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:
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.
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.
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.
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.
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