, some guy that we’re working with on on a deal. And you know, we were talking about diversification of online portfolio. So make sure you have you diversifying your traffic sources, make sure that you’re diversifying your monetization methods and make sure you’re diversifying and seasonality. And he said, you know, “Look guys, I get where you’re coming from. I’m not bashing you on this,” he said, But look, I’m diversified already. This is like the 5% of my investments to where I want to be more risky, right?

So I don’t care so much about the diversification here. Like I want the 2x, 3x, 4x potential, and I thought that was kind of interesting. I was like, “Wow, okay.” I mean from our perspective, we want to diversify our online portfolios because you know, we want to make sure it works, right? It-

Ace:
[crosstalk 00:18:14] Yeah.

Justin:
It’s big, it is our business. But from his perspective, he was like, “Look, I want to take a real stab.” Like, you know what I mean? “I want this to be the high-risk, high-reward scenario because I’ve got all my money and you know, all my other money and you know, in more stable stuff.” So I thought that was kind of interesting.

Ace:
Yeah, I think that, you know, when it comes to, everybody has a different investment objective and a different way to think about it and go after it. Personally, I still consider that diversification, you know what I mean? So part of a portfolio is gonna be the very risky stuff where you’re like, “Hey, I’m going all in, I want to see if this thing could explode,” and all of that. And that should be a part of the diversification. Still, whether you see it as hey, you know, I’ve got the other stuff, I’ve got to conservator stuff and all of that, and then this is my play money, you know? I think that still is a big part of having a diversified portfolio. But yeah, I agree.

Justin:
All right, man. Let’s talk about cashflow versus capital gains investing. And this is big with real estate, right? There are two main ways you’re gonna make money. You’re either going to cashflow the deal you put the money in, and you have renters and you’re, you know, making a bit of cashflow every month on the deal. And then the second way is through, over time, you know, gaining equity or your equity goes up, your position in the property goes up. You bought it for $300,000 and you know within let’s say three to five years, it’s gone up by $100,000 and you’ve gained money there.

I think it’s similar for this to online properties, right? Because I think you’re gonna cashflow really, really well with online businesses. It’s significantly better. But there’s a time factor that comes into owning these online businesses that you’re going to gain value as well, right? If you’re sitting on an online business that’s working for a year or two years, three years, just being around that long is gonna help you.

Ace:
Yeah, and we’ve seen over these last few years, man, just how multiples have gone up. So when we’re looking at deals, I think we have that long-term perspective, you know? I bought my first deal 16 years ago and five years ago we started to see this market really start to mature, and over these last couple of years we’ve seen multiples just continue to increase. And so, because there’s a little bit of the factor, people are figuring things out. I mean, there are deals that I would have done four years ago that I wouldn’t touch today because we’ve kind of realized, okay, this is something you want to stay away from it. So the more mature this market becomes, I think we’re gonna continue to just see that increase in overall value of the market.

Justin:
Yeah. I’d say four to five years ago, you really could buy a legitimate online business for 10 times the monthly cashflow. So instead cash-flowing $2,000 a month, you could actually buy it for, you know, $18,000 to $24,000. That was doable, whereas that’s not at all possible today. I mean, you’re not going to find a legitimate deal. If you are, it’s a unicorn and congratulations, you found one. But, they’re just not around all that often.

So I guess my point here is that, let’s say that you’re buying a business right now, today, right? And you’re buying it for 24 times the monthly net profit. So you’re buying it and it’s $2,000 a month and you’re buying it for $24,000. This is very likely, if you can hold on to that business and it does nothing else, you hold on to it for three to five years, it’s very likely multiples are going to continue to improve as they have been. If you could get it for 36 months or three years, right, you’ve added 50% to the value just by hanging on to it for three to five years.

Justin:
And I think that’s kind of the position we’re in. So in terms of capital gains, you can definitely gain by just hanging on to it and maintaining. But there’s also the cashflow option to think about.

Ace:
Yeah.

Justin:
If you’re able to buy a business and get paid back on the investment in two years, that’s ridiculously fast.

Ace:
Yeah. I mean, when I still have a couple of rental properties that I’ve held onto and that was one of the things that was a shocker to me. Coming from doing deals, you know, that was the fourth business that I bought, and I was used to operating in a world where a really terrible deal was gonna be three times earnings as opposed to two. And then I’m coming into this world where at that point, there were 25 different TV shows about flipping real estate, then everybody and their cousin and their mom were real estate investors together, and it was a ton of interest. And so I was excited to buy that business because everybody was talking about real estate.

Ace:
And then I get in and realize, “Okay, it’s going to take me 15, 20, 30 years to pay this off. Who knows where I’ll be or what I’ll be doing in 30 years?” So it was such a slow asset to me, coming from this world when it came to cashflow. And so, you know, the value of me having some rentals now is the diversification. But when it comes to just really generating some cashflow and being able to pay your bills with an asset and that kind of thing, the cashflow in this was just significantly better than physical real estate.

