When Building Your Real Estate Plan – Don’t Forget These Six Items…

13

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.

How to Invest in Real Estate While Working a Full-Time Job

Many investors think that they need to quit their job to get started in real estate. Not true! Many investors successfully build large portfolios over the years while enjoying the stability of their full-time job. If that’s something you are interested in, then this investor’s story of how he built a real estate business while keeping his 9-5 might be helpful.

Click Here For Your Free eBook!

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?

Outside Investors

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?

Your Team

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?

Investment Type

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.

Photo: HAURY!

About Author

Kenneth Estes

During Kenny's decade in finance he bought many single family rentals in rural areas, as a hobby. Along the way, he talked some brave souls into joining him as investors and recently retired from finance to take his hobby to the next level. Find more by and about Kenny on his personal blog and his recently created twitter account!

13 Comments

  1. Kenny, I would like to point out a few things regarding commercial investments.

    1)Commercial investments are most prone to economic downturns.While residential properties are also affected but still the impact on commercial is huge.

    2)The risk in commercial investment is huge.If a residential investment doesn’t turn out very well still it might give decent returns but a commercial property might not even get leased.

    3)Commercial properties require much better management that residential, which technically is one more risk.

    My 2 cents.

  2. Arun, I respect your comments but don’t agree with you.

    While commercial is affected by economic downturns, it is based much more on numbers than single family. Because of this, you don’t go off of comps but rather value the property off of its performance. Sure cap rates change with changing economic conditions but no matter what happens, value is still based off of performance.

    To your second point, I think you are only thinking of say a corner drug store and the like. Don’t forget that anything above 5 multifamily units is technically commercial and also don’t forget all of the other asset classes like self storage, office, retail, etc…

    Bad management is bad management whether it’s on a sfr or a 200 unit complex. It’s going to have the same affect no matter the size of the property. You could also argue that commercial management is much easier because of economies of scale and an overall lower cost per capita . If you own a 100 unit complex, the management company has the ability to give your property much more attention and focus more of their resources towards it.

    • Nick, my comments are based on my limited knowledge plus my primary experience is in Asian markets, so I may be incorrect.By residential I mean housing complexes while commercial refers to offices,retail spaces and so on.The terminology differs in various parts of world.

      1)In case of economic downturns, residential sector witnesses tenants moving to more affordable options.So the impact is, reduced rental rates or stagnant rentals as demand remains same but we witness a shifting of demand.In case of commercial complexes there is a significant reduction in demand , employees are fired and offices get closed.This was the core difference I was pointing out.

      2) Real estate development always has a speculative component based on how the location turns out.Suppose a shopping complex and a residential complex are developed in same neighborhood and that neighborhood doesn’t turn out as well as expected.In such cases the chances of shopping complex getting leased are very low but residential complex might still get leased out albeit at lower rental.

  3. I’m pulling ideas from your article for my REI planning. Since I’m new so far I have come up with goals but not to the extent of the direction of where this article is going.

  4. Great items Kenny! As I get more involved in REI, I am finding the aspects I really like and those I don’t so much and this allows me to focus on what I really want out of REI.

Leave A Reply

Pair a profile with your post!

Create a Free Account

Or,


Log In Here

css.php