What does it take to be successful as a real estate investor? Certainly not a college degree. I mean, yes, some universities offer courses on real estate finances, and popular REIs are invited to share their knowledge with young students. But what do you learn from lectures and even from Q-n-A sessions with eminent REIs?
“It’s impossible to learn to plough by reading books” – that’s what people say, and this saying applies to real estate investing, too. It’s a business in which experience, networking, and people skills triumph, and if you don’t have any of those, you shouldn’t even consider working as a REI.
With this in mind, it’s quite natural for REI’s to have reservations towards business planning. What’s a business plan, if not yet another book on real estate? But things are not so simple, so let’s explore the merits of a business plan.
REI novices that are worth their salt have some of the following priorities:
If you’re doing all that already, why set aside time and effort for business planning?
Studies show that business plans positively affect performance and that companies that have business plans grow faster. Now, while these studies are general and apply to different types of entrepreneurs, real estate investors too can benefit from having a strategic outline of their business.
A business plan is a document that states the long-term goals and the short-term objectives of the company. It also covers the operational aspects of meeting these goals, such as organizational structure, financing strategy, and marketing framework.
If you are a real estate investor that is intent on running the business all on your own, you may be tempted to think that you don’t need a business plan. After all, it does sound official, corporate, and divorced from the daily struggles of getting leads and closing deals. However, by the end of this thought exercise, you’ll see that any REI, be it a one-wo/man-show, or be it a great real estate company in the making, would gain invaluable insight about their business by writing a business plan, though it goes beyond that, too.
Why you need an REI business plan:
REIs can use the standard template for business plans – and as long as you do a good job at separating the different sections within the document, you really can’t make a mistake. The templates usually have the following elements: mission and vision, goals and objectives, organizational structure, finances, marketing, and branding. Some companies decide to include a section on causes or charities they are willing to support.
As an REI, it’s also recommended to cover the issue of investing strategies in the business plan (you can add a separate section or integrate the strategies into existing sections) and to outline a contingency plan for critical aspects of your business that can go wrong (like losing a partner, or investments in which you don’t break even).
Let’s take a closer look at each section of the business plan. It will become apparent how it will benefit the growth of your REI business as we go along.
The mission statement, the vision, and the values that will get you there – these are all themes you want to include in the opening section. It’s arguably the shortest section of your business plan – usually a couple of paragraphs on the first page.
Common wisdom dictates to write the mission statement after you’ve completed all other sections of the business plan. Also, you can use the mission and vision statements of companies whose values you identify with for inspiration. But the most important point in the opening paragraphs of your REI business plan is to explicitly state that you’ll treat everyone in the business with respect (and of course, to follow through on this value statement in your everyday operations).
Although the mission statement is short, its consequences are far-reaching. For example, if you state that your REI business is dedicated to bringing 20% profit to lenders, stakeholders will take your word for it. Or, if you state that you value your employees’ well-being and want them to spend more time with their family – don’t be surprised if they ask for a 4-day work week down the line. So, be very careful of the wording you’ll use in your mission statement.
You can also include info on the type of entity you’ll register (sole proprietor, limited liability company, limited partnership, a corporation) so that the reader immediately has an idea of what your company is all about.
Legally, you are free to double-cross clients or to be a proper shark that takes advantage of motivated sellers in distress. Regardless, make sure you incorporate some type of business ethics in your operations because reputation and referrals mean a lot in the real estate business. You simply can’t act like Machiavelli in local real estate deals and remain accepted on that market. People, be they lenders, motivated sellers, or colleagues, will either refuse to work with you, or they will be excessively apprehensive when they do work with you, so you’d end up losing business opportunities in both scenarios. Support people and treat them with respect – this can easily result in an extra deal coming your way down the line.
In a nutshell: Come to terms with the business ethics you are comfortable with and express it clearly in the mission statement section.
It’s recommended to include both long-term goals (let’s say a 5-year plan) and short-term objectives (for the next year) in the business plan.
