Strategic Planning...There is more than meets the eye

A quote widely attributed to a German officer during WW II stated, “One of the serious problems in planning the fight against American doctrine is that the Americans do not read their manuals, nor do they feel any obligation to follow their doctrine.”

Back during this time a lot of changes were occurring within our military but, if you compare how the US Military plans and fights now to that time period, I would say that this is no longer the case. I can say this fairly confidently as a 30+ year Army Veteran and former instructor at the Joint Forces Staff College during my career. So what does this have to do with being a Real Estate Investor? Actually, quite a lot. Consider this, how many books and articles have we read about a particular subject? Now, how many of those books and articles basically said the same thing? Consider the definition of Army Doctrine, “As a military term, Army doctrine is defined as the fundamental principles by which the military forces or elements thereof guide their actions in support of national objectives.” (John Spencer, What is Army Doctrine, https://mwi.usma.edu/what-is-army-doctrine/)

Now, let’s reword this. As a Real Estate Investment term, REI Doctrine may be defined as the fundamental principles by which Real Estate Investors guide their actions in support of investment goals and objectives. Hmm, if you think about it, this is not very far from the truth. Consider the recommended reading that both Josh and Brandon always talk about and also consider some of the books that consistently come up when they ask their guests what their favorite business book is. I would say “Rich Dad, Poor Dad” by Robert Kiyosaki is equivalent to strategic level doctrine that many of us strive to abide by and follow especially his definitions of assets and liabilities.

What about “The Ultimate Beginner’s Guide to Real Estate Investing” by Bigger Pockets? How many of us have read this and use it as a reference? How about the forums and blogs, how many of the topics surround a particular area of REI with the discussion often revolving around tried and true practices and principles? This ladies and gentlemen is exactly what doctrine is. It both educates and guides us on our journey for financial freedom within the context of being a Real Estate Investor. The importance of this statement is simple, to follow and abide by doctrine, one must understand it. To understand it, we read, we listen to podcasts, we talk to successful investors and we ultimately learn. When you have a solid understanding of doctrine it allows you to develop a viable and actionable plan that will help you achieve your investment goal(s).

This segues into the main point of this particular post, the plan! Since I am a relative newbie to real estate investing I realized that I must understand the basics of the REI doctrine before I could develop a plan. To this end I have been doing exactly what I said above, reading, listening, speaking to investors and learning. After doing this for about a month I sat down and developed my plan that I intend to execute in 2019. I did fall back on my background as a strategic planner and program manager as I developed my plan as I am comfortable with that particular process. Now, my methodology is rather in-depth so instead of trying to cover it all in one post I will break it up into a few. Consider this an example/tutorial of “how the retired Army guy developed his plan.” It is my hope that by writing this others may gain something of value that helps them develop their own plans.

So let’s get started with some very basic definitions that are critical to how I developed my plan.

Current Operational Environment (COE) – combination of the conditions, circumstances, and influences which will determine the use of resources and help an investor make decisions

Ends – Goals or Objectives

Ways – Actions taken expressed in verbs

Means – Resources and Requirements

Goal – Long term end result, broad in scope, general or specific in nature, harder to measure

Objective – Short term, narrow in scope, specific results, measurable

End State – Primary goal; conditions that establish completion of the primary goal

Decision Point – A point in time and space where the leadership anticipates making a decision concerning a specific investment course of action

Critical Requirements (CR) – Essential conditions, resources and means

Critical Vulnerabilities (CV) – CRs or components that are deficient or vulnerable to neutralization

Strategy – A plan of action(s) or policies designed to achieve a major goal

These are the primary terms that I focus on when developing my strategic plan, there are a lot more out there that apply to military operations but for my purposes, these are what I focused on. Now, these terms may mean absolutely nothing to you if they are not put in context. For those within our community that are either in the military now or former military they may make complete sense but for the sake of clarity, I want to go over them and help define what each term means.

Let’s start with the COE and let me ask a question, how do you know how to get to where you are going if you don’t know where you are coming from? This is the crux of the COE. In simplistic terms, I can’t get to Las Vegas if I have no idea where I am starting from. Understanding the COE helps you define your goal as well as the objectives you must attain along the way. To this end, I spent an entire day defining my COE which involved reviewing my current financial position, evaluating the surrounding area markets, and understanding the current political and economic climate and its effects on the overarching economy moving forward.

