00Introduction Welcome to the UBG to Real Estate Investing
01Chapter 1 How to Invest in Real Estate: An Introduction
02Chapter 2 Real Estate Investing Education
03Chapter 3 Real Estate Investments: Niches and Strategies
04Chapter 4 Create your Real Estate Investing Business Plan
05Chapter 5 How to Find Investment Properties
06Chapter 6 Real Estate Financing
07Chapter 7 Real Estate Marketing
08Chapter 8 Real Estate Exit Strategies
Create your Real Estate Investing Business Plan
No great building is made without careful planning well before ground is broken. Plans serves as a map for developing the structure, without which the building simply wouldn't come together. In the same vein, carefully crafting your real estate business plan will be an integral part of your journey. This chapter focuses on the options available for creating your plan, which will prepare you for your entrance and long-term success in real estate investing.
This chapter includes:
|Creating a Business Plan|
|Assembling Your Team|
|Business Entity Structuring|
Do you wish to be great? Then begin by being. Do you desire to construct a vast and lofty fabric? Think first about the foundations of humility. The higher your structure is to be, the deeper must be its foundation.Tweet
Creating a Real Estate Investing Business Plan
If you were to get in your car and take a road trip across the country to somewhere you have never been, would you just trust your gut and start traveling in the general direction of your destination? Most likely, you'd bring a road map of sorts.
The reason we use maps and GPS is because oftentimes the road is unpredictable, and the right road may seem to lead to the wrong place. Other times, the wrong road might seem to point directly toward your destination. Road maps are created to identify the easiest route, pitfalls you want to avoid, and special things to see along the way.
The same principle applies for your journey into real estate investing. This section will discuss building the road map that you'll follow on your real estate journey. In business, we call it a business plan.
What Your Real Estate Business Plan Should Include
Mission Statement—When people ask you what you do, what do you tell them? Your mission statement should clearly define your purpose and it should include the benefits your business provides. Do your research and come up with a solid mission statement. This is the “why” in your road trip.
Goals—Where do you want to go? What do you want real estate to help you to achieve? If your goal is to make $5,000 per month in passive income, write that down. If your goal is to flip four houses per month, write that down. These goals may change over time, affecting the rest of your business plan—and that's okay. Make sure to put down both short- and long-term goals. By setting smaller, more achievable goals, you'll give yourself something to consistently look forward to accomplishing—which will help you stay motivated.
Strategy—There are hundreds of ways to make money in real estate—but you don't need that many. You simply need to choose one strategy and become a master of it. That strategy (vehicle), if dependable, will carry you through to your destination (your goals). If you choose to flip houses to generate cash in order to save up enough money to quit your job, write that down. If you want to build passive income for your retirement by buying up small multifamily properties write that down. Don't worry if you don't understand (or know) how you're going to accomplish everything in the plan. Remember, your business plan can, and will, change in time. As you learn, you'll fill out your plan with additional details.
Timeline—What is your desired timeline to reach your goals? Be realistic, but don't be afraid to reach, either. Do you want to retire in 10 years? Are you planning to quit your job next month? Document your timeline here. Do this in accordance with your goals.
Market—Define your market. What kind of properties will you look for? Low-income? High-income? Commercial buildings? As a beginner, choose an area you feel most comfortable with. As a new investor, plan on investing in a property that is within short driving distance of your home (unless your local market makes it impossible). Doing this will help you to become an expert in your locale, which will help you analyze nearby deals and opportunities. It will also help you identify and get to know the players in your area, which will ultimately help you find partners—and again, more opportunities.
Criteria—Before you go out and start looking for deals, you need to establish a strict criteria for them to adhere to. You'll want to define your loan-to-value, cash-flow requirements, max purchase price, max rehab budget, and max timeline, to name a few. One of the most important lessons you can possibly learn is to stick to your criteria and walk away from any deal that does not meet it. Becoming emotionally attached to a deal is easy, but if you always stick to your criteria, you’ll take emotion out of the picture.
Flexibility—If you don’t find enough deals to cherry pick from, change your market and/or strategy. You'll learn more about this in chapter 5. Flexibility within your criteria is one of the most important concepts to understand and clearly define. Too many new investors get excited and buy the first deal that comes their way. By having clearly defined criteria, you are able to easily reject the 99 percent of properties that won’t end up being a good deal.
Marketing Plan—How are you going to create a marketing system that brings in motivated sellers? How will you find the best deals that are listed? Will you use the MLS, agents, online searches, direct mail, or other means of finding deals? We will cover different marketing strategies in chapter 7.