Justin:
There’s a liquidity problem that comes with online businesses, though. I mean we’re out there, there are other people that are out there, but it’s not as clear, right? And it’s not as clear as if I was trying to sell my house where I got to my realtor, they’re going to put it on the market for me or I can do it. There’s like a gazillion do-it-yourself options out there, someone looking to sell their house, but it’s not as clear for online businesses and that’s something that I think we can help with, right? Because you know, if we as brokers, whatever, we make ourselves more known and we show people, look, there are more people out there looking to buy businesses than you think, I think you have an opportunity to exit this one and take your cash and do whatever with it. I just think that that’s going to help our industry overall.

Ace:
Absolutely. And I think that’s one of the reasons that we’re seeing this increase in multiples is just a general increase of interest and demand.

Justin:
All right, guy. Let’s talk about the management of the properties or you know, in some sense the passivity of a home, a duplex versus an online business.

Ace:
Yeah. You know, when it comes to real estate, because it’s such a mature market compared to what we’re doing, you’ve got all these peripherals, service types of businesses and one of them is property management companies. So they’ll go out and collect rent for you, find tenants for you, and at the end of the month, you know, take out any repair money that may have been spent and send you a check. And that’s a nice thing. When you think about, hey, you know, having the coconut on the beach money, that’s nice just to know that this money can be deposited in my account, I pay my mortgage and I don’t have to worry about anything. When it comes to the virtual assets, one, you want to keep an eye on it even if you have people that you’re outsourcing to running it, because like we talked about earlier, there’s some volatility to this market.

And you know, if you’re even with passive deals, if you’re not keeping an eye on them, it can get you into trouble. I’ve got one of my most passive deals that, you know, I’m a little embarrassed to say we tried to figure out, you know, I was just used to getting money every single month on this deal. And one month I didn’t get money from it. And I was like, “Man, what happened?” You know, it’s been online for six years. So I figured, you know, I bought it six years ago, I’ve gotten my money back four or five times over, so I figured that was just the end of it. And I went to the site, it was down. I was like, “Man, I don’t know what happened at crash.” I didn’t even have enough backup anymore. So I didn’t know what was going on. And then I come to realize that I had let the domain expire.

Justin:
Oh God. Oh Ace, you’re killing me.

Ace:
Oh, terrible. I’m embarrassed to tell you, man. So I was very, very fortunate. So when I bought it, I put it on the five-year deal and whatever. Just, you know, obviously after five years, didn’t even think about that. Fortunately, nobody had gotten it. I was so fortunate and bought on it and it is still sending me checks. But I definitely keep an eye out on that now.

Justin:
Those [inaudible 00:26:19] will hold you hostage, man. There are people just waiting in the wings to swoop that up as soon as you drop it, and now they’ll gladly send it back to you for a fee.

Ace:
Yeah, I do not recommend allowing that to happen. That could have been a nightmare.

Justin:
So you know, talking about management and passive deals, I mean everyone wants this, you know, amazingly passive website, right? The is around and like you said, this makes you money for six years and those are awesome, right? But everyone’s looking for those and sometimes you don’t find those, right? Sometimes they do require some level of work. And I know there are probably at least a dozen people I know that this presents an opportunity for them. So there are all these sites that require some work, the owner may not want to put that time in. There’s an opportunity for those people to offer some kind of service.

I’m kind of property management service to manage and run those sites for them, right? And they have the skillsets and that kind of thing, and these are the types of, I think, secondary markets that’d be really interesting in our space that just were a little early for those. But I think that there’s gonna be a lot of opportunity for the people that can run the sites. It’s an open up options for potential investors that it wouldn’t get involved otherwise that might now. Yeah, I think it’d be really interesting.

Ace:
Yeah. You know, one of the things that we do a lot of is kind of pool resources of similar deals around a team that’s already running those businesses because sometimes it can just not be economically viable for a person to go and build their team around some $50,000 smaller business. But you put five of those together, you’ve got a small team working on doing the same types of tasks, so they’re all getting better at what they do, and they’re focused on those businesses. That can be a huge opportunity for people to be able to take advantage of the economies of scale and build your team’s skillset.

And once again that the really crucial thing is that no matter what, when it comes to these deals you can’t just sit back and let somebody take care of everything for you, you know? Even with real estate you can find really amazing realtors that are great at finding investment properties and that kind of thing in this space. The work, if you’re going to kind of have that back end and have that team, will still come in doing the due diligence properly, looking at enough deals, comparing them and finding the right business that is going to be able to be run as passively as possible.

