Detailed Business Plan in REI
Real Estate Investor · Denver, CO · Member since 2008 · 19 posts · 5 votes
I'm still a REI newby. I purchased my home last March and have since made a new years resolution to buy my first rental in 2008. I've read many of the forums on biggerpockets, have already read as many motivational books I need, and now I am into the nitty gritty books with the details of running a business. The book I am reading through at the moment is from the Smart Start Series, How to Start a Business in Colorado. I believe a lot of the essentials apply to REI, but not all of it.
My question to the biggerpockets community is how important is it to have a detailed business plan going into REI's? I understand the importance of analyzing each property before going forward with a deal, but do many of you have a business plan for your corporation as a whole, or is it more of a property by property analysis?
I say absolutely!
I, maybe, am a strange animal (though the more I hang around on this site, the more I feel as though I have found kindred spirits). I am building an empire (in my mind). The plans I have for my business are grand. Often, I need to reign my goals back to fit reality - that is done through a thorough business plan.
What's more, I am continuously amazed when bankers tell me I have the most prepared presentation of anyone who has ever come before them. I do not believe my presentations are that grand. I give them a copy of my 30 or so page business plan spirally bound at Kinko's with a color cover. They want tax returns out the ying-yang. They want my wife and mine personal for three years, my brother and his wife's personal for three years, the company's for three years, and P&L plus Balance Sheet. Instead of handing them a pile of papers. I get binders from Office Max, Pocket Holders, and Labels. I put it all together in an easy to read, easy to find professional package. And.... I GET THE LOAN!
Why do a Biz Plan?: First, to get your head right and know you better. Then to get the loan! This is definitley a use other people's money business.
Are you building a business or buying 1-2 properties as a way to invest?
Planning is a great idea but it is not the same as action. The plan at this stage should reflect your intent for the next 12 or so months. You do not need a large corporate structure for what might be 1 transaction in 12 months.
Think about your goals, your available cash and time. Then create a road map that matches. Call it a business plan when presenting it to bankers. Many investors have never had a business plan as most of the time you just need to fill out forms for a banker unless you are dealing with the commercial side of the bank.
So, maybe you do or maybe you do not need a formal business plan.
I say absolutely!
I, maybe, am a strange animal (though the more I hang around on this site, the more I feel as though I have found kindred spirits). I am building an empire (in my mind). The plans I have for my business are grand. Often, I need to reign my goals back to fit reality - that is done through a thorough business plan.
What's more, I am continuously amazed when bankers tell me I have the most prepared presentation of anyone who has ever come before them. I do not believe my presentations are that grand. I give them a copy of my 30 or so page business plan spirally bound at Kinko's with a color cover. They want tax returns out the ying-yang. They want my wife and mine personal for three years, my brother and his wife's personal for three years, the company's for three years, and P&L plus Balance Sheet. Instead of handing them a pile of papers. I get binders from Office Max, Pocket Holders, and Labels. I put it all together in an easy to read, easy to find professional package. And.... I GET THE LOAN!
Why do a Biz Plan?: First, to get your head right and know you better. Then to get the loan! This is definitley a use other people's money business.
I agree with Heathen. I also provide a professional packet to the bank when I go for a loan. I just bought 11 units in 4 buildings in January and got 100% financing (100% of the purchase price), despite the often touted mortgage woes. That packet includes my 4 page business plan, personal financial statement, tax returns for the past 2 years (personal and for each company), cash flow analysis, insurance info, etc, etc, etc.
It makes a difference if the bank believes that you know what you're doing! It makes an even bigger difference if you actually know what you're doing and you can show that you are successfully following your business plan.
Good Luck,
Mike
Thanks for the comments guys.
REI,
I agree that I may not need a full blown spiral bound plan at this time, but I would like the first purchase to be part of an overall plan. At the moment my wife and I are focusing on generating the capital needed for an adequately funded reserve. Rather than sitting around while that happens, we are beginning to put together a plan on how we are going to create and maintain our "empire" as Heathen put it.
Heathen/MikeOH,
I hadn't thought about the impact a well presented business plan could have on the bankers. I was planning on doing a business plan mostly for myself to create a "roadmap" as REI put it. Something to give me direction going forward and something to help evaluate where I am and where I came from in the future, but if I am going to go to that trouble, why not go the extra step and create something presentable for the banks. This is where I was having dificulty deciding if a well thought out business plan would have the same impact for a real estate investor as it would for say a small restaraunt owner trying to get funding. Looks like it will.
Eisenhower said something like:
The reason for planning is not so you can follow the plan. It is so you can think through what might happen and otherwise prepare.
The quote if I could find it is a good bit better but I think you get the idea.
1. Just doing a plan will force you and your other half to line up. You will find where you share goals and objectives. You will be training the team to think the same way so when decisions need to be made and the other person can not be consulted the right decision is made.
2. Plans do impress others. Partially because they confirm that you are more than just hot air. That you take things seriously. The other party could be a co-investor, it could be a seller who you want to offer seller financing, it could be a banker.
3. Most SFRs are funded using a loan process where a business plan is never going to be consulted. if you want a line of credit or a blanket facility they a banker will expect a business plan almost before they start talking to you. You are on the commercial side of the bank and only businesses come to that side of the bank. The residential side is very different. SFR can be funded from the commercial side but normally they will do so only when you own a few properties so you fall outside the risk profile of the residential department.
Business plans are great because they make you think. No plan will last all that long when you are starting out. The market will force you to adjust the plan. That is not a bad thing. It is the process by which the plan gets better.
Go for it. Just do not spend too much time planning vs. getting out into the market to see if the plan will work.
Note that a proper business will commonly go off-site to work on a business plan. An off-site working meeting at a nice location where the team can focus on the planning and get away from day to day business as usual things. Sounds like a good way to for a couple to focus and do some team building. Speak with an accountant as to what might be tax deductible.
A trip to HI to do the plan? Maybe not when you are first starting but you get the idea.
I have found the Small Biz Admin. is not great in the biz plan writing tools, but they do provide a nice start, outline, and thinking points for someone with little to no experience in this area:
http://www.sba.gov/smallbusinessplanner/plan/writeabusinessplan/index.html
Bizern1018,
You do need one. Not so much to impress others, rather than for your own understanding.
You need to be able to prepare a table, to show on a timeline which money goes where. And where it came from.
Draw at least the cash column, the loans and the property. This will give you a very decent idea for a start. And write down dates for everything.
You may also want to see some financial ratios. I'll be able to help you: write me if you need.
Keep it very simple: one goal (I think) is to understand the way money works in this investment. It has to be simple enough so that your friend, when asks you why you did it, will get a very well prepared answer.
Steve