Do you want to achieve financial freedom? Is the purpose of your REI business simply to get you out of debt and take care of your family? Or do you have the vision to employ an x amount of people within 10 years? Or to enter and dominate many real estate markets? There is no right or wrong answer. REIs can make a living by sticking to a few neighborhoods (especially in high-demand markets), but you might also want to coach others to work for you and to go after as many real estate markets as possible. Whatever your shtick, it should be clearly outlined in your REI business plan.
Numbers help keep the projections practical. For example, novice REIs often focus on the number of deals they want to close in a year. It’s a great way to keep the focus, but don’t inflate the projections to present your company as larger than it actually is. Those who know how the REI markets work will immediately assume that you either don’t know what you’re doing or you are deliberately cooking the books to manipulate others – both are against you in the long run.
Once you have set your goals, you can go after objectives. It boils down to project management from that point on. Break down the objectives as much as possible – even to daily tasks that will help you keep up. This is the actionable aspect of setting up goals, where you simply determine the individual steps that will take you there.
For instance, in the first three months, you start a two-channel marketing campaign, get twenty leads, and close two of them. To do this, you need to:
Obviously, the actionable items aren’t included in the business plan – they go in your business calendar.
In a nutshell: Having clear and achievable goals in your REI business plan doesn’t only make your day-to-day operations more focused, but it also helps illustrate (to lenders, consultants, and colleagues) the direction in which you are headed.
This is the section where you provide an overview of the general business framework. Since REIs deal with investments, some sort of Investing Strategy is central to any real estate investor’s business plan.
Real estate investors adhere to different investment strategies based on the return of investment that is expected. In essence, there are a handful of options:
Keep in mind that while you and other REIs would know the jargon, you should go to the trouble of detailing the investing strategy in plain terms so that any layman lender can jump on a project, even if this is their first real estate venture.
By explaining the framework to potential partners, you can also find weak spots in your REI strategy, which is a good thing, as you take the opportunity to improve the business framework. Of course, it’s not easy to take all factors into consideration from the get-go.
For example, if you are after passive rental income, you should have a whole system in place to protect the investment – tenant policy and property management are the most important aspects of it. In this case, the cleaning services, the renovation crew, and the rental agency (if you use them) are your strategic partners. Meanwhile, staying away from troublesome tenants is your prerogative.
The section on investing strategy can also include details on the deals you want to specialize in (if applicable). So, if you believe that going after a specific type of motivated sellers (eg. those with properties in probate proceedings) would give you a strategic edge over your competitors, you can cover the characteristics of your target clientele in your business plan as well.
In a nutshell: A solid REI business strategy facilitates decision-making in the long run because once you’ve decided the big-picture stuff, you will know whether the properties you come across satisfy the preset goals. You won’t waste anyone else’s time and they won’t waste yours. Of course, you can revisit the strategy if something changes as you move forward.
This is the part of your REI business plan where you prove to the reader (potential lender?) that you know your stuff. Pack a lot of value, but be short and concise, because the conclusions ought to be apparent right away.
Continuing on the example from above, if you are after passive rental income from the properties you invest in, then you can present data on rental occupancy rates, average rent over time, rental market demand, employment rate, costs of living, and other metrics for your market that drive the message home. In essence, these are the figures that support the validity of your investment strategy.
You can also expand the analysis to show your position relative to competitor REIs in the target market. Some are proponents of using the SWOT method (strengths/weaknesses/opportunities/threats) for analysis in REI business plans, but you can go for any other method as well. Just make sure that the analysis points out a vital piece of information (you don’t have capital) or a competitive edge (your small business inspires trust in local, motivated sellers unlike offers from big companies).
In a nutshell: Now, you are probably evaluating the real estate market on an ongoing basis (a good rule of thumb is every quarter), but this section of the business plan serves to show general market trends to others, so keep it simple.
It goes without saying – marketing is one of the pillars of REI businesses, so it’s prudent to set aside a section in the business plan in which you outline your marketing strategy.
You want to be the first to get to motivated sellers and this takes proper planning and setting aside a budget. In this section of the business plan, you can share how you intend to communicate with everyone, including clients, colleagues, the rehab crew, competitors, lenders, etc. It goes beyond typical branding (like logo, a motto, and a catchphrase) because you need to establish a relationship with your clients before they need your services.
