Chapter 4: Creating Your Real Estate Investing Business Plan
"Do you wish to be great? Then begin by being. Do you desire to construct a vast and lofty fabric? Think first about the foundations of humility. The higher your structure is to be, the deeper must be its foundation." -Saint Augustine
No great building is made without careful planning before ground is broken. This plan serves as the map for the development of the structure, without which, the building just won't come together. In the same way, carefully crafting your real estate business plan is an integral part of your journey. This chapter will focus on the options you have in building that plan and will prepare you for your entrance, and long-term success, in real estate investing.
This chapter includes:
- Creating a Business Plan
- Assembling Your Team
- Business Entity Structuring
Creating a Real Estate Investing Business Plan
If you were to get in your car and take a road trip across the country to an area you have never been before – would you just trust your gut and start traveling in the general direction you want to get to? Most likely, you'd take with a road map (or G.P.S. Or Smartphone, of course.)
The reason we use road maps is because often times the road is unpredictable and the right road may seem to lead to the wrong place. Other times the wrong road might seem to point directly toward your destination. Road maps are created to show the easiest route, the pitfalls you want to avoid, and special things to see along the way.
The same principle applies for your journey into real estate investing. This section is going to discuss building the road map that you'll follow on your journey. In real estate – we call this a “business plan.”
What Your Real Estate Business Plan Should Include
- Mission Statement - When people ask you what you do, what do you tell them? This is mission statement should clearly define your purpose and should include the benefits your business provides. Do your research and come up with a solid mission statement. This is the “Why” in your road trip.
- Goals - Where do you want to go? What do you want real estate to help you to achieve? If your goal is to make $5,000 per month in passive income – write that down. If you goal is to flip four homes per month – write that down. These goals may change over time, affecting the rest of your business plan – and that's okay. Make sure to put down both short and long term goals. By setting smaller, more achievable goals, you'll give yourself something to always look forward to accomplishing -- this will help you stay motivated.
- Strategy - There are hundreds of ways to make money in real estate – but you don't need hundreds. You simply need to pick one strategy and become a master of it. That strategy (vehicle), if dependable, will carry you through to your destination (your goals). If you are choosing to flip homes to generate cash in order to save up enough to quit your job – write that down. If you are looking to build passive income from small multifamily properties for your retirement – write that down. Don't worry if you don't understand or know how you're going to accomplish everything in the plan. Remember, your business plan can and will change in time, and as you learn, you'll fill the plan out with more details.
- Time Frame - What is your time frame to reach your goal? Be realistic but don't be afraid to reach, either. Do you want to retire in ten years? Are you planning on quitting your job next month? Document your timeline here. You can do this in accordance with your goals, as mentioned above.
- Market - Define your market. What kind of property will you be looking for? Low income? High Income? Commercial areas? As a beginner – choose an area you feel most comfortable with. Most new investors should plan on investing within a short driving distance to your home, rather than investing long distance (unless your location makes it impossible.) Doing this will help you to become an expert in that area, which will help you more easily analyze deals and opportunities. It will also help you know the players in the area, which will ultimately help you find partners, and again opportunities.
- Criteria - Before you go out and start looking for deals, you need to establish the criteria which those deals must fall in. You'll want to define your loan to value, cash flow requirements, max purchase amount, max rehab amount, max timeframe, etc (these are all items you'll pick up as we go further). One of the most important lessons you can possibly learn is to stick to your criteria, walk away from any deal that does not meet your criteria. It is very easy to become emotionally attached to a deal, by sticking to your criteria, you take the emotion out of the picture.
If you are not finding enough deals to cherry pick from, you can change your market and/or strategy. You'll learn more about these areas of criteria in chapter 5. This part of your business plan is one of the most important to fully understand and clearly define. Too many new investors get excited and buy the first deal that comes their way. By having clearly defined criteria you are able to easily reject the 99% of properties that are not a good deal.
- Marketing plan - How are you going to create a marketing system so motivated sellers come to you? How will you find the best deals that are listed? Will you use the MLS, agents, online searches, direct mail to lists, or other means of finding deals? We will cover different marketing strategies in chapter seven.
- Financing Deals - How do you plan on acquiring your deals? Are you using conventional, hard money, private money, equity partners, seller financing, lease options, or some other creative method? Finding financing is often a challenge in today’s market and private money provides a tremendous solution. Learn to attract private money so you've always got a steady flow of finance when deals present themselves. We'll cover this more in chapter six.
