Business plan to obtain financing

12 Replies

I am new to real estate investing and have read that it is best to present a business plan to obtain financing. Can anyone recommend a good source to find a real estate business plan template? If anyone has created one and is willing to share, that would also be appreciated.

Thanks for the help.

A business plan isn't needed for Real Estate Investing. The bank will look at the property and determine if they will lend you the money based on the LTV of the property. You will generally need 20% down and if the LTV is there (Loan to Value) then I have never had a problem borrowing against Real Estate. The best route is a home equity line of credit against your own home.

Micheal, I have to disagree here. Real estate investing is a business and as a rule of thumb, you always want to keep your business and personal finances as separate as possible. NEVER, EVER, tie your personal home into an investment property. It is flat out too riskly. If something goes wrong with the investment property and you end up losing it than you could lose your primary home as well.

Froehlis, if you are serious about getting into real estate investing, then here are a few things I would suggest to get yourself ready (financing and otherwise).

1) Real Estate Investing is a business. Treat it as such.

2) Decide on a small local area near home to get started and decide how you want to invest (IE. Do you want to fix 'n flip?/Do you want to fix em up and rent them out?/Do you want to buy em and wholesale out to other investors?/Etc.)

3) Learn EVERYTHING you can about your chosen area before you start putting your money into any deals (IE What's the retail market like?/What's the rental market like?/Are the neighborhoods you're looking on the rise or decline econamically)

4)Evaluate your personal financial situation.
-How much cash do you have access to? Ideally I would recommend having enough cash on hand for 6 months payment reserves plus enough for your down payment and closing costs? Now I know most new investors won't have that kind of cash avaliable, so at bare minimum, I would say have enough cash for the 6 months payment reserves. The closing costs and down payment can be worked around, but at least give yourself 6 months worth of payments to either sale the property or get a renter into it.
-Clean Up Your Credit. Pay off your old collection accounts/Pay off your credit card balances, if you can. If not, then at least pay them down below 50%./Make sure that your current mortgages are paid ON TIME (this can kill more investment deals than you know.) For conventional financing, the lowest your middle credit score can be is around 620; 660 or higher will open up most programs for you.

5) Get your financing pre-approved.
Know how much you are approved for and what you payments will look like before you start shopping. This will speed up the financing process and make you look more professional to your potential sellers.

Hope this information helps and good luck in your new career.

John has fantastic, succint advice for how to approach real estate investing.

Michael is right that a business plan is not needed to invest in real estate, but I disagree with him about using a home equity line of credit to purchase your next home. This is a trend I've seen a lot of in the past 2-3 years and it's a long, clanging signal that you are over-leveraged. Why? You are taking out a loan to take out a loan. Even if you can make it work, the universal FM loan application requires you to affirm that you are not borrowing the money you are using as a down payment. If you are and you misrepresent that, you are commiting mortgage fraud. Can you get away with it? Absolutely, but at what cost. The 80% / 20% rule of leverage does not exist as a cruel and unusual way to complicate the lives of real estate investors. It is a ratio forged through hundreds of thousands of mortgage transactions, defaults, and foreclosures. If you start cheating the system (borrowing for a down payment on a loan, and then lying about it) you jump head first into the red line of VERY HIGH RISK INVESTING. Not higher risk because there are higher rewards; higher risk because you are OVER-LEVERAGED and in over your head.

froehlis, to address your question though. You do not need a formal business plan; no bank will ask for it, nor will they likely use it if you give them one. They will look at your credit and how much cash you are putting up front. If you are a sophisticated investor, then you can raise capital through a business plan and doing the dog-and-pony shows around town. It sounds like you are starting out. Spend your time instead by learning everything you can about your local area through talking with Realtors, taking classes, meeting investors, going to the Registry of Deeds, Land Court, etc. Best line ever was John's

"1) Real Estate Investing is a business. Treat it as such. "

Wow, you guys are beating me up today.

My main point was that you don't need a business plan to begin investing in Real Estate.

Secondly, I would love to hear how you all got started in Real Estate. When I started, all I had was equity and little cash but not enough to put a large amount of money down on a house or pay cash for it. I would say the best approach to investing is to save as much money as you possibly can for a down payment, but that is not always the case for the majority. I think in any business there are risks, and Real Estate Investing is risky.

I understand the fraud issue but there are banks out there that will loan on an investment property based on 20% down from an equity line. It is know up front as to where the 20% is coming from and the bank is willing to take the risk. Nothing underhanded is taking place.

To me, I didn't like having the equity line against my own home but that is what I had to do and many, many properties later, that is not an issue anymore. BUT, an equity line of credit to pay all cash for an investment property vs. a downpayment is the less risky option if you have that kind of equity.

