Help Needed Reviewing Early Draft of My Business Plan

11 Replies

I've been researching REI hard core since November (it's become a full time job basically) and I've put together a very early draft of my business plan. I would love people's thoughts on the feasibility of my plan or things I should look out for. Bellow is the early draft (doesn't seem to be an attachment link on this forum). Just a reference, I live in California and will be investing out of state. Once again, this is my first pass at my business plan and everything in it is subject and open to change. I know I still have a lot of work to do on it :)

Real Estate Investing Business Plan

Mission Statement: To generate enough passive income to fuel my creativity and also be flexible with my schedule.

Goals: The long term goal is to have 556 out of state rental units generating $150 each a month in cash flow. This can work out to being owning 4 apartment complexes with 150 units in each of them. The short term goal is to be earning $50,000 a year in passive income by December 2020. To do this I will need to own 30 units that each generating $150 a month in cash flow (which could be as simple as owning 7x 4-unit multi-family homes and two single family homes).

Strategy: Start off by purchasing multi-family homes and rent them to generate passive income. Eventually working your way into apartment complexes and renting those to generate passive income. With each of these purchases, I will renovate them (BRRR Strategy) to increase their equity and then refinance them to both recoup my initial investment and also generate some extra cash to be used towards my next investment property.

Time Frame:

Year 1 (2018): Purchase 5 units (Generate $9,000 in NEW Passive Income A Year)

Year 2 (2019): Purchase 10 units (Generate $18,000 in New Passive Income A Year)

Year 3 (2020): Purchase 15 units (Generate $27,000 in New Passive Income A Year) FINANCIAL FREEDOM REACHED!

Year 4 (2021): Generate $90,000 in New Passive Income A Year (Purchase 50 units?)

Year 5 (2022): Generate $135,000 in New Passive Income A Year (Purchase 75 units?)

Year 6 (2023): Generate $1800,000 in New Passive Income A Year (Purchase 100 units?)

Year 7 (2024): Generate $1800,000 in New Passive Income A Year (Purchase 100 units?)

Year 8 (2025): Generate $1800,000 in New Passive Income A Year (Purchase 100 units?)

Year 9 (2026): Generate $1800,000 in New Passive Income A Year (Purchase 100 units?)

Year 10 (2027): Generate $55,800 in New Passive Income A Year (Purchase 31 units?)

Market- I will purchase properties in desperate need of renovation in C+ to B- neighborhoods. These properties will be located in Kansas City, MO (alternative markets: Indianapolis, Indiana and Columbus, Ohio).

Criteria- Not Completed

Flexibility- Not Completed

Marketing Plan- I will locate properties through word of mouth, MLS, real estate websites (realtor.com loopnet). Deals will also find me through the network that I will create during daily conversations with bankers, real estate agents, and other real estate investors.

Financing Deals-For the first four deals I will be getting interest only private loans to purchase through my LLC (thus building my LLC's credit) and renovate the properties, then refinancing through a local bank. After that I will need to switch over to a portfolio loan and eventually involve other investors for larger purchases. Other alternatives will be going to lenders that do Freddie Mac loans (up to 10 properties). Most likely I will have to move up to Commercial Lending/Loans after 4 properties anyways because I will be possibly purchasing 5-plexes on up at that point. Another alternative is seller financing.

How Will I do My Deals- Once I purchase a property, I will have my team renovate both the inside and outside of the property. If needed I will upgrade the wiring, replace all plumbing with PEX piping, install a new furnace, and if needs be, replace the roof (which will almost guarantee me 10 plus years before I have to do any maintenance work on major appliances thus increasing the revenue generated by each property). Total cost of renovations should be $50,000 or less (for 4-plexes or smaller). After the renovations are complete (8-10 week timeline), I will get a new appraisal and refinance the property for 75-85% of the new appraisal (if seasoning period applies, I will pay the monthly bill on my interest only loan myself and with cash flow from renter). This will provide me funds for paying off the original hard money loan and provide some extra cash for myself (which will be put back into the business minus a small cut for myself). After renovations I will have my local property management company place a renter in the property to start generating cash flow.

