Cheers! You’re now ready to get serious and make your real estate investing business professional. You’ve probably searched for real estate investing business plan because you recognize this is an important key to success. Before you begin deploying any capital or begin searching for a single investment property, sloooow down. First things first, let’s put together your real estate investing business plan.
Being diligent about the path you will take to achieve success will increase your likelihood of positive outcomes and minimize hiccups along the way.
This plan will guide you through your goal to invest in income property. Don’t fret, the plan isn’t solidified in stone and no you don’t need to submit a sample of your blood to begin. When we started, we tried to be less formal and more flexible and called it a “business strategy plan.” We knew we didn’t want to be too rigid however we were focused on understanding the full landscape and challenge our assumptions.
Like you, we really believed our idea was the greatest thing since sliced bread and the first page after the title page was a confidentially agreement! Funny, looking back now, there is no need to be paranoid of others “stealing” your idea. You’re definitely not the first to consider a real estate investing business nor will you be the last. Yes you may have secret sauce or a special method to your madness, but be willing and open to sharing your ideas and plans with others.
As you refine your business over time you may develop confidential processes that you want to protect.
For now, let’s just focus on getting your ideas on paper and generating those first dollars.
The main categories for your real estate business plan include:
Company background/Personal qualifications
The first step in the process is to do a short and concise brain dump. Describe your planned company overview and company objective. It’s okay to start with a quote to get the wheels turning on the white page…
“What has been will be again, what has been done will be done again; there is nothing new under the sun.” Ecclesiastes 1:8-10.
List your personal qualifications which will make you a good real estate investor and add value for future success in your pursuit.
Determine your why and your ultimate overall real estate investing goal
Your real estate investing business plan should clearly state your “why” and your ultimate overall real estate investing goal. For us, we each had very different motivations.
Richelle felt she was financially behind her peers because she went to graduate school before starting to work and she wanted to catch up – fast.
John wanted to break away from the family investment company and gain success and traction on his own. He wanted to operate and build his own brand the way he felt it should be done.
Each individual’s “why” will vary but it is nevertheless important to identify your own ideas of why.
Next, quantify your overall real estate goal.
Big or small your goal is yours! It can be to own a second home and rent it out. It can be to a mass enough real estate rental income to replace your current employer. It can also be to build a generational real estate empire of which you can be proud. There are no wrong answers here, folks! Dream big or dream small, whatever you choose is the reality we set out to help you create.
What are your income goals for rent?
Before we can recognize your income goals, we’d like to highlight some of the most common expenses that frequently occur in the real estate investing business. Income taxes, property tax, building insurance, water fees, sewage fees, landscaping, snow removal, maintenance, accounting fees, marketing, advertising your property, management of the property, and not to mention any unexpected expenses that come up from time to time.
Now, for your real estate investing business plan, having a clear income goal will keep you on track for benchmarking and measuring success in your investments. It’s a great idea to start with how much you want to make and work backwards to add-on the property related expenses to reverse engineer the process. We suggest estimating expenses at 55% of gross monthly rent.
How will success be identified and measured?
To make it clear, you’ll need a benchmark to identify and measure success. Sometime the easiest way to do this involves putting a dollar value and time limit on it. This type of goal setting is proven to work and was popularized by Napoleon Hill’s Think and Grow Rich. Try something like this:
Big goal: “I will have $ _____ in monthly income by ______.”
Now let’s get a bit more granular:
I want to invest in real estate because_____________________________________________________________________________________________________________________.
I would like to generate passive income amounting to $_________/month
I want to invest in this type of property: _________________________________
The average income I will target for each property/unit is: $____________
Therefore, I need to buy (#)_______________ of (type of property) _______________________ I commit to __________________________________ this year.
Conduct a SWOT analysis (strength, weakness, threats, opportunities)
A SWOT analysis is a powerful business tactic to survey the marketplace and competitive landscape. This concept applies both to yourself and your budding business. OK, this step of your real estate business plan can be challenging but also rewarding so we recommend puuusshiing yourself!
S: Strengths. What are your strengths? Describe how these strengths will apply to your real estate investing business. Don’t know? It can be difficult to recognize your own strengths.