Justin:
Yeah, I really like your idea of, you know, let’s say you have an e-commerce business and it’s only making $1,000 in profit a month. With that, you’re not going to have a developer and designer and customer service reps. You’re not going to have much of a team. But if you have, you know, 10 sites like that or 15, you can have a designer that works on all of those sites, a developer that could work on and fix problems with all of those sites. So eventually, if you have a portfolio of these types of sites, you’re going to have a team of people. And if those sites are similar in some aspects or you know, like either the customer service aspect and you can like cross-train people to work on all the sites, the developers know all your sites and work for you, you can build really amazing team.

So the cost for you to pick up a new site is much more limited. Like you already, if I’m looking for an e-commerce business and I go, “Oh, I see that this one needs a redesign and we need to add a bunch of products,” but I’ve got a team of people that can already do all of that. It’s a much easier purchase for me, right? Because I can pick that side up, have my team take it on, have them do the work that needs to be done on it, and just throw it into my portfolio. Whereas if I’m looking as a brand new buyer with no team with nothing, I’m like, “Oh my god, I got to find a designer. I’ve got to, you know, put a developer together that hopefully doesn’t screw it up,” and it can get messy. So I think there’s real value in this team-based approach.

Justin:
All right, man, let’s move into our fifth and final section. Let’s talk about legal protections and restrictions that come with, you know, virtual online businesses versus physical real estate. Honestly man, I’ll just put it out there. You know, these virtual asset kind of space, this is a really new frontier and it’s basically the Wild West, man. I mean, there are, there’s no, there aren’t any protection. So if you were looking like, well, what about this? Or how can I set it up or structure it this way? No, you can’t. You have to maintain some leverage. There has to be some level of trust in the business and you know, you’re gonna get what you get. So yeah, it’s kind of rough and it’s good and bad. I mean, I like the fact that it’s relatively easy to get involved when there aren’t a lot of restrictions, but some of the protections aren’t there, too. That would be nice, probably.

Ace:
Yeah, it would be. I think a lot of people come into this space, especially if you are used to selling something like real estate and you’re like, “Okay, so when do I get my closing docs, and when do I get my closing statement and you know, what’s the purchase agreement look like?” All of these things. And they’re just used to tons and tons of documentation because that’s what the world of real estate is like. For us, it’s just not that way. The other side of this is that everything changes so much and you know, I think about just like you said, everything has changed over the last five years and how much more mature than the market is. I don’t think that there will be a huge focus on this space for two reasons. One, it’s just tough for Congress to keep up with everything that’s going on in the online world.

I mean we see these multibillion-dollar companies that cause issues like a Airbnb and Uber, and they can barely keep up with them that’s moving a lot slower than smaller spaces like ours. So I don’t think there’ll be a lot of loss from that perspective. And then really, the government is already kind of stated that when it comes to our spaces, they aren’t looking to really protect people. I tell people this all the time that that come to us for help. Brokers, nobody in this space has any fiduciary responsibility to you unless you have a specific contract that says that. So unlike in the world of real estate, where you, a broker, if they’re representing both parties, they have a legal fiduciary responsibility to make sure that both parties are treated fairly.

Justin:
Yeah.

Ace:
When it comes to this space, they look at, they say hey, if you’re to buy a business, you’re a big boy. They were under the same laws as Warren Buffett and Mitt Romney, and it’s up to us to be able to protect ourselves. And so there is that like, you know, a broker’s fiduciary responsibility is to get the business sold for their client. So-

Justin:
[crosstalk 00:32:54]Yeah.

Ace:
… those are some of the things that people have to get used to.

Justin:
Put on the big boy pants and strap in, man, ’cause this is a big ride. We’ll see how this works. There are very few protections, I mean, it’s just you’re doing deals. What’s really crazy to me is that, I mean, so many deals in this business are done on handshakes or you know, a little more tech-savvy Skype calls. We’ve done deals with you, five- and six-figure deals that are really over the phone, right? I mean over the Skype, like halfway around the world. Like we’re in the Philippines or something and you’re in wherever you watch, somewhere in the U.S. or not and you’re like, “Hey, let’s-

Ace:
[crosstalk 00:33:27]Yeah.

Justin:
… do this deal.” We’re like, “Okay, that sounds great” and done, right? That’s it. Now I’m not saying that there aren’t reasons for contracts and there are times where that’s needed, but I mean a lot of times there’s not even that. So yeah, it’s pretty Wild West, man?

Justin:
It’s interesting, though. I mean I think it’s a lot freer, and I know there are obviously some other brokers in our space and there are other people in our space that are kind of contract-heavy. And I appreciate it ’cause there are things they’re doing to tighten up the market and I think, make some standardizations that are probably helpful, but kind of like the Wild West they’re in right now. I mean, you know with it comes all these crazy kind of deals that could work their way out. I mean, lower multiples which give you better returns. That’s kind of interesting.