- How You're Going to Do Your Deals - How are you going to turn a purchase of a property into profit? Clearly define the steps. Make sure to document all your income and expense sources and prepare for the unexpected; you also want to prepare several exit strategies in case the first one doesn't work out as planned.
- Teams and Systems - Clearly define your team and the systems you and they will use to delegate and automate tasks. Who will be on your team? Will you need an attorney, CPA, Etc? You don't necessarily need to know who those people are, simply what roles you will need on your team. More on this below.
- Exit strategies & Backup Plans – Having multiple clearly defined exit strategies is one of the most important parts of your business plan, especially for new investors. How are you going to exit the deal? What are your backup plans? Do you flip, lease option, wholesale, bird dog, sell the note, sell the entity holding title, rent and hold, or some other technique? What is the end-game. This needs to be clearly defined. Again, we'll talk more about this in Chapter eight.
- Illustrate Example Deals –One of the parts of the business plan that seems to get new investors excited is to illustrate the future of your business. What would an ideal, but feasible, next ten years look like? Illustrate purchases, cash flow, appreciation, sales, trades, 1031 exchanges, cash on cash return, and more, to demonstrate what your path might look like. This goes somewhat hand in hand with your goals -- it just illustrates possible ways of making them happen. Additionally, this will change with time because, of course, ideals are not real life. However, it is good to see what is possible.
- Financials - Include a personal description of where your financials are at today. What do you bring to the table? Do you have any equity you can use? Are you starting with nothing? Document your current situation and update it as often as it changes. As you move forward with your investments, it is always important to have at the ready your complete financials.
One last thing – remember that road maps and business plans are guides, not rules. A business plan is meant to give you direction and to motivate you to follow it. When you have a clearly defined business plan – carrying out the plan and envisioning the end becomes much more attainable.
It is almost impossible to follow a financial or real estate road map perfectly. While you can plot your course with care and extreme precision – there are still many outside forces at play. However, your road map is designed to keep you headed in the right direction at the correct speed. You may come across bumps in the road, dead ends, and even a break-down or two. However, if you hold as tight as you can to the map you've created, you will pass through those problems and come out at your destination.
If you talk to investors who have failed in this business, you'll find that the majority of them did so primarily because of a lack of preparation and planning. Don't fall into this trap.
For more information on creating a business plan, check out:
Assembling your Team
While as in investor you are required to wear many different hats, you don't need to (and can't) wear all of them. Instead, you need a team. When we refer to “team,” we're not suggesting you go out and hire a team of employees to work under you. A “team” is merely a collection of individuals in various different businesses that you can rely on help you move your business forward. Here's a brief look at who should be on any winning real estate investing team:
Your Mentor - Every successful entrepreneur needs a good mentor - a guide. By training under the watchful eye of one smarter then us, we can only get smarter. For more information on mentors, see chapter four.
Mortgage Broker/Loan Officer - A mortgage broker is the person responsible for getting you loans – especially if you are going “conventional” (not hard or private money). You want someone who has the experience of working with other investors and you want that person to be creative and smart. Many loan officers have a pipeline of buyers (or future buyers); real estate investors can use the help of local loan officers to build a list of buyers and lease purchasers for their properties.
Real Estate Attorney - It is important to have someone on the team who can go through contracts, and who knows the legalities of all your moves. Don't try to pinch pennies by ignoring this valuable member of your team. You don't need to meet for hours with your attorney each week, but want someone to be available when you need them. Having an attorney who is skilled with real estate investing is highly important for the success of your career. Keep in mind, attorneys can also be compensated through fees collected at acquisition or disposition of a property.
Escrow Officer or Title Rep - If you live in a state that uses Title & Escrow companies, your escrow officer or title rep is the person responsible for closing the deal - taking you from "the offer" to "the keys." Having a good one on the team helps to close deals that much quicker. You always want people looking out for YOUR interests.
Accountant - As you acquire properties, doing your own taxes and bookkeeping becomes increasingly difficult. As soon as possible, hire an accountant (preferably a Certified Public Accountant). Your numbers guy should also be well aware of the ins and outs of real estate and preferably own rental properties of their own. Come tax time, this is the man to help you through the write-offs. A good tax accountant will save you more than they cost.
Insurance Agent - Insurance is a must, and as in investor you will probably be dealing with a lot of insurance policies. Be sure to shop around for both the best rates and the best service. Do not skimp out on getting insurance, as you never know when you'll need that policy.