As an instructor, this was one of the exams we gave. Our students, US and Foreign Military officers in the rank of Major and above, were given information over a period of time that provided an information on different aspects of a particular environment. Our lesson plans all tied into the completion of a culmination exercise so as the classes progressed they were given more and more information and had to use the tools we taught to organize, evaluate and develop courses of actions and strategic plans. The first one was the COE and they had to write a paper that defined the COE based on the information they were given.

The importance of this step is quite vital in the development of your plan as you may find, after completing your analysis of your COE that the path you thought you wanted to tread will not get you to your goal. The COE is in essence your start point. It tells you what you are dealing with in the current point in time and provides you insights into future trends based on what is going on in the here and now. I will explain how I developed my COE in a separate BLOG post as it is something that can be quite labor intensive in nature. Now on to the next set of terms.

Ends, Ways and Means. I grouped these together because they are almost a cliché within the military planning community. Ends is pretty self explanatory as it is quite literally an objective or goal so I won’t really delve into this much as most people understand this. However, ways and means do require a bit more looking into as they are not as simple as a stated goal; let’s start with “ways.”

“Actions taken expressed in verbs.” What exactly does that mean? Well, let’s put it into context. Within the REI community we refer to the different methodologies of investing as strategies e.g. flipping, wholesaling, buy and hold, etc. In reality, these are actually “WAYS.” Remember, ways are defined as actions taken expressed in verbs. Now, let’s look at the three things I just mentioned. Flipping a house, this is an action taken and the term FLIP is a verb. So when you flip a house you are buying, renovating and selling it to achieve a profit this is NOT a strategy, it is a way to achieve an end. Wholesaling and buy and hold are exactly the same, the common "end" to all three of these is profit but they are different “ways” or actions to achieve that profit and, they may support multiple “ends.”

There are those that only flip houses, some that just do wholesaling and others that focus only on buy and hold. More often that not, I think many use a combination of “ways” to achieve their end(s). As you develop your strategic plan and define your end(s) you will review different methods or “ways” to achieve that end. What is also important to understand when considering your ways is your “means”. After all, just because flipping a house is the quickest and most efficient way to reach your end, it does not mean you have the resources or can support the requirements to do so.

Means are usually expressed as nouns and verbs and a key part of any means is resources. Do you have the money not only to buy a house to flip but to also afford the renovation and carrying costs of the flip? When developing your “ways” you must also list out the “means” to achieve it which will also often translate into defined requirements. Requirements on the other hand can be a product of an identified resource or, it may be a stand alone item that has nothing to do whatsoever with your resources and vice versa. Sounds confusing? Let me try to use an example. Say I find a house being offered for $50k and I determine that my ARV will be $120k. I decide that instead of cash flow, I want to develop capital and decide that the best method or “way” is to flip the house. I now need to evaluate my “way” and list the “means” by which to execute this course of action.

End – Capital Development

Way – FLIP house

Means resources:

Money to buy House $52k

Money to renovate $40k

Money for Carrying costs $2k

Money to market house $2k

Money to pay Realtor $7200

Various contractors

Project MGMT software

Financial MGMT software

Means requirements:

Cash - $101,200k

Flooring contractor

Electrical contractor

Plumbing contractor

Carpentry contractor

Project manager

Insurance

Realtor

Permits

Survey

Insurance

Architectural drawings

If you noticed, there were requirements that didn’t directly translate from a resource, permits are a great example as this really isn’t a resource but it is often a requirement before you can do any type of renovation. Additionally, not all resources become requirements. Project management software may be a resource you have, I have MS Project, but it is not necessarily required as I can manage the project just as well with an Excel spreadsheet. The key is to identify as many resources and requirements that you have or will need to successfully execute the method.

