Please review and critique this newbie's business plan!!

Please review and critique this newbie's business plan!!

Fayetteville, NC · Member since 2014 · 53 posts · 8 votes

If you made it this far, then I already owe you thanks for taking the time to read my post. I've been working on this business plan for about a week now. The process has helped me tremendously. I have so much to learn and so much experience to gain. However, I'd like to mitigate the discovery learning as much as possible. Please take a look at this initial draft and provide whatever feedback you feel necessary. Again, I thank you. V/R, John.

Mission Statement: No later than March 2015, we will begin to buy real estate below market value; provide affordable and well maintained housing to renters; and create wealth and financial freedom for our family.

Investment Strategy: Buy and Hold.

Investment Vehicle: Du/Tri/Quadplexes.

Goals: Consistently and constantly work to build and improve upon relationships with ‘The Team,’ fellow investors, brokers, business owners, and the community at large. People first, always.

I have specific financial goals but will keep those close hold.

Market: Class B multi-family units in middle class areas (median income is $30-$60K) within a 30 minute drive from my house. Properties will be close to a highway, public transportation, retail/shopping, and large employment centers. I will also research and take into consideration the area’s present and future employment opportunities, demographics, and historical rental market rates (increasing vs. decreasing). I currently serve in the US Army so the exact location of my market will be determined by where Uncle Sam sees fit to send me next.

Criteria: A GOI of 3% or better of the purchase + renovation price. I know that the rule of thumb is 2%, but the extra 1% is a buffer for my inexperience and property management fees. The purchase price is $150,000 or less. Property is less than 15 years old; preferably a brick structure vs. a wood frame; with a pitched roof. I will look for properties that I can instantly add value to. Target rental rate is $650 - $900 a month depending on the median income of my market.

Finding Deals/Marketing plan:

1. We will work with a broker until my wife gets her real estate license.

2. We will utilize Craigslist.com, Realtor.com, Loopnet.com, the classifieds, and the tax collector’s office to find properties that meet our criteria.

3. We will drive for dollars.

4. We will use direct mail in the case of absentee owners and abandoned properties that look like promising investments.

5. Through our business transactions and getting involved in local REIGs, we will consistently and constantly work to build and improve upon relationships with ‘The Team,’ fellow investors, brokers, business owners, and the community at large.

6. Through our relationships we will be able to find win – win situations with assets that are off- market.

7. To sustain our momentum, we will continue to utilize and improve upon a continued mix of networking and leveraging relationships, advertising campaigns (using Google and setting up a website), and the internet.

Financing: We will utilize the following financing options as they are available to us:

1. Owner Financing.

2. HomePath Mortgages (10% down) for bank repos owned by Fannie Mae

3. VA (zero down), FHA (3.5% down), or 203K Loan (3.5% down). Not preferred because we have to live in the property.

4. Conventional Financing. Not preferred because we have to live in the property and put 20% down.

5. Partnership. Only on a commercial deal.

The Deal: These are very generic steps, but I will utilize more detailed steps and checklists when executing each step described below.

1. Find potential deals utilizing the means previously described in the target market previously described.
2. Screen those deals by doing some internet reconnaissance and running the numbers to see if they give me a GOI of 3% or better on the purchase price.

3. Do a physical reconnaissance on the property.

A. Get a rough estimate for repairs. Take someone with rehab experience and utilize a checklist.

B. Look for opportunities to add value to the property.

C. Check the comps. Is the rent below, at, or above market value?

D. Talk to the seller and check their motivation level.

E. Create a property profile.

4. Run the numbers again and see if it makes sense to continue pursuing the purchase of the property.

5. Determine what I am willing to pay for the property and get pre-approved.
6. Send the broker/owner a Letter of Intent.

7. Execute due diligence.

A. Do I need a property manager or lawyer at this point to check out the leases?

8. Get the team to move in to make the property rent ready as soon as possible.

A. Hire a property manager and rent out the property as soon as possible

B. Immediately begin marketing the property

Exit Strategy:

1. Sell with a broker.

2. FSBO.

2. Lease to Own. If we are not able to sell the property in a reasonable amount of time, we will consider the option of ‘Lease to Own”.