Financing Deals—How do you plan to acquire deals? Are you using conventional loans, hard money, private money, equity partners, seller financing, lease options, or some other creative method? Finding financing is often a challenge in today’s market, and private money provides a tremendous solution. Learn to attract private money, so you've always got a steady flow of financing when deals present themselves. We'll cover this more in chapter 6.
How You Do Your Deals—How are you going to turn a property purchase into a profit? Clearly define the steps. Make sure to carefully document your income and expenses, and prepare for the unexpected. You should prepare several exit strategies in case the first one doesn't work out as planned.
Teams and Systems—Clearly define your team and the systems you will use to delegate and automate tasks. Who will be on your team? Will you need an attorney? A CPA? You don't necessarily need to know who will fill those positions, simply figure out what roles you will need the people on your team to play. More on this below.
Exit Strategies and Backup Plans—Developing multiple clearly-defined exit strategies will be extremely important to your business plan. How are you going to get out of the deal? What are your backup plans? Do you flip, lease, wholesale, bird dog, sell the note, sell the entity holding title, rent and hold, or use some other technique? What is the end game? Clearly define it. We'll talk more about this in chapter 8.
Illustrate Example Deals—This part should excite you! Think about what the next 10 years will look like in an ideal but feasible world. Illustrate purchases, cash flow, appreciation, sales, trades, 1031 exchanges, cash-on-cash return, and more, in order to demonstrate what your path forward may look like. This goes somewhat hand in hand with your goals—it just illustrates possible ways of making them happen. Additionally, this will change with time because, of course, ideals are not real life. However, it is good to see what is possible.
Financials—In your business plan, include a description of where your personal finances are at the moment. What do you bring to the table? Do you have any equity you can use? Are you starting with nothing? Document your current situation and update it whenever it changes. As you move forward with your investments, it is always important to have complete documentation of your finances at the ready.
One last thing— remember that road maps and business plans are guides, not rules. A business plan is meant to provide direction and to motivate you to follow through. It is designed to keep you headed in the right direction at the correct speed. When you have a clearly defined business plan, carrying out the plan and envisioning the end game becomes much easier.
dead ends, and even have a breakdown or two. However, if you hold as tightly as you can to the map you've created, you will pass through the obstacles and eventually come out at your destination.
If you talk to investors who have a few failures under their belts, you'll find that the majority of failures were due to a lack of preparation and planning. Don't fall into this trap.
Assembling Your Team
As an investor you are required to wear many different hats, but you don't need to (and can't) wear all of them. Instead, you need a team. When we refer to your team, we're not suggesting you go out and hire a team of employees to work under you. A team is merely a collection of individuals in various businesses that you can rely on to help you move your own business forward. Here's a brief look at who should be on any winning real estate investing team:
Mentor—Every successful entrepreneur needs a good mentor, a guide. By training under the watchful eye of someone smarter or more experienced, we can only get smarter. For more information on mentors, see chapter 4.
Mortgage Broker/Loan Officer—A mortgage broker is the person responsible for getting you loans—especially if you are going conventional (rather than hard or private money). Find someone who has experience working with other investors, someone who is creative and smart. Many loan officers have a pipeline of buyers (or future buyers) set up; real estate investors can use the help of local loan officers to build a list of buyers and lease purchasers.
Real Estate Attorney—It is important to have someone on the team who can go through contracts and knows the legalities of your moves. Don't try to pinch pennies by foregoing this valuable team member. You don't need to meet for hours with your attorney each week, but he or she should be available when you need. Having an attorney who is skilled and has real estate experience is highly important to the success of your career. Keep in mind, attorneys can be compensated through fees collected from an acquisition or disposition of a property.
Escrow Officer or Title Rep—If you live in a state that uses title and escrow companies, your escrow officer or title rep will be the person responsible for closing the deal, taking you from the offer to the keys. Having this person on your team helps to close deals that much quicker. You always want people around who will look out for your interests.
Accountant—As you acquire properties, doing your own taxes and bookkeeping will become increasingly difficult. As soon as possible, hire an accountant (preferably a certified public accountant). Your numbers person should also be well aware of the ins and outs of real estate and will preferably own rental properties of their own. Come tax time, this is the person who will help you through the write-offs. A good tax accountant will save you more than the cost of their service.
Insurance Agent—Insurance is a must, and as an investor, you will probably be dealing with a lot of insurance policies. Be sure to shop around for both the best rates and the best services. Do not skimp out on getting insurance. You never know when you'll need your policy.