Teams and Systems- (section not complete)

- Mentor

- Mortgage Broker/Loan Officer-

- Real Estate Attorney-

- Escrow Officer or Title Rep-

- Accountant-

- Insurance agent-

- Contractor-

- Realtor-

- Property Manager-

- Great Handyman-

Exit Strategy and Back-Up Plans- Main strategy is to sell the property(s). If there is not a rush to sell a property my first strategy will be seller financing so that I can still generate some income and return on investment through interest. If time is more of an issue I will sell through a real estate agent to the general public.

You're going to need a lot of capital/income to qualify for these loans... Even if you got on the low end (and no added costs which isn't really achievable) 50k a unit going to put you at 750k by year 3. It's more likely you're going to see costs probably closer to 70+ a unit which takes you over a million...

Let's just use a constant, to get an idea of what kind of capital you'd need. Let's use 75k per door (probably too cheap early on, but whatever). Let's assume 25% down, and 2% for closing costs. It's likely a lot more for Hard Money.... 


Year one: 375k, 93,750 for down payment, 7500 closing costs. Total Needed:101,250. Income produced: 150x5, 12 mo = 9,000. (92,250 spent)

Year Two: 750k, 187,500 for down payment, 15,000 closing costs. Total Needed 202,500. Income produced 9,000+ 18,000= 27,000 (175,500 spent)

Year Three: 1,125,000, 281,250k needed for down payment, 22,500 for closing costs. Total Needed 272,500. Income Produced: 27,000 + 27,000 = 54,000 (218,500 spent)

Year Four: 3,500,000 875k down payment, 70k closing costs 945k Total needed 945k, Income produced 54,000 + 90,000= 144,000. (801,000 spent)

So to get to year 4 (and assuming you get full 150/mo door *12) you're looking at needing 1,287,250 in capital. If you don't use the income (150 mo) you'd need: 1,521,250.

Now, that's probably a tough sell to investors w/ 4 years experience. Years 6-9 ea would be almost 2 million.

Then we still have to take into consideration that lenders will want cash reserves of probably somewhere around 6-12 mo for each loan...

How much liquid capital do you have To get started? Cash-outs are going to require skin in the game, at least at first. The best commercial cash out I could find was 85 LTC which was about 65 LTV. Also, you have to pay for renovations somehow.

Plans are great, but the most important thing is DEALS. 

Originally posted by @Lee Ripma :

How much liquid capital do you have To get started? Cash-outs are going to require skin in the game, at least at first. The best commercial cash out I could find was 85 LTC which was about 65 LTV. Also, you have to pay for renovations somehow.

Plans are great, but the most important thing is DEALS. 

Hi Lee! Right now I have zero liquid capital but hoping to build on that soon. I'm also going to be reading Brandon Turner's book on Low and No Money Down REI.

@Jon Passow You have a plan based on interest-only private loans to your LLC? That it? That's the financial foundation of a plan that has you buying 25 units in the next three years? And you'll be buying *more than one new property per month* in Year 3 using these interest-only loans and $27,000 in annual cash-flow provided by the properties in Year 1 and Year 2? That's $27,000 equates to $1,800 per property. So you'll be refinancing properties post-renovation more than once a month? That's possible but I don't see where you get the capital to put down for the bank financing. On top of that you're purposefully buying properties that are in desperate need of renovation (i.e. more capital).

Sure, there are hard money lenders out there that will lend.  Far fewer will do it with no capital contribution from you.  The terms will likely get much more aggressive with no financial skin the game.  You'll be coming with an "ask" for both the buy-money and the renovation money.  But regardless of how that goes, you're still dependant on refinancing once your renovations are complete.  

Banks won't love your idea of having "zero money" in the property so you'll have to pull capital from somewhere. And you really "have" to do that to pay back the HML so you can (hopefully) recycle their money into the next property.

Bottom line, with "zero liquid capital" you could change your Year 1 goal to "Buy 25 units!" and it wouldn't make it any more or less reasonable.  

Originally posted by @Andrew Johnson :

@Jon Passow You have a plan based on interest-only private loans to your LLC? That it? That's the financial foundation of a plan that has you buying 25 units in the next three years? And you'll be buying *more than one new property per month* in Year 3 using these interest-only loans and $27,000 in annual cash-flow provided by the properties in Year 1 and Year 2? That's $27,000 equates to $1,800 per property. So you'll be refinancing properties post-renovation more than once a month? That's possible but I don't see where you get the capital to put down for the bank financing. On top of that you're purposefully buying properties that are in desperate need of renovation (i.e. more capital).