I think when it gets really tight in terms of restrictions and stuff, we’re going to see those multiples increase. We’re going to see some of that ROI, that juicy ROI, go away and you know then it’s, I don’t like that. It’s kind of sad to-

Ace:
[crosstalk 00:34:20]Yeah.

Justin:
… me I think. When we get to that we’re probably at least 10 years away if ever. Like you said, I think the government is just really poor at keeping up with technology unless you’re an Uber, Airbnb, they’re not going after you. And those guys really, they just got so big so fast, and the government’s like, “Oh hey, we need to kind of shut this down.” And then they’ve got enough time to work their way out of it. So yeah.

Ace:
It is, it’s so fun to see them navigating that. I was just reading that in New York, Uber has hired Al Sharpton to start making noise on their behalf and fight for. So you know, just like you could have fun with it and be creative once you turn into a billion-dollar behemoth, to fight these guys back. But for us, you know, we’re small enough that we’re not getting paid attention to and I agree. I mean, I think it depends on your preference. For the person that likes a lot of structure and a lot of documentation and all that, I would really recommend like, hey, this isn’t the right world for you. The reason that you get these amazing returns is that it is the Wild West. And if you go into the Wild West not knowing how to operate or you know, use your gun and you move around.

Justin:
Or brig your six-shooter with you, yeah. You better … High Noon, buddy.

Ace:
Exactly, man.

Justin:
I went with that, we’re taking that reference way too far, man. But yeah, dude.

Ace:
Yeah, you’re right, you’re right. The key is, in this space, you know, know what you’re doing. Lots of people are having a ton of success. It’s not to the point where it’s impossible for a newbie to come in and make money, but it is crucial that you’re familiar with the space and the types of deals that are going to be the right fit for you, and you don’t get in over your head.

Justin:
All right, man. So let’s talk a little wins here. Like in the financing section, who wins the financing? Is it physical real estate or is it online businesses?

Ace:
I would have to say that real estate, real estate wins when it comes to financing. There are an endless number of options. People are fighting to give you money for real estate advertising, spending tons of money to get to you. And so you know, you compare that to our world, it’s just not there yet.

Justin:
Yeah, yeah. I think once it gets there, then the online real estate space or that online business space is just blowing up, right?

Let’s talk risk/reward man. I think, I think the online businesses has it here. I think it’s such an early market that, you know, the margins haven’t been squeezed out of it yet. So-

Ace:
[crosstalk 00:36:50] Yeah.

Justin:
… yes, it’s, you know, somewhat high-risk, but I think the reward beats it there. So I think they, I think the online businesses takes that. What do you think about cashflow and then when you think about capital gains?

Ace:
Yeah, I think again, here online deals just are killing it right now. I think it’s a lack of competition when it comes to competing with other buyers for the deals, and just the fact that it isn’t a mature market to be able to get in and get, like you said, Justin, get all your money back in a couple of years? I mean, it’s so funny sometimes talking to people, they’re like, “Man, you know I really got to grow this business and you know I want to get a good return. It’s like, what world did you come from that 50% a year wasn’t a good return, because I need to go there.

Justin:
Yeah, yeah. I think online businesses has it for capital gains too, at least in the short term. I’m not sure about long term, but in the short term they have it suddenly because over the last few years we’ve seen multiples increase on these businesses, so just hanging on to the same business for two or three years is going to get you quite a few gains. I think that’s gonna continue for the next two, three, five years. I don’t know where it’s gonna go from there, but I think in the short term, I think all my businesses have the capital gains, too. What do you think about passivity, man, in terms of management and work you have to do?

Ace:
Real estate has it. I mean, from the small property management company up to large billion-dollar REITs, where you can totally passively invest in a deal. It’s a lot more mature market. There are a lot of services around real estate that make it really easy to find deals, manage deals, sell deals, so it can, it can be a really passive process.

Justin:
Yeah man, I agree. In terms of legal protections and restrictions, I don’t know, man. This one’s really depends on like where you’re coming from. I think when it comes to restrictions, it’s pretty open in the online business space. When it comes to protection, it’s pretty open on my business space. So it really just kind of what market you’d like to plan. If you like a more established market, something that’s out there that you kind of know what you’re going to get, you kind of know what’s expected, I’d say, you know, physical real estate. If you kind of like the I don’t know where this is at and where we’re going, we’re going to try to make a deal here and I have much more freedom to move around, I think the online business space may be the place for you.

Ace:
Yeah, I agree. I think both of us err on the side of less restrictions. We’ll give up some protections in order to have less restrictions, to be able to just be entrepreneurs. Very few entrepreneurs want restrictions. We go into this space because we don’t expect to be protected. We want to go out and have the freedom to do deals, make our own way. And this is a space where you can do that right now.

Justin:
Absolutely.

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