4. Sell to another Investor. This is worst case scenario and will only be used if we suddenly run out of funding.

Building a Team and Systems:

1. Learn how to utilize Google to automate as many processes as possible.

2. Create a LLC.

3. Get involved in the local REIG and BP and start looking out for:

Mentor(s)

Real Estate Agent(s)

Real Estate Attorney

CPA

General Contractor(s)

Mortgage Broker

Inspector

Title Company

Insurance Agent

Property Manager

Handyman

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Lender · Greater LA/Orange County area, CA · Member since 2012 · 3k+ posts · 3k+ votes
12y

Great start. Better to have it on paper as most people won't even do that!

I suggest goals to be numerical and measureable. You have listed objectives.

Separate into a business plan, marketing strategy and monthly revenue targets. I also prefer a marketing calendar that details markets, sales funnels, campaigns and media used (direct response mailings, print ads, etc.).

Don't get hung up on getting it perfect because it will never be perfect.

Remember that it's your plan and can be tinkered with, tweaked and changed to suit your discovery of new markets and opportunities.

And, never let planning be a substitute for action and doing deals!

See this reply in the discussion

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  • Lender · Greater LA/Orange County area, CA · Member since 2012 · 3k+ posts · 3k+ votes
    12y

    Great start. Better to have it on paper as most people won't even do that!

    I suggest goals to be numerical and measureable. You have listed objectives.

    Separate into a business plan, marketing strategy and monthly revenue targets. I also prefer a marketing calendar that details markets, sales funnels, campaigns and media used (direct response mailings, print ads, etc.).

    Don't get hung up on getting it perfect because it will never be perfect.

    Remember that it's your plan and can be tinkered with, tweaked and changed to suit your discovery of new markets and opportunities.

    And, never let planning be a substitute for action and doing deals!

  • Fayetteville, NC · Member since 2014 · 53 posts · 8 votes
    12y

    Rick,

    Thank you for the feedback. I will absolutely take action early next year. There are some financial objectives that I need to accomplish first, so I figured I'll take the next 5-6 months and make the best plan that I can as well as continue to educate myself.

    I do have numerical and measurable goals that are broken down by month and year for the next 10 years. I just didn't post them as part of the plan.

    You mentioned a marketing calendar. Would you recommend marketing right away or after I have a few deals under my belt? I plan doing alot of the leg work myself so do you think it will be necessary to advertise and create a sales funnel before I do my first deal? Can you provide an example of what a single month on a marketing calendar would look like?

    Also, I'm checking our your website as we speak...interesting. I look forward to your response. Thank you.

    V/R,

    John

  • Wholesaler · Memphis, TN · Member since 2014 · 37 posts · 7 votes
    12y

    Wow, I think you are off to a great start! I think you have done more than most investors do. Some of us just plan it as we go lol. All I have to add is just to be flexible, though you have a "Business Plan." Real Estate can lead you down a million different paths. There are so many ways to invest in Real Estate whether it be through buying and selling houses or providing services to those that do that. The sky is the limit for you and your wife. Let's Go!!!

    Thanks,

    Courtney Taylor

  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    12y

    @Johnathan Butler 

    Nice to see you putting some planning effort in before spending money. 

    Rick is spot on, set objectives that are measurable - i.e. 5K in monthly revenue in 12-18 months; 1K in monthly NOI in 18 months, etc. The metrics need to fit your objectives and market.

    I understand your reasoning for looking for rent at 3% GOI, but be advised that in many areas it will not be a reality; in our local market you have to hunt hard for half that (1.5%). That said, 3% GOI is meaningless if your operating expenses are 70% of revenue. While 2-3% GOI are nice targets to have, make sure to consider them in conjunction with NOI and CFBT (or CFAT if you wish).

    In your analysis and setting of metrics, do not forget to make sufficent allocations of net income to capital reserves for future capital expenditures (roof, HAVAC, sewer line replacement, etc).

    Welcome aboard and best of success to you.