After you have evaluated your “way” and listed the “means” that are needed to achieve your “end” you may decide that you don’t have the means, pun intended, to use this particular “way.” This is why you must take the time to do this evaluation or you will find yourself starting down a path that brings you to a screeching halt because you neither have the resources or the requirements to complete the journey. How you go about determining the resources and requirement that are needed to support the chosen “way” is up to you. What works best for me may not work well for you. I tend to be a bit anal retentive and calculate things down to the Nth degree, it is the planner and project manager in me. You may not be as detail oriented but I do advise that you are realistic and thorough in defining your “means.” Failure to do so will likely result in two potential outcomes: project cost increase and margin reduction or, failed project.

It may seem a bit extreme but when you take the time to think about it there are really only three outcomes of any plan. Complete success, failure or, a variation of success in the way of reduced outcomes or outcomes better than expected. Some may disagree with this way of thinking and I have no qualms with that, this is just the way I think. With this, I want to cover three more terms and then wrap up this portion of my mad rantings. As defined early on, “ends” are defined as goals or objectives. These terms are often used interchangeably but the Military defines each differently and then tends to add subsets that confuse people! What is important to understand is that both terms serve a purpose and ultimately feed into our end state. Let’s start with goals.

Goals are long term in nature, tend to be broad in scope and can be either general or specific in nature. For example I can say my goal is to achieve complete financial freedom within five years of implementing my strategic plan. Or, I can say, my goal is to have $5 million in personal assets and $2 million in liquid assets for my business as a capital reserve fund within 10 years of implementing my strategic plan. Both are long term and both are relatively broad in scope. So what about objectives? Can’t you say that what I just wrote can also be called objectives? Yes.

Head hurt yet? Sorry about that. From a completely semantic point of view the terms are interchangeable. From a planner’s point of view they are different. The biggest difference is time, specificity and measurability. Broad goals are sometimes hard to measure e.g. “complete financial freedom” is a bit hard to measure since it is not clearly defined. It doesn’t mean you can’t do it, it just means it takes a bit more effort. An objective on the other hand is very easy to measure and always specific. Another way to look at an objective is as a set of stairs. Your COE is the bottom of the stair case, your goal is the top of the stair case and your objectives are each stair that lead to the top. Each step is clearly defined, short term in nature and clearly measurable.

What you will notice is that I added the Ends, Ways and Means term to the picture and the objectives are also “means” in this case. This is not uncommon since means are also defined as requirements and not just resources hence the term, “means to an end.” I hope this tied in all the terms I have discussed thus far as visualization often makes things easier to understand. I am a very visual learner so like diagrams and pictures. The last term is a bit more nebulous in nature, end state. By definition it is a goal but that is only part of it.

End state is not just the primary or overarching goal e.g. complete financial freedom, it also encompasses the conditions that allow you to achieve your primary goal. Back to the goal of complete financial freedom, what must exist to make this happen? Money? Sure, that is a piece of it and material in nature but what are the conditions that must be present to allow you to have this money? When one establishes their long term goal they must also define what must be present to achieve that goal. For total financial freedom we could say that the conditions that must be met to ensure that this goal is met are as follows.

1. $5 million in assets that provide a consistent passive income of $500k annually

2. Systems and processes that maximize effectiveness of investment growth

3. Systems that maximize efficiencies of investment processes and minimize waste

4. Risk mitigation strategies that effectively reduce the maximum amount of loss to no more than 10% of any given investment

5. Tax shelters that minimize taxation on profits

These are specific conditions that must exist for me to say that I have successfully reached my End State. If any one of these conditions are not met, I have not yet achieved my primary goal or end state. The development of a viable and achievable end state was also one of the written exam requirements we gave our students. After a complete analysis of the COE and a thorough understanding of the superior commander’s intent they had to develop a written end state that supported the commander’s overarching strategic goal. As a real estate investor, we must define our own strategic goal and end state and also determine what it should look like when it is reached. For me, the conditions that define my end state are many so getting there will take some time.

I now come to the end of my madness, for the moment, but will be back to complete the cycle of insanity soon. Hopefully, it won’t be delayed by sickness as it was this time. Nothing like getting the creeping crud for a couple of weeks to sap the will to do anything out of you! I hope this is useful to someone and I am always looking to discuss thoughts, ideas and questions on anything I posit. I am by no means an expert so am always listening and learning. I will finish up the terms in the next post then start to delve into the development of my strategic plan.