Sure, there are hard money lenders out there that will lend.  Far fewer will do it with no capital contribution from you.  The terms will likely get much more aggressive with no financial skin the game.  You'll be coming with an "ask" for both the buy-money and the renovation money.  But regardless of how that goes, you're still dependant on refinancing once your renovations are complete.  

Banks won't love your idea of having "zero money" in the property so you'll have to pull capital from somewhere. And you really "have" to do that to pay back the HML so you can (hopefully) recycle their money into the next property.

Bottom line, with "zero liquid capital" you could change your Year 1 goal to "Buy 25 units!" and it wouldn't make it any more or less reasonable.  

To obtain my goals, how would you go about financing then? And I was looking to have multi-family homes so those 25 units could just be spread out to 6 multi-es, one purchased every other month.

@Jon Passow You're missing my point, you need to look at what you can achieve with your financing situation.  Then look at how to parlay that into reaching your goals.  Right now you've architected a nice shiny building...that doesn't have a foundation.  You're sketching out "Year 3" rather than figuring out "Property #1".  

So how would I go about it? Get your W2 on track so you can start to save. Use savings for a downpayment for your first investment property. Combine it with funds from a HML if you have to in your rehab scenario. Use "Property #1" to figure out if all of your assumptions are correct: rehab costs, timing, refinancing, etc.

Based on what little I can guess from "no capital" and $27K being your financial freedom number, there's no reasonable "how would you go about financing then?" solution for your goals.  I guess the easy thing would be to say "owner financing", "subject to", etc.  I'd say "partner with someone" but then you start splitting the cash-flow 50/50 (if the financer is generous).  

Even in those scenarios you'd have to come with the cash for refinancing. And those "owner financing" deals typically aren't going to come with the best terms, you'll have vacant units during rehab, etc. Then post-renovation you'll have a bill for the HML (who lent you to rehab money) and it's unlikely that increased cash-flow is going to let you pay that (and the debt to the owner) so you're back to dealing with a bank.

I'm sure you can run through some scenarios were a, b, c, d, and e all come together and coalesce but until you do it with Property #1 the who idea of scaling is putting the cart before the horse.   

@Jon Passow

I could not agree with @Andrew Johnson more. You have to have some cash. If you're going to find an awesome first deal and get a hard money loan on 70% of ARV and all of your costs (acquisition plus rehab) are below that you will still need to pay the 4-5 points on that money and come up with the monthly interest payment. Despite the low and no money down book you need SOME liquid capital. That HML is going to want to see a statement of your financial position and zero liquid capital is risky! I would work towards saving 20k liquid capital. I really think that is a bare minimum. You can also look for partners, someone who will loan you a bunch of money, take out money from your house, pull money from a 401k. Something, you really do have to have something. A plan is great but like Andrew said, you actually need to get house number one, not have a plan to get a ton of houses.

Originally posted by @Andrew Johnson :

@Jon Passow You're missing my point, you need to look at what you can achieve with your financing situation.  Then look at how to parlay that into reaching your goals.  Right now you've architected a nice shiny building...that doesn't have a foundation.  You're sketching out "Year 3" rather than figuring out "Property #1".  

So how would I go about it? Get your W2 on track so you can start to save. Use savings for a downpayment for your first investment property. Combine it with funds from a HML if you have to in your rehab scenario. Use "Property #1" to figure out if all of your assumptions are correct: rehab costs, timing, refinancing, etc.

Based on what little I can guess from "no capital" and $27K being your financial freedom number, there's no reasonable "how would you go about financing then?" solution for your goals.  I guess the easy thing would be to say "owner financing", "subject to", etc.  I'd say "partner with someone" but then you start splitting the cash-flow 50/50 (if the financer is generous).  

Even in those scenarios you'd have to come with the cash for refinancing. And those "owner financing" deals typically aren't going to come with the best terms, you'll have vacant units during rehab, etc. Then post-renovation you'll have a bill for the HML (who lent you to rehab money) and it's unlikely that increased cash-flow is going to let you pay that (and the debt to the owner) so you're back to dealing with a bank.

I'm sure you can run through some scenarios were a, b, c, d, and e all come together and coalesce but until you do it with Property #1 the who idea of scaling is putting the cart before the horse.   

 I really like your shiny building lacking foundation analogy! A focus on the short term is something I'm lacking in my plan.

