Dwight D Eisenhower famously said “Plans are worthless but planning is everything.”
When it comes to real estate investing, no one can tell the future. That doesn’t mean you shouldn’t try. There have been other articles written on BiggerPockets.com exploring how to make a plan. However, thanks to my financial background, I like to think I look at things with a different bent. So let’s get your brain juices flowing by bring up some topics you need to consider when you’re doing your real estate planning. Look 5-10 years in the future when answering the questions in each section.
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Loan To Value
Loan to Value is the amount of your financing divided by the value of your home. If you’ve borrow $80,000 on a $100,000 house the LTV is 80,000/100,000=.8 or 80%. The higher the percentage, the more risk you are taking on. I’ve made this argument many times in the past, but keep your LTV at a reasonable number. 100% LTV means you have no room for error. If anything unexpected happens in your market, you’re going to wind up in squeeze.
- Do you have a high income that you can use to dig yourself out of a hole?
- Is your income low enough that a bad investment will lead to bankruptcy?
- What LTV is ideal? Is this higher or lower than what you have today? Do you need to change your approach?
Passive Cash Flow
Passive cash flow is magical money that comes in your front door every month without you lifting a finger. In real estate, this typically is created by investing in rental real estate.
- Do you want to pursue passive cash flow? You can make money in real estate without passive cash flow.
- Are you still working? Are you hoping to use passive cash flow to retire? If so, how much income will you need to be able to quit your job and still make additional investments?
- Do you have goals in your life outside of simply retiring? What are they? How much income will they require?
One way to grow your business is to bring in outside investors. These folks want to create a passive income, but they want to be as far removed from the day to day as possible. If you have a strong track record and experience, you could mange their real estate investments for them, and take a small cut for your services. The advantage is this allows you to scale up fast. The disadvantage is you now have as many bosses as investors.
- Are you a people person? There is a sales element to having investors.
- How do you handle people challenging you? All investors will want to keep tabs on their money and to do that they’ll dig into every aspect of your operation.
- Can you handle the responsibility? It’s not just your head on the chopping block anymore.
Focused or Diverse
When it comes to growth, you really have two options: spread your empire over vast distances or stay localized. There are pros and cons to both. If you stay localized, the deals you get will be limited by the size of your town. If you spread out, it will create operational complexity. How you answer these questions will have a large impact on your real estate planning and your life.
- Do you enjoy travelling? Even if you have local property management in place, you’re going to have to visit your locations frequently. There are countless horror stories involving absentee owners and local property mangers. Don’t become a statistic.
- How do you like complex environments? If you grow to 20 locations, you will have to create some structure to manage it all.
- What are your requirements for a new location?
One of the most important aspects of growing any business, and your real estate planning, is your team. You need to think ahead and visualize what it’s going to look like.
- How many members will you require? Don’t forget, you’ll need accountants, lawyers, property managers, contractors, book keepers, abstractors, receptionists, etc.
- Who on your team will work for you? Who will remain independent?
- How will you know when you need to expand your team? Is it a certain amount of money? Number of units? Number of investors?
You need to determine what type of real estate you’ll be investing in.
- Do you want to as little to do with property management as possible? Want low turnover and few calls? Consider commercial investing.
- Are you good at negotiating and analyzing deals quickly? Single family residential might be good for you.
- Do you want to minimize your staff and simplify financing? Mull over large multifamily (economies of scale kick in around 100 units).
Wrap It Up: Do your Real Estate Planning Today
Before you get deep into a career as a real estate investor, make the time for real estate planning. Figure out what your empire will look like in 5-10 years. Do this today! Take out a piece of paper and start writing. Don’t plan on doing it tomorrow because tomorrow will turn into the day after, which will into next month, which will turn into next year, which will turn into you being the captain on a rudderless ship. The topics I’ve raised here are designed to get you thinking, but they’re far from the whole picture. That’s what the rest of BiggerPockets is for.