Contractor - A good contractor seems like the hardest team member to find, but can often make or break your profit margin. You want someone who gets things done on time and under budget! Be sure that your contractor is licensed/bonded/insured to protect you. Don't simply hire the cheap guy.
Supportive Family & Friends - Having the support and backing of loved ones is important in any endeavor. If your spouse or family is not on board - don't invest until they are.
Realtor - An exceptional real estate agent is fundamental in your investing career. You or your spouse may even choose to become a real estate agent yourself to gain access to the incredible tools that agents have. Either way- having an agent that is punctual, a go-getter, and eager, is important. Real estate agents are paid from the commission when a property is sold. In other words – for the buyer, an agent is FREE. They can be an excellent resource for contract real estate work which may include the following activities: birddogging, referring buyers, showing properties, open houses, broker price opinions, etc.
Property Manager - If you don't want to actively manage your properties, a good property manager is important to have. A good property manager can be hard to find – but finding one that can efficiently manage your rentals will make your life significantly easier.
Great Handyman - Someone to take care of the little things that come up on a daily basis is imperative to have on board. Ask for referrals from other landlords for the best handymen; they typically don't need to advertise but work almost entirely on referrals from a small group of investors and homeowners.
One of the best sources for finding these team members is through referrals from other investors. In general, another investor would be happy to refer their handyman, mortgage broker, or accountant to you because it reflects well on themselves and their relationship with that professional. Try asking around at your local real estate investor club or here on BiggerPockets, and you'll be well on your way towards putting the pieces in place.
What Makes a Great Real Estate Team?
A great real estate team is defined by their ability to consistently produce reliable RESULTS. As you might suspect, that’s WAY more difficult to construct in real life than it is to talk about it.
Investors, especially ones with either large portfolios or those who flip a lot (often both), rely on their team daily. When one member fails, the entire endeavor suffers - sometimes to the point of sabotaging the team's goals altogether. Whether you’re serving clients, flipping properties, or keepin’ track of your rentals, your team must consistently produce and avoid the ‘ExcuseTrain’ at all costs. There are those who do - and those who make excuses. The latter will pull you down faster than you can imagine.
People talk a good game, so watch them when it’s their turn to produce. A great team member should exhibit certain traits, which are sometimes difficult to see on the surface, but can be witnessed through longer conversations and via referrals from others. For example:
- Are they really experts?
- Do they interact well with everyone?
- Are they a pain to contact?
- Do they return calls/emails quickly.
- Do they hit deadlines?
- Do they produce as promised, when promised?
- Can they communicate clearly and efficiently?
Assembling the team will not happen overnight, but once together, they will give you the backing and help you’ll need to make your real estate investing dreams come true.
For more information about building and maintaining your team, check out:
Should I Use a Partner or Go It Alone?
Before beginning your real estate journey, you will need to decide if you want to pursue your career on your own or with the help of a partner. This decision is not the same for everyone and depends largely on your knowledge, time commitments, abilities, talents, and timeline. If a partnership is something you plan on pursuing, the kind of partnership becomes important as well. Some individuals choose to invest in real estate from the start, with a partner. Others choose to invest with partners on case-by-case, deal-by-deal basis.
The following chart will give you the pros and cons of using a partner vs. going through your investing career alone.
Team Brainstorming: Two heads are better than one, so ideas can often develop with more clear focus and direction, as multiple minds work through the same issues.
Real estate investing generally takes a lot resources and can often be too expensive for one person to handle alone. A partnership allows you to pool your resources to get off to a stable start. A solid partnership may also help with bank financing.
Assistance with Analysis:
It is important to master the art of deal analysis (which we'll cover more in chapter five). There are hundreds of considerations when searching for your first real estate investment deal - so having someone else looking at your numbers will increases your odds of an accurate analysis.
Different people bring different strengths and weaknesses to a partnership. e.g. Analytical vs. hand on, construction vs. financing, time vs. knowledge. Understanding what each person excels at, and harnessing that strength, is key for successfully working with a partner.
When investing in real estate, there are a lot of tasks that can easily overwhelm your life. Effectively and fairly dividing tasks can ensure that all partners are able to contribute to the business without being overwhelmed.
Networking with others within and outside the real estate industry is vital to the growth of your real estate investing endeavors. In a partnership, each partner already comes to the table with their own network of connections.
A partnership, if both sides do their part, will help to keep the business moving forward; you've got a built in accountability partner to keep you to task. When one partner begins to falter, the other can step in and assist to ensure the team is moving forward.