Contractor—A good contractor is often the most difficult team member to find. Contractors can make or break your profit margin. Find someone who gets things done on time and under budget! Be sure that your contractor is licensed, bonded, and insured in order to protect yourself. Don't simply hire the cheap guy.
Supportive Family & Friends—Having the support and backing of loved ones is important in any endeavor. If your family or spouse are not on board, don't invest until they are.
Realtor—An exceptional real estate agent will be fundamental to your investing career. You (or your spouse, if you’re working together) may even choose to become a real estate agent in order to gain access to the incredible tools that agents have. Either way, working with an agent who is punctual, eager, and a go-getter is essential. Real estate agents make money from commission when a property is sold. In other words, for the buyer, an agent’s service is complimentary. Agents can also be an excellent resource for contract real estate work, which may include the following activities: bird dogging, referring buyers, showing properties, open houses, price opinions, and more.
Property Manager—If you don't want to actively manage your properties, a good property manager is important to have. A good property manager can be hard to find, but finding one who can efficiently manage your rentals will make your life significantly easier.
Handyman—You’re going to need someone to take care of the little things that come up on a daily basis. Ask other landlords for great handyman referrals. A good handyman typically doesn’t need to advertise, working almost entirely off referrals from a small group of investors and homeowners.
One of the best sources for finding these team members is through referrals from other investors. In general, another investor should be happy to refer their handyman, mortgage broker, or accountant to you because it reflects well on them and their relationship with that professional. Try asking around at your local real estate investor club or here on BiggerPockets, and you'll be well on your way toward putting the pieces in place.
What Makes a Great Real Estate Team?
A great real estate team is defined by its ability to consistently produce reliable results. As you might suspect, it’s way more difficult to construct a team in real life than it is to discuss it here.
Investors, especially ones with large portfolios or those who flip a lot (often both), rely on their team daily. When one member fails, the entire endeavor suffers, sometimes to the point of sabotaging the team's goals altogether. Whether you’re serving clients, flipping properties, or keeping track of your rentals, your team must consistently produce, and avoid the excuse train at all costs. There are those who do—and those who make excuses. The latter will pull you down faster than you could ever imagine.
People often talk a good game, so watch everyone closely when it’s their turn to produce. A great team member will exhibit certain traits that are sometimes difficult to immediately recognize but can be identified through conversation or through other people’s referrals. For example:
- Are they really experts?
- Do they interact well with everyone?
- Are they a pain to contact?
- Do they return calls and emails quickly?
- Do they hit deadlines?
- Do they produce, as promised, when promised?
- Can they communicate clearly and efficiently?
Assembling the team will not happen overnight, but once it’s together, it will give you the assistance and backing you’ll need to make your real estate investing dreams come true.
Should I Use a Partner or Go It Alone?
Before beginning your real estate journey, you will need to decide if you want to pursue your career on your own or with the help of a partner. This decision is not the same for everyone and depends largely on your knowledge, time commitments, abilities, talents, and timeline. If a partnership is something you plan on pursuing, the kind of partnership becomes important as well. Some individuals choose to invest with a partner from the start. Others choose to invest with partners on a case-by-case basis.
Team Brainstorming: Two heads are better than one. Ideas can often develop with clearer focus and direction as multiple minds work through the same issues.
Pooling Resources: Real estate investing generally takes a lot of resources and can often be too expensive for one person to handle alone. A partnership allows you to pool your resources to get off to a stable start. A solid partnership may also help with bank financing.
Assistance with Analysis: It is important to master the art of deal analysis (which we'll cover more in chapter 5). There are hundreds of things to consider when searching for your first real estate investment deal, so having someone else looking at your numbers will increase your odds of an accurate analysis.
Complementary Qualities: Different people bring different strengths and weaknesses to a partnership, e.g. analytical vs. hand on, construction vs. financing, time vs. knowledge. Understanding what each person excels at, and harnessing that strength, is key for successfully working with a partner.
Task Division: When investing in real estate, there are a lot of tasks that can easily overwhelm your life. Effectively and fairly dividing tasks can ensure that all partners are able to contribute to the business without being overwhelmed.
Expanded Networking: Networking with others, within and outside the real estate industry, will be vital to the growth of your real estate investing endeavors. In a partnership, each partner comes to the table with their own network of connections.
Accountability: A partnership, if both sides do their part, will help to keep the business moving forward; you've got a built-in accountability partner to keep you to task. When one partner begins to falter, the other can step in and assist, ensuring the team continues moving forward.