Another way to determine your strengths is to pay attention to the comments and compliments that others give you, particularly if they happen with any regularity. This is similar to the Seagull Theory basically saying that the compliments that you receive are actually other people recognizing your strengths. We bet you’ll smile the next time you see seagulls at the beach!
Examples of your strengths could be a strong credit score, leadership and project management skills or even a vast network with many useful connections.
W: Weaknesses. We know, you don’t have any weaknesses (obviously you are an oh so perfect person). Contrary to what you may believe, we all have areas where we can improve. Again, those close to you are uniquely positioned to provide feedback on areas they believe you can improve. That’s right, it’s time to call up your college roommate (or better yet that old boyfriend or girlfriend!!) to get the cold hard truth.
Have thick skin and don’t take this as completely negative, the exercise is not meant to beat you up. It doesn’t mean that they don’t love you. (Well that old flame might NOT love you anymore…sorry!)
Identify the gaps and weaknesses in your real estate investing strategy?A low credit score can be a weakness. Do you have a background in real estate or finance? Do you have contacts or mentors who can guide you through the process. Are you going to be making improvements to the property which could involve tools, permits, or contractors?
Go ahead and write all day if you have to. This is your opportunity to be transparent with yourself! It does not mean you are weak, actually you are building strength.
O: Opportunities. The opportunities portion of this exercise is just that, an account of the opportunities that would allow you to progress faster than you otherwise would or gain a competitive advantage. This could be anything from an abundance of housing stock availability, to the need for a particular niche product. Many investors have found success by focusing on affordable, luxury, student, short-term or some other type of niche rental market.
Alternatively, there could be an opportunity to maximize rent income or add equity to a property’s value. Also note that in a down market there might be access to low-cost financing. Accessing a city development plan could also bring opportunity your way.
We can summarize this section with the quintessential Warren Buffet quote “Buy when others are fearful…” This has certainly proven true for our portfolio.
T: Threats. This is an interesting category. This category is a sobering analysis of what could go wrong or derail your progress. A threat to building your passive income through real estate investing would be losing your current primary income stream.
If you work a full-time job, losing that source of income could delay or permanently derail your ability to purchase property or cover expenses until the business is profitable on its own. Other threats include: being taken advantage of by a more experienced person or even buying the wrong property for your needs or expertise.
Advisors such as CPA’s and Attorneys are valuable for adding insight to unknown threats, be resourceful and reach out if you’re having difficulty answering this section.
Here’s to your secret sauce! It’s now time to set yourself apart from other would be or newbie investors. This section of your real estate investing business plan will allow you to solidify your advantages in the market place.
Do you pride yourself as a shrewd negotiator who can solidify target price points? That’s great! Is the current economic condition undervaluing assets at prices below where they traditionally should? This could definitely mean opportunity if your research and strategy align with timing and execution.
Competitive advantages can include relationships. You may have connections to a wonderful core team of people who all have your success and best interest in mind. Some members of this team might include your banker, realtor, home inspector, real estate appraiser, contractor, property manager, mentor etc. Recognize that not going into the process of real estate investing alone will enable you to be more successful.
Proper support systems can really propel your business forward. Knowledge and education can also be leveraged as a competitive edge above others. Maybe you studied real estate at a college or maybe you successful gained your real estate sales license which provides a deeper understanding. A parent who will guide you through the process step by step or another mentor that you trust can help you succeed.
Identify your competitive advantage and leverage it to its fullest potential for the benefit of your income goals and long-term success.
Financing is critical to your real estate investing business plan. You will need to know how to fund current and future properties. Remember, we stress, it all starts with a budget! It is best to decide if you will utilize cash reserves, obtain debt financing and/ or use equity from an existing property as a line of credit.
Are you purchasing the property with cash? If so, how much will you need to complete the project.
How much will you need to save to make your deposit for a mortgage? Again, there are no right or wrong answers here.
The point is to identify the strategy that works best for you and your monthly budget from the beginning.
What product type will you invest in? What price point, property characteristics, and neighborhood demographics are important to you?
Here the fun part of the real estate investing business plan! We know you probably have ideas about the property type you’re looking to invest in. This is the place to tell yourself and others all about it, and please, spare no detail! Here you will be able to categorize action items in order of importance. For example, if you’ll be using credit and financing as an integral part of your strategy, get the ball rolling to understand what you will qualify for.