Starting out in real estate investing can be overwhelming. A partnership can help inspire confidence and motivation when obstacles arise. A good partnership can be revitalizing and motivating.
As with any investment, real estate investing involves a certain level of risk. Having a partner splits the risk (and thus, the profits) and can lessen the fear of loss.
Partnerships can be difficult due to the possibility of vast differences in personalities. When you are relying on another person to get things done and you don't mesh perfectly, conflict can easily arise.
Difference of Opinion
Everyone has an opinion of how things should be done. If you are in a partnership, you are forced to compromise on many aspects of your business. From paint color to investment type – differing opinions can cause difficulty.
As with any close relationship, it is easy for suspicion and trust issues to arise – especially when things aren't going well. Trust can be hard to gain and quick to lose. Fraud also can play a role in the demise of many businesses and partnerships.
When you are acting alone, you have the ability to quickly make decisions based on how you want things. In a partnership, you are often times forced to discuss all decisions – no matter how trivial – with your partner, which can add a lot of time to your dealings.
When you form a partnership – your profits, by nature of the agreement, are split. In other words – you will make a lot less money per deal than if you were doing it by yourself.
Often times people get into business with friends of family - and many times that becomes the death of that relationship. Partnerships don't always work out – and when they don't, the relationship is often severed for good. A partnership is very much like a marriage -- don't get into it unless you're ready!
When you rely on someone else, it's easy to set expectations on how something should be done. However, when the partner doesn't live up to your expectations, it's easy to be bitter and blame the other person.
Responsible For PartnerWhile the legal ramifications depend largely on the entity structure you set up,you and your partner are still in business together which means you are responsible for them, at least in terms of the business. if they skip town, you are still responsible for the whole business. Make sure your real estate attorney helps you draft any partnership agreements to help protect your interests.
More Complicated Taxes
When it's just you alone, your taxes are much more straight-forward then if you're working with partners. The more members you bring on as owners, however, the more complicated the bookwork becomes and the more time consuming (and costly) tax season becomes.
"A friendship founded on business is a good deal better than a business founded on friendship." -John D. Rockefeller
Four Tips for a Successful Real Estate Partnership
If you've decided that the benefits of a partnership outweigh the negatives - be sure to follow these four tips to minimize problems:
- Don’t be jerk:
Treat your partnership with care and have a giving spirit.
- Learn to Compromise:
There will be disagreements and conflicts in a partnership - and there must be compromises.
- Talk Daily:
Talk every single day, when possible. Discussing daily events as well as future goals will keep the relationship stable and validates the reason you are partners.
- Plan Ahead:
Do not start a partnership off the wrong way. Make sure the arrangement is written, well planned and includes an operating agreement to detail the roles and responsibilities, capital contributions, profit splits, and exit strategies.
The Bottom Line of Using Partnerships
While partnerships have a lot of benefits, they are not for everyone and if not properly created, they may be a silent killer to your investment plans. If you choose not to use a partnership – you are not actually investing alone. There are thousands of individuals in the BiggerPockets community that can help you though any weaknesses you may have. You can also outsource many of the things you don't want to do, rather than give 50% of your profits away. For example - if you are not good at construction – it may be cheaper to hire a contractor than to partner with an individual who is good with construction.
If you decide to use a partnership – be careful from the beginning. Many people simply do not make good business partners. If you decide you would like to pursue a business partnership – be 100% confident that you choose a business partner that will treat you fairly, add value to the relationship, and maintains similar goals to yours. Carefully plan out the arrangement (in writing) and constantly communicate. If both partners remain committed to the business, you will likely develop one that is prosperous for all parties involved.
For more information about Partnerships, check out:
Business Entity Structuring
It is important for any real estate investor to understand that incorporating your business is almost universally regarded as one of the best ways to protect yourself from personal liability. There are many opinions about what structure to set up, when to create one, and so on. BiggerPockets recommends that you consult with a real estate attorney or accountant when making these important decisions. The following are some additional sources about business entities that you may want to check out:
Without a proper foundation, your investment career is bound to show cracks and can result in possible failure during rough weather. This chapter was written to help solidify your foundation and give you an overview of the different options you have in creating the strongest business plan possible. If you have further questions about these items, don't be afraid to ask questions in the BiggerPockets Forums.
Once you have chosen your niche, researched and educated yourself about that niche, and set up a proper foundation to build your investment property on, it's time to start shopping for your first property. Chapter five will go into greater depth about the criteria you need when shopping for your investment property.
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