Warning: Do Not Invest Without Having One of These First!

by | BiggerPockets.com

A road map, a plan of attack, a business plan – whatever you may call it. To become a successful real estate investor you need a plan.

Planning is the most important step for any investor who wants to become a successful real estate investor in my personal opinion. One of the important aspects of planning is that it eliminates bad habits and the fear of failure. When one makes a plan and sticks to it – one is likely to prioritise, focus on what is important, and it provides the framework for informed decision making.

Prior to beginning your investment search for deals, I would recommend that you sit down over a cup of coffee/tea and lay out your investment plan so that you can find the “best” deal that matches your risk, reward and market criteria.

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Investment Plan Elements

Investment plan should contain the following elements at minimum to help make it useful to you in the long run:

Market Area:

The key question to answer in this section is: Where do you want to invest?  Some investors want to invest in their “own backyard” while other feel comfortable going out of their state and even out of the country. You can make this criteria as a broad as possible the state/city or as refined as the zip code.

Maximum Investment Price:

Some investors say that it does not matter what the price is as long as the deal makes sense. There is truth to that statement but the honest truth is that money is not unlimited and every investor has a different capital investment budget so that should be kept in mind as you decide on your maximum investment price. Hence by defining your maximum investment price you can be more focused on your areas and not waste time  looking at deals that you cannot raise capital behind. Remember time is a very precious commodity when it comes to finding and acting on deals.

Asset Type:

A real estate investor should start in one asset class (in my personal opinion) and get comfortable understanding the demand and supply drivers of that asset class prior to jumping into others. The asset classes can range from single, multifamily (2 to 4 or 5+ units), retail, industrial, special purpose, hotel and healthcare. Within each broad category there are sub-classes so pick your asset class on the basis of your interest and expertise.

Return Criteria:

Everyone is looking to purchase or invest in real estate to do one thing: Make Money! Hence it is important to understand what is your target investment strategy?

There are two broad criteria of investment strategies: Flipping or Cash Flow. Based on your target strategy, you need to establish return metrics that a deal must have for it be marked as a “Prospect” within your search.

For Flips investments, it is important to define the “minimum spread” between the After Repaired Value (ARV) and your all in investment (total debt and equity investment dollars).

For cash flow investments, you can setup measures such as Cap Rate, Cash on Cash Return, Equity Multiple to define the minimum threshold that matches your return needs.

Risk Criteria:

As an investor you need to define your risk appetite upfront to help determine what markes or investment strategies work for you. How does one define risk is the big question that most people ask? The best answer I can give for this question is that it depends on what you consider risky.

For Flip Investors, risk question can be geared towards the elements:

  • A. Liquidity: how long can you carry the asset paying for all the holdings costs before the asset sells or you need to take cut price.
  • B. Solvency: do you have the capacity to refinance your debt or equity commitments in the project to carry the project out longer if it does not close or sell within the original project time frame?
  • C. Return Delta: how big of a difference is the Quick Sale (90 days or under) liquidation value from your projected market sales price? Do you still break even if you sold the asset at the liquidation value?

For Cashflow investors, risk can be defined as cashflow violatility:

  • A. Return Delta: How big of standard deviation of the cashflow from the expected monthly cashflow return causes your investment to produce a negative monthly cashflow?
  • B. Solvency: Can you carry that negative monthly cashflow and for how many months?

Your Map to Accomplish Your Goals

An investment plan is like a map that one uses to achieve their real estate goals and objects. A well executed plan saves time, helps in making good decisions and helps mitigate an unforeseen crisis. Remember a plan is living document that needs to be updated as your crtieria, and investment needs change.

Happy Investing

Photo: ToNToN CoPT

About Author

Ankit Duggal

Ankit Duggal(G+) is the Investment Director of a New Jersey Income Operating & Consulting Company . Ankit is a seasoned value investor who enjoys achieving a zen through surfing, hot yoga, and snowboarding.


  1. I agree with Mark. When I’m looking at a deal, or just a particular problem, I run multiple scenarios and solutions, typically in my head, of what could happen and how can I deal with it if it does. You can’t foresee everything but it helps greatly if one of your scenarios does pop up your not taken by surprise so much because you had already come up with a solution. At the vary least, it keeps you prepared for the unexpected. While a plan isn’t as glamorous as other aspects of the business, it has helped me keep on track better because its so easy to say “if I did this, I could raise the value” or something equivalent but then you have to look at your plan and ask yourself “is why I came into this deal with the intention of doing it that particular way.”

    • Ankit Duggal

      Exactly Roy. You cannot predict everything, but you should run scenarios so that you can avoid the obvious potential surprises. You can use your head as you do Roy. I am not as smart as that so I utilize the Scenario building tool within Excel to help me achieve the same sensitivity analysis. Thanks for the comment.

  2. Oh, I like the Risk Criteria section. I think too many people go into business ventures without performing this reality check. Expenses and emergencies will and do happen, so plan accordingly ahead of time.

    Wonderful article – thanks!

  3. This is a great article! I have been working on writing a “business plan” since I decided to get started in REI and I think I’m making it harder on myself than it needs to be! This helps me include all the necessary elements so I can easily refer back to my plan and whatever my question is, it should be perfectly clear and laid out in the business plan. Thanks!

  4. Great piece Ankit,

    You know what they say, ” People don’t plan to fail, they just fail to plan”, and I do believe when people say RE investing sucks or is dangerous it usually leads back to the fact that they spread themselves too thin and didn’t have enough reserves.

    Dave Van Horn

  5. I agree and disagree. I’ve never had a written business plan or goals, and have done OK, controlling just over $5 million of property and six-figure income. For many people, carefully writing it down makes a lot of sense. BUT…don’t get hung up too much about that. Once you study buying techniques, and your market, and start to learn how to tell a deal from a not-deal (I spent a year doing that before I bought my first investment property), I recommend just choosing a good deal and jumping in head first.

    • Ankit Duggal


      I commend you on your portfolio. You did however complete a business plan whether you realize it or not. By spending one year studying the market and telling what is a deal from not-a deal you were able to define your own investment plan mentally. What metrics helped you decide what was a deal v. not-a deal?

      Happy Investing

  6. So true Ankit. I tell so many people in business not just real estate about coming up with a business plan so you can follow something and measure your results. I think many that don’t because just think it is some big fancy elaborate process that will take them years to do. I do believe in more planning and the time spent is not wasted but for those that think it is complicated I say just start off by doing just a one page plan. It is a start.
    Great advice here.

    • Ankit Duggal

      Great advice. An investment plan does not need to be complex. It needs to be a tool for you to use to measure oneself and their results. A one page plan with bullets is more than sufficient to get the ball rolling and thinking about your real estate investments as a business.

      Thanks Michael.

      Happy Investing

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