Confidence and Motivation: Starting out in real estate investing can be overwhelming. A partnership can help inspire confidence and motivation when obstacles arise. A good partnership can be revitalizing and motivating.
Split Risk: As with any investment, real estate investing involves a certain level of risk. Having a partner splits the risk (and thus, the profits) and can lessen the burden.
Personality Conflicts: Partnerships can be difficult due to the possibility of vast differences in personalities. When you rely on another person to get things done, if you don't mesh perfectly, conflict can easily arise.
Difference of Opinion: Everyone has an opinion about how things should be done. Partnership will require you to compromise on many aspects of your business,from paint color to investment type. Ultimately, differing opinions can cause conflict.
Suspicion/Lack of Trust: As with any close relationship, there’s potential for suspicion and trust issues to arise—especially when things aren't going well. Trust can be hard to gain and easy to lose. Fraud has also been known to play a role in the demise of many businesses and partnerships.
Delayed Decision-Making: When you act alone, you have the ability to quickly make decisions yourself. In a partnership, you will most likely have to discuss all decisions—no matter how trivial—with your partner, which can slow down your dealings.
Smaller Profits: When you form a partnership, your profits, by nature of the agreement, will be split. In other words, you will make a lot less money per deal than if you were going it alone.
Mixing Business and Friendship: Oftentimes people get into business with friends, family members, and friends of friends or family—and many times, that decision becomes the death of the relationship. Partnerships don't always work out, and when they don't, the relationship may be severed for good. A partnership is very much like a marriage. Don't get into one unless you're ready!
Unrealistic Expectations: When you rely on someone else, it's easy to get caught up in your expectations of how things should be done. When your partner doesn't live up to your expectations (or vise versa), bitterness and blame often enter the equation.
Responsibility: While the legal ramifications will depend largely on the entity structure you set up, you and your partner will still be in business together, which will mean you’ll be responsible for your partner, too, at least in terms of the business. If your partner skips town, you’ll still be responsible for the business. For this reason, you should have your real estate attorney help you draft a partnership agreement in order to help protect your interests.
Tax Complications: If you work alone, your taxes will be much more straightforward than if you work with a partner (or partners). The more people you bring on as owners, the more complicated the bookwork will become—and the more time consuming (and costly) tax season will be.
Four Tips for a Successful Real Estate Partnership
If you decide that the benefits of a partnership outweigh the complications, be sure to follow these four tips to minimize problems:
- Don’t be a jerk: Treat your partnership with care and with a giving spirit.
- Learn to compromise: There will be disagreements and conflicts in a partnership, but there must be compromises.
- Talk daily: When possible, speak to your partner every day. Discussing daily events as well as future goals will help relationship stability and validate why you are partners.
- Plan ahead: Do not start a partnership off the wrong way. Make sure the arrangement is written, well-planned, and includes an operating agreement detailing the roles and responsibilities, capital contributions, profit splits, and exit strategies.
The Bottom Line
While partnerships come with many benefits, they are not for everyone. What’s worse, if they are not created properly, they may end up being the silent killer of your investment plans. If you choose not to forge a partnership, you won’t be investing alone. There are thousands of individuals in the BiggerPockets community who can help you through whatever you may be facing. You can also outsource things you don't want to do rather than splitting your profits. For example, if you are not good at construction, it may be cheaper to hire a contractor than to partner with an individual who is good with construction.
If you decide to create a partnership, be careful. Many people simply do not make good business partners. If you decide to pursue a business partnership, choose a business partner who will treat you fairly, add value to the relationship, and maintain similar goals. Carefully plan out the arrangement (in writing) and communicate constantly. If both partners remain committed to the business, it will likely become prosperous for all parties involved.
Business Entity Structuring
It is important for any real estate investor to understand that incorporating your business is almost universally regarded as one of the best ways to protect yourself from personal liability. There are many opinions about what structure to set up, when to create one, and so on. BiggerPockets recommends that you consult with a real estate attorney or accountant when making these important decisions.
Without a proper foundation, your investment career is bound to show cracks, possibly resulting in failure. This chapter was written to help solidify your foundation, providing an overview of how to create the strongest business plan possible. If you have further questions about these items, don't be afraid to ask questions in the BiggerPockets forums.
Once you have chosen your niche, researched, educated yourself and set up a proper foundation, it will be time to start shopping for your first property. The next chapter will examine the criteria for shopping for a property.