  • Residential Real Estate Agent · Cookeville, TN · Member since 2013 · 1k+ posts · 948 votes
    12y

    @Johnathan Butler 

     Multies have their own unique sets of risks.  In particular, the exit strategy.  If you make a mistake and buy a bad property (or the base in Clarksville gets shut down or reduced in size or whatever), multies are much harder to sell at that point.  What I'm trying to say is that if you make a mistake somewhere and get into a negative cash-flow situation, you will likely have to sell the thing at a loss to get out of it (if you can't fix the cash-flow problem).

    Many people don't consider the fact that one can actually lose money investing in real estate.  It happens all the time, and it happens to very smart and experienced investors.  Not trying to scare you away, just be aware.  Also, don't fall for the idea that multies are "safer" because they have more doors.

    Anyway, do a very strong due diligence.  Trust no one.  Verify all numbers.  Make no assumptions that you can not prove.  Don't rely on "projections".

    You can probably tell that I write from experience on this topic.

  • Jonna WeberPro Member
    Moderator
    Investor · Boise, ID · Member since 2011 · 1k+ posts · 736 votes
    12y

    Nice job @Johnathan Butler ! You obviously have attention to detail, which bodes really well for you. I personally would be open and looking for a SFH for a first purchase, only because of the initial learning curve and exit strategy possibilities. I find the pool of buyers is much larger if one needs to sell. Thanks for your service to our country and happy investing!

  • Rental Property Investor · Brookline, MA · Member since 2013 · 1k+ posts · 777 votes
    12y
    Originally posted by @Johnathan Butler:

    Financing: We will utilize the following financing options as they are available to us:

    1. Owner Financing.

    2. HomePath Mortgages (10% down) for bank repos owned by Fannie Mae

    3. VA (zero down), FHA (3.5% down), or 203K Loan (3.5% down). Not preferred because we have to live in the property.

    4. Conventional Financing. Not preferred because we have to live in the property and put 20% down.

    5. Partnership. Only on a commercial deal.

    Nice work sir!  I applaud you thinking about, and saving for, your foray into Real Estate.

    A couple things about your financing area:

    2. Homepath 10% down is ONLY for SFH. 20% for duplexes and 25% for 3-4 unit properties. (Homepath Down Payments) If you live in a Homepath property, you can occupy it for 5% down, NO PMI and your down payment can come from anywhere.

    3. You only have to occupy these places for 12 months. 

    4. Not sure where you got the 20% down. Most banks that I'm aware of will lend on non-owner occupied SFH and duplexes at 20%. You should be able to get into a home for 5% down using conventional financing. But there is little sense in doing so if you qualify for a Homepath loan because of the lack of PMI.

  • Fayetteville, NC · Member since 2014 · 53 posts · 8 votes
    12y

    @Courtney Taylor. Thank you for the feedback and I acknowledge everything that you have said. I look forward to the many paths this business will take me down. This whole undertaking is more about maximizing my God given potential than it is anything else, so learning is the best part!

  • Fayetteville, NC · Member since 2014 · 53 posts · 8 votes
    12y

    @Roy N. Acknowledged, and thank you for the feedback. I understand your comments about my target NOI, but what is CFAT or CFBT? In regards to capital reserves, do you think that the 50% rule is sufficient to account for that? I understand that the 50% rule is a rule of thumb and doesn't work for every deal, but is it a good enough planning factor to account for capital reserves? Thank you.

  • Fayetteville, NC · Member since 2014 · 53 posts · 8 votes
    12y

    @Bryan L. Great feed back and thank you. I will take your input into consideration. I understand that I will likely make learn some expensive lessons, but it's part of the process right? However, in light of your comments I have kind of pigeon holed myself. I definitely can't rule out a SFM and must judge each deal on it's own merits. A SFM may very well generate more cash flow than a multie. Thank you.

  • Fayetteville, NC · Member since 2014 · 53 posts · 8 votes
    12y

    @Jonna Weber. Thank you for the feedback and dually noted about the reduced initial learning curve and exit strategy possibilities with a SFH. Thank you for the warm wishes.

  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    12y
    Originally posted by @Johnathan Butler:

    @Roy N. Acknowledged, and thank you for the feedback. I understand your comments about my target NOI, but what is CFAT or CFBT? In regards to capital reserves, do you think that the 50% rule is sufficient to account for that? I understand that the 50% rule is a rule of thumb and doesn't work for every deal, but is it a good enough planning factor to account for capital reserves? Thank you.