A large part of RE Investing and any other business when you start is debt management and if you can handle that then you will be successful. I have never heard of a business that was completely out of the red when it first started out. Most take 5 years to start making money.

froehlis
As you can see there are many ways to get into the business and the approach that some use does not work for everyone for many reasons. Tackleberry and JWorley have excellent advice as well, but I did not have the money starting out and some could argue that I should have waited, but I was hungry enough to make it work. So hopefully you can absorb it all and make the right decision for yourself.

Michael,

Good points. I wasn't aware that there are banks who will let you borrow the down payment from your HELOC. IF that's the case, then I think you stated the tradeoffs really well. It really is about your risk tolerance. Mine has always been low; I was never willing to end up bankrupt or with ruined credit from a foreclosure. Investing was something that I wanted to do on the side.

When in a pinch, though, I understand why one might use the HELOC money. Thanks for the clarification!

In addition to a business plan it is important to have goals in mind for your business. Because investing in real estate IS a business its not some hobby. I always define a hobby as something you do for fun but doesn't make you money. I hope you do make a business plan its an important article to focus your business and to reference as your business progresses over time.

In response to your request for a business plan template - I just bought one for $39.00 from a website *****************.
I too am just starting out and decided I needed a concrete plan first. This was the best $39 i've ever spent. It helps put all your ducks in a row and know where you're going. It will also be extremely useful when I approach private investors - it will show them were I'm going! This was another reason I bought it. It lets you take it step by step and really clarify what you want to do personally. I had one printed and ready to present, but a close family member critiqued it for me; so i'm onto the second edition. Hope this helps. Good luck.

go to microsoft.com and in the search block type in templates and search for a business plan, If you have ms word. I just downloaded one the other day. Don't expect to complete it in a day it will take about 2 months to complete then you will be constently changeing it as you learn. It will be about 35 pages or so. As far as a HELOC to invest I took a line of credit out on my primary home for $72,000 I then purchase a property paying CASH from the line of credit then in 3 months i got a HELOC on my investment property for a 20 year fixed loan at 8% they lent me 90% of the appraisal and I did not have to pay any closing cost. I was able to take out about $5,000 more than i Needed that i used to pay off some debt. Do your homework and you can't lose.

Re: using a HELOC to start investing in real estate

There is always a trade off of risk vs. reward and any decision you make is fine so long as you are willing to take the risk for the potential reward.

Reward: get cash for down payment on an investment property.
Reward: get cash for repairs on an investment property.
Reward: get cash for holding costs of a fix & flip property
Reward: you avoid PMI.
Reward: you can avoid a second mortgage on the investment property.

Risk: your monthly debt payments are higher.
Risk: business failure could mean you will not be able to pay for your home.
Risk: in the case of bankruptcy you might lose 100% of the value of your home. This is because HELOC is not used as purchase money and (in some states) the lender will be able to sue you for deficiency.
Risk: HELOC rates are usually variable rather than fixed.
Risk: HELOC will go on your personal credit report, whereas investment property mortgage could be on a business credit report. Even if you personally guarantee the loan the HELOC still hits your credit report harder.

There might be others, but these cover the major points that I think about. Personally I would rather have a second / larger mortgage for the investment property than get a HELOC on my residence. That's just my risk tolerance. I especially would hate to lose my home in the worst case scenario of bankruptcy and bankruptcy is something that I will fear until my passive income exceeds my monthly expenses.

If you can't afford large commercial properties then consider rehabbing residential properties.

If you can't afford to rehab residential properties then you might try buying a small house and rent it out.

If you can't afford any house in your area then consider investing in another area (CA prices are ridiculous in my opinion).

If you can't invest in another area then consider hard-money loans.

Lastly, if you have absolutely no cash at all then consider flipping.

There are many ways to get into this game. Take a serious look at what kind of cash, time, and experience you have with real estate and decide what route(s) you can go. Many new people start out by flipping (assigning contracts to other investors... e.g. you are a "realtor" for investors).

I agree, you will need a business plan. Not only is it good to give to a lender, but it is your road map.

You will need a business plan that is catered to the type of investing that you will be doing. I assume you are going to buy and hold investor (be a landlord).

You may want to pick up MikeOH's eBook. He has a business plan in it that will do the job.

http://store.biggerpockets.com/books/landlord/1MinutetoRentalPropertyRiches.html

I guess I'm the contrarian here! I've never had a business plan because I don't look at Real Estate as a business but rather as a long term Investment for my Retirement and Financial Future. Quality, Investment Grade Real Estate always appreciates and provides High Income/cash flow. Of course that is my preference. However, if you like the challenge and risks that go with buying Retail, Real Estate, then you should have a business plan, marketing plan, and personal goals just like any other type of business.

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