So, go for a multichannel marketing strategy that includes bandit signs, driving for dollars, listings, social media, Google ads, direct mail, pay-per-click, your own website… You know, the stuff we usually write about. Having this aspect of marketing laid out helps build credibility with everyone that comes into contact with your REI business.
Marketing plays a role in the overall success of any other business, but as we like to point out here at AdWords Nerds, marketing for real estate investors may be the only element of a business plan that will give you a competitive advantage.
This is where you delve deep into numbers. Don’t worry, the type of data you need to include is standard: financial statements like cash flow and balance sheets.
Populating the data is easy. What is difficult is incorporating every possible item in a revenues/expenses spreadsheet. If we follow up on the example with rental properties from above, it’s easy to bank on the rental income you’ll get. But you also need to include a whole array of expenses: upkeep costs (cleaning and maintenance), renovation costs, property taxes, expected vacancy rate, interest on loans or mortgage (if applicable), operating costs (eg. gas for visiting properties, phone bill for your call center), advertising costs, and many other data points along those lines.
Unless you focus on real estate that satisfies a specific set of requirements (like a fixer-upper house with renovation costs of $20,000 at most), your financial analysis will vary for each property under contract.
Therefore, you can also address, in general terms, the issue of raising capital. There are a number of ways to finance your REI business: mortgage (or put equity on the line), private lenders, venture partners, crowdfunding, and even creative finances. A short summary of the creative financial terms you can offer, like lease option agreement or seller financing, may help you get a new partner.
In a nutshell: Spend some time calculating financial projections. Bankers and lenders need to have this kind of information about your financial plan to make the go/no-go decision.
In this section of the business plan, you describe the operational aspects of being a real estate investor. It’s equally important for a one wo/man team, as it is for a company with 100 employees.
It’s a “who does what” type of report. If you work alone, then describe the services you will hire to delegate day-to-day tasks to – tasks that are beyond your expertise (eg. property appraisal) or those you don’t have time to do yourself (eg. a call center).
For bigger businesses, you can put together a diagram showing the organizational structure. As long as you make it clear which employee is responsible for managing a certain aspect of the workflow, you can’t make a mistake.
In addition to this, you can also include info about the processes you intend to use, but don’t go into too much detail. For example, you can explain the life cycle of leads, the client relationship system you’ll use, the follow-up process, and the playbook for your call center.
In a nutshell: You simply create an outline for turning leads into closed deals, and this is as helpful for you as it is for any potential partner or lender.
This is your plan if things go south. Every investment bears risks – real estate is no exception. If you put yourself in the shoes of a banker or a lender, you’ll see that this section of the REI business plan might dictate your fate, because no one wants to throw money away.
So in this section, you consider worst-case scenarios. What if your rehab project ends up costing you more than originally projected? What if your venture partner suddenly needs to pull out of the business? What if your rental property has excessive vacancy rates?
Of course, the most important question is: “Who will cover these losses?”, followed by: “How many losses can you take in the course of a single year?”
Remember, developing an exit strategy is essential to show your partners that you have a plan that will keep you afloat even if there is a downturn in the real estate markets. This is not meant to discourage you from starting your REI business, it’s simply a way to prepare you for facing the real possibility of dealing with failed investments.
In a nutshell: Sometimes, you won’t break even, so show yourself, and everyone else, that you’ve taken this into account when you composed the REI business plan.
As we near the end of this thought exercise, we urge you to work on your business plan for real estate investing and to put it in writing. If you lack experience in drafting this type of document, you can ask for help from a friend or a family member that has the necessary skills.
You can also forward it to a mentor or hire a professional – the cost would probably be the best money you’ve spent for getting your project off the ground. The main idea is to get an opinion from someone who will do their best to discover faults in your business plan.
Writing a real estate investor business plan will help you reevaluate the foundation of your future business. Most REIs have an entrepreneurial spirit and would rather test their assumptions in the real world than putting them on paper. Do note, however, that this type of document can be very handy for building relationships with lenders, partners, and clients down the line, not to mention all the other benefits we described above.
So, get comfortable and start visualizing the type of business you want to build. Then, sit down and start writing your business plan.
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