    CFBT - Cash Flow Before Taxes (and, usually before reserves). This is (NOI - debt service)

    CFAT - Cash Flow After Taxes - these are your retained earnings once Uncle Sam (or in our case, "the Crown") have taken their share.

    <soapbox>

    The purpose of the "50% rule" {of thumb} is to enable you to quickly triage candidate properties and dispense with those for which a deal simply could not work.   It is not a substitute for a thorough examination of the numbers and you should never make a purchase or operations decision based on the outcome of this test.   Have a look at @Frank Gallinelli's contributions to BP and his book "What Every Real Estate Investor Needs to Know About Cash Flow" ... it is very accessible.

    </soapbox>

    To get back to your question, the "50% rule" is to roughly estimate operating expenses or the purposes of calculating Net Operating Income (NOI). Technically a reserve is not an expense and comes out of net income ... actually out of CFBT.

  • Investor · Kansas City, MO · Member since 2013 · 35 posts · 11 votes
    12y

    @Johnathan Butler

    Wow, those are some very well thought out plans. My significant other and I made our first deal in real estate last year using a VA loan. We have lived in the property for a year which is a limitation, but overall using the VA loan was a great way to get started. I thought I'd share a few notes about that experience.

    -As you may know, you can use a VA loan to buy up to a 4-plex. We had trouble finding a lender who was willing to write a VA loan for our duplex. In fact, we were told by several lenders that you could not use the VA loan to buy multifamily properties which is incorrect. It took some persistence, but we ended up having luck working with a mortgage broker. A lot of lenders, unfortunately, just don't know how to handle VA loans.

    -The VA loan is a great way to get started in real estate with almost no money down. We never would have been able to get started in real estate so quickly without using that loan program. Additionally, vets with a disability status equal to or greater than 30% are exempt from paying the loan's funding fee. We had to tell our lender that and remind them again after the included the funding fee anyways.

    Good luck!

  • Fayetteville, NC · Member since 2014 · 53 posts · 8 votes
    12y

    @Aaron Montague. Thank you for the feedback and education. I will definitely do more research and gain a better understanding on the various methods of financing. Thank you.

  • Realtor · Schaumburg, IL · Member since 2011 · 289 posts · 118 votes
    12y
    Awesome job. Just based on reading this I can tell your on your way to reach your objectives. Good luck
  • Fayetteville, NC · Member since 2014 · 53 posts · 8 votes
    12y

    @ Christopher Leon. Thank you very much for the encouragement.

  • Fayetteville, NC · Member since 2014 · 53 posts · 8 votes
    12y

    @ Brittany DeWitt. Thank you for the insight on VA Loans. Sounds like the implied task is for me to understand the intricacies of the VA loan because I may very well end up educating my lender. Congrats on your first purchase. If you don't mind me asking, what is your exit strategy for your duplex? What are the top 3 things that you know now that you didn't know heading into the transaction? Thank you again, and God bless. V/R, John

  • Fayetteville, NC · Member since 2014 · 53 posts · 8 votes
    12y

    @ Roy N. I appreciate the insight and information. As suggested, I will spend some time this weekend looking at Frank Gallinelli's contributions. Have a great 4th of July weekend. Thank you again. V/R, John

  • Clarksville, TN · Member since 2011 · 42 posts · 12 votes
    12y

    @Johnathan Butler 

    From what I can see that is a very good business plan and very well laid out. It seems as if you have covered all the major areas. Stick with that and continue to learn all you can and you will succeed.

  • Plano, TX · Member since 2014 · 197 posts · 33 votes
    12y
    Great job! The hardest and most rewarding part is when you take the leap. Good luck! Thx for your service!
  • Investor · Fort Worth, TX-Texas · Member since 2014 · 37 posts · 15 votes
    12y

    @Johnathan Butler 

    Wow!  I love your break-down.  I'll be honest... I'm stealing it!  LOL!

    Thanks!