@Jon Passow Another practical way to look at it is to play the scenario in reverse.  Let's say you saved up $20K over the next year.  Someone you don't know comes to you with their first real estate investment idea, it's an out-of-state (a place you've never gone) location and major rehab project (which they don't have experience estimate costs or time) and they want to buy-and-hold it but need someone to put up the 100% of the down payment so they can finance the rest.  And then they tell you they're going to need rehab costs as well so you'll either need to refinance your house or take out cash-advances on credit cards.  And they hope that in 8-10 weeks with zero money of their own they can go to a bank and refinance to get you your $20K + rehab costs back + points and interest to make it worth your while.  And they also have nothing in terms of collateral to put up.

I know that's not an exact analogue but I'm trying to make a narrative up for "story time". Now go and tell your girlfriend that this is an investment that you want to make. Your entire life savings, new debt (either a credit card or refinancing your property) in the hopes of making a return lending the money. What interest rate would you think is fair for that proposition? What interest rate do you think your girlfriend would think is fair? Even if this mysterious stranger buys the property at 60% of "fair market" I'll go out on a limb and say that both of you will think: it's way too risky, they don't have skin in the game, how do you know they'll follow through, what if they change their mind, what will stop them from walking away, etc. If you're honest with yourself you'll probably arrive and a *really* high interest rate that it would take to mitigate your risk. Then you have to turn around and ask yourself, would I want to pay that interest rate for access to capital? Usually the answer is "no" :-) Net result, it's a similar "ask" that you're making of an HML.

Now play the story back again with either: a.) a person with a track record of having done this 3 times already and/or b.) they are putting up the $20K for the down payment and you're lending the rehab costs.  Odds are you'll look at the deal a lot more favorably.

The fun part is that "put yourself in the shoes of the lender" scenarios is akin to what a lot of guys do when they talk about sports trades.  They can always come up with deals that "make sense for their team" but when you start asking "why would the other team do it?" they stumble through some haphazard ill thought out answer.     

Originally posted by @Andrew Johnson :

@Jon Passow Another practical way to look at it is to play the scenario in reverse.  Let's say you saved up $20K over the next year.  Someone you don't know comes to you with their first real estate investment idea, it's an out-of-state (a place you've never gone) location and major rehab project (which they don't have experience estimate costs or time) and they want to buy-and-hold it but need someone to put up the 100% of the down payment so they can finance the rest.  And then they tell you they're going to need rehab costs as well so you'll either need to refinance your house or take out cash-advances on credit cards.  And they hope that in 8-10 weeks with zero money of their own they can go to a bank and refinance to get you your $20K + rehab costs back + points and interest to make it worth your while.  And they also have nothing in terms of collateral to put up.

I know that's not an exact analogue but I'm trying to make a narrative up for "story time". Now go and tell your girlfriend that this is an investment that you want to make. Your entire life savings, new debt (either a credit card or refinancing your property) in the hopes of making a return lending the money. What interest rate would you think is fair for that proposition? What interest rate do you think your girlfriend would think is fair? Even if this mysterious stranger buys the property at 60% of "fair market" I'll go out on a limb and say that both of you will think: it's way too risky, they don't have skin in the game, how do you know they'll follow through, what if they change their mind, what will stop them from walking away, etc. If you're honest with yourself you'll probably arrive and a *really* high interest rate that it would take to mitigate your risk. Then you have to turn around and ask yourself, would I want to pay that interest rate for access to capital? Usually the answer is "no" :-) Net result, it's a similar "ask" that you're making of an HML.

Now play the story back again with either: a.) a person with a track record of having done this 3 times already and/or b.) they are putting up the $20K for the down payment and you're lending the rehab costs.  Odds are you'll look at the deal a lot more favorably.

The fun part is that "put yourself in the shoes of the lender" scenarios is akin to what a lot of guys do when they talk about sports trades.  They can always come up with deals that "make sense for their team" but when you start asking "why would the other team do it?" they stumble through some haphazard ill thought out answer.     

 I like your idea of role reversal. It gets me thinking about "how better can I market/represent/present myself to investors".

Let your budget be your guide, find the most efficient way to spend it. Then once you max it out, find a way to increase it and then again max it out. 

Low no money down requires: owner willing to take risk with you (rare), primary home (but has to be under 4 units), partner with someone (what skillset do you have they don't?), Or you have access to capital so you can buy cash and refi out.

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