The amount of money you can comfortably finance will determine the price point you pursue. If you plan to use cash, be very clear about the amount of money you are willing to spend on both the property and any renovations. Rest assured, there are quality housing products at all price ranges. Also, bear in mind that you may have to drive a bit from where you currently live to find them.
Next, think about what neighborhood characteristics and demographics are important for you.
Understanding your investor profile can be really beneficial here. If maximizing cash (income) is king, then school district and proximity to walking paths will not be top priorities. However, if you want to rent to people who could potentially join you for a Saturday round of golf, then neighborhood amenities should remain top of mind.
Understanding the market segmentations of your city will really put things in perspective. In John’s business plan, for example, he stated that there were about 17,000 listings available at the time (wow that’s a lot of houses), of which almost half (49.5%) were priced at $150,000 or below.
This was critical to his buy and hold strategy seeking cash flow. John carved out his market strategy of targeting distressed single-family and two-family dwellings located in predominantly stable neighborhoods. This exercise really helped him recognize the wide landscape of available product and narrow his focus to what he was truly interested in investing.
Let’s get down to business! This section of your real estate investment business plan will help you clarify your strategy to acquire the property.
We know it’s sounds simple… you have the money and you’re going to buy the building… right?! Well, first do you know how you plan to find the product that you’ve previously identified as your focus? Will you be working with a real estate salesperson?
Realtors and real estate salespeople can be a wonderful benefit to your search for property. They can act as your first line of defense when it comes to confirming your research about price and potential value. Some people even decide to pursue their real estate license as a part of their acquisition strategy. Also, access to the Multiple Listing Service (MLS) makes your Realtor extremely effective at locating property in your preferred acquisition location.
Your acquisition strategy should detail the target condition the property at the time of purchase. If you plan to buy a fixer upper, understand the range of costs for the renovation and factored that into the overall price.
Are there specific items in the home which you are willing to consider for improvement such as minor painting, new carpet, and other cosmetic improvements? Write it down and try to understand the implications of your actions.
Imagine you have purchased an ideal property as outlined in the acquisition plan. Congratulations! Now it’s time to perform. You should exert great effort for each property undertaking. This implementation plan should include three parts, the renovation plan, the renovation process, and your property management strategy.
Renovation plan. The renovation plan plays a major role in the short and long-term success of your real estate business. You must always control cost! Try your best to avoid underestimating the repair cost and be careful of not paying too much for materials and labor.
Also, don’t take the cheap route or shortcuts when making improvements! You walk a fine line here. Profit and performance of the rental property will be directly tied to adhering to the plan and not overrunning cost with unexpected expenses (which are more than likely to occur.) So budget for the unexpected! Your implementation plan should have a targeted completion time for the project. Depending on property, a range of 30 to 90 days should be normal.
In your renovation plan, you should divide your scope of work for each property as a step by step process. The exterior work is usually completed first in efforts to attract potential tenant base, as well as build neighborhood goodwill. Exterior work includes landscaping, roofing, windows, siding, and doors.
Next, the major systems are checked and serviced as needed. Major systems include electrical, plumbing, heating and cooling… these are the heart, brain and veins of most property and must be cared for. Finally, we move on to complete cosmetic details such as drywall, painting, carpet, and finishing details.
Remember the longer the property is not producing you income, the longer it is costing you money. Merely holding property will NOT benefit your bottom line!
Renovation Process. Understanding how you will select contractors makes a difference. Will you select be a person or handyman you know? Will you work with a construction company you’ve worked with in the past or through the bidding process? Maybe you have access to referrals from mentors or advisors. You could also plan to be more hands on and complete the home improvement yourself. The point here is to clarify what your plan is. Do you understand construction and labor cost?
Property Management Strategy. Have a plan in place so you can execute when the time comes! Do you plan to manage the property on your own or will you be selecting a property management company? If you will manage the property yourself, start developing systems for tenant screening, leasing and dealing with maintenance calls. If you plan to hire professional management, start interviewing potential providers and understand their process for taking on new clients. The last thing you want to think about after finishing a renovation is the next mountain of work to determine your property management plan.