  • Fayetteville, NC · Member since 2014 · 53 posts · 8 votes
    12y

    @Richard Montoya. Go for it!!!! My plan is the assimilation of other people's plans...there is nothing new under the sun. I'm still working on it and for every question I answer I come up with 10 more. It's been a good forcing function for learning. As I mentioned earlier in the thread, I have time to keep tweaking it because there are some financial objectives that my wife and I must accomplish before we make our first investment. I wish you the best. V/R, John

  • Investor · Kansas City, MO · Member since 2013 · 35 posts · 11 votes
    12y

    @Johnathan Butler 

    Yes, I would definitely recommend when you take advantage of the VA loan that you don't take your lender's word on anything without verifying for yourself. We never could have made this deal happen if we'd just trusted the bank when they told us that VA loans couldn't be used the way that we wanted to.

    We've learned a lot through this process.  The first big lesson we learned, which I think is somewhat common on the first deal, is that all renovations cost more than you think they will.  We've done a lot of updates and upgrades ourselves over the last year.  We learned that it's pretty easy to over improve a rental property, especially since we've owner occupied half the duplex for the first year.  We've gotten in the habit of going to a showing for every other apartment on the street that comes up for rent or sale, just to try and keep our property in perspective.  We've collected all that data on the size and price of the other duplexes on the street, which is good to keep records of.  Finally, we're about to go through tenant turnover for the first time, so I expect to learn a lot from that process.

    As far as exit strategy for this duplex, we're still evolving on whether we plan on keeping the property or selling it when I'm done with school.  We've already lived here a year, so we've decided to stay a second year in case we do sell when we move.  I believe that will give us the option of avoiding capital gains taxes on the side that we owner occupied.  Most duplexes in this area are sold as individual townhomes, so we plan to split the two properties and sell that way.  We have pretty good cash flow, though, so we can hold it after we move if we decide that is advantageous.  

  • Investor · Mc Kinney, TX · Member since 2014 · 59 posts · 19 votes
    12y

    @Johnathan Butler , great job getting things on paper.

    Take advantage of the time you have from now until your March 15 goal date of getting started. You should start now. Go to REIA meatings and start meeting and greeting other investors with interests the same as you. That is where you're most likely to pick up the mentors. Who knows you might decide to partner with another experienced investor sooner than you planned to show you the ropes. It's all marketing, let them get to know that you are interested in buying properties, or have properties to sell, etc.

    One area that appears missing from your plan is how you will finance your business. You address how you will finance deals to take advantage of leverage, but what isn't shared is how much money you are going to put into the business. Do you plan on saving money from your pay check, maybe you have other things of value you could sell to give you the capital your business will need to move forward and expand. Speaking of financing deals don't forget about Private Lenders. These could be the people at the REIA meetups or perhaps referrals from those people.

    Like you I'm in the planning stages and hope to put up my Business Plan on the forums within 2 weeks.  

  • Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes
    12y

    Let me be the Devil's advocate here.  Not that there's anything wrong with your business plan, but this is what I can see as a problem:

    If you don't, yet, have any deal under your belt, you don't realize how flexible you need to be in this business. It doesn't matter how well you have planned everything out, things will go differently than planned. The school of hard knocks is out there and I guarantee you, every investor has stories when things changed and they had to adapt. 

    So, I think it can be a problem, if you have this exact strategy in mind. It's like having a round hole and looking to only find round pegs. And then you pick up a peg that looks round, but is somewhat oval and you notice that it doesn't fit, but you will keep trying to push it into that round hole, because that's what your plan is based on. 

    I was born and grew up in Germany. And if you know anything about Germans, we're known for having everything structured. I learned that I had to let go of that structure, if I wanted to survive as a real estate investor, because I had to be able to spin on a dime and change my exit strategy, if needed. 

    Sometimes I had to move into the house that I renovated and had planned to sell. Sometimes I had to rent it out. I had sworn to never be a landlord again and a few years ago opportunity knocked and now I have 14 rentals. I worked with historic homes and vacant lots. 

    So, again, nothing wrong with your business plan per se, but I think it can be difficult for you to change your strategy, when the situation requires it, because your mind will be set and you might not be ready to be flexible.

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