As a real estate investor, do you need to have a business plan? No. Wait, let me reel back. You may need a defined plan at some point, but hear me out before deciding on when you need said plan.
If you’re anything like I was when I was starting out, trying to figure out how in the world I was going to pull myself out of my corporate job, business plans seemed essential to my pursuits! Of all the grandiose ideas I kept coming up with, whether it be for a new business or an investment, a business plan was the first thing to follow once I had a new idea.
Now, ask me — of all of those grandiose ideas that I made business plans for, how many of those ideas ever came to fruition? Zero. But,now I own my own business, and I own a successful portfolio of rental properties. Have I ever had a business plan for any of those? Nope.
So I think it’s time to break down the when and the what of a business plan: when you should have it and what it should be.
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When Should You Have a Business Plan?
Before I go too far here, let’s clarify some terms. When I say “business plan,” I am referring to what we all learned in school — you know, the one that contains an executive summary, a company description, a market analysis, the organization and management, blah blah blah, all the way down to financial projections over some multiple-year timeframe.
Don’t get me wrong, these plans are great, but the short answer to when you will need that is — IF (and that is a big IF) you need one, you won’t need it until quite a ways down the road, essentially once you already have something in work and functioning (and more specifically if you have some kind of business going, rather than just straight investments). I’ll expand on that later. But the short answer is I really don’t think you need this kind of plan until you are much further along, if even then. Unless you are running a business, you are hoping to sell or you are trying to pitch investors, then someone may want to see this. But for general investing and just starting out, forget about this kind of detail.
Here is a new term I’d like to introduce: “Strategic Plan.” Obviously I didn’t make this term up myself; it already exists, but I rarely hear anyone use this term when talking about investing. The definition of a strategic plan says it is a document detailing out plans that you use to communicate to your organization. Consider yourself, your investing goals, and your organization. This kind of plan is an opportunity to pencil out your general plan and goals, and as an investor, this is all you need to do initially. Am I making this kind of planning sound pretty nonchalant? Well, that’s how I mean it. The reason I say it so nonchalantly is because I don’t think a fancy plan should be your primary focus when you are just starting out.
In terms of timing, here is what I think you should do if you are just getting your feet wet in investing:
- Decide your ultimate goal for investing (is it to earn capital, is it to have passive income, etc.) and use that, combined with your interests, to decide which method of investing to try out (flipping, wholesaling, rental properties, notes, etc.).
- Try said method of investing out. Feel it out, do a little trial and error in it, explore ways of doing it, and see how well it is resonating with you. If the method is in fact resonating and it seems to be panning out (even a little), go to Step 3. If the method does not seem to be working out or you aren’t enjoying it, revisit Step 1 and then try Step 2 again. Rinse and repeat until you find what seems to work for you, then move on to Step 3.
- Based on your now-experience and better feel for realistic processes and returns from said method, now come up with a strategic plan. Start with how much you want to earn, and determine what it will take to earn that. So essentially start out with your end goal (a more specific end goal than your general goals for investing that you came up with in Step 1) and work backwards to determine what will get you there. This — knowing your goal and how you plan to get there — is your strategic plan, and quite frankly, all you need to succeed.
This leads me to the next section — what needs to be in your business plan. Or as we’ve now determined, your strategic plan. But before I jump to that, to conclude this section of when you need a plan, the summary of my point is: Yes, have a plan at some point, but don’t stress over it initially and honestly don’t worry about it at all right away. First things first — find what works for you. You can plan all day long to be an amazing property flipper, but if flipping isn’t in your blood, flipping just isn’t going to be your thing! I say all the time that I wish flipping was in my blood because I think it’s a great opportunity and could be a ton of fun. But the reality is, I’m just not a flipper. I wish I were, and certainly if I put my mind to it I could learn it, but it would be going against my natural grain so I’d rather save it for later when I’m in a position to just do it on the side for fun.
Rental properties, on the other hand, follow right along my natural grain, and therefore it is much easier to be successful with them. How did I find that out though? Trial and error. Good thing I didn’t spend too much time making an extensive flipping plan! You have to experience some trial and error to find what you are meant to be doing, and what you like doing. Don’t waste time making an extensive plan in the beginning until you know what this is, other than just knowing your ultimate goal, so you can at least have a starting point.
What Should the Strategic Plan Include?
Ultimately your strategic plan should include how you are going to get to your goal. This can be as detailed or as general as you want it, really just dependent on where you are in the process. Let’s say you want to accomplish receiving $5,000 in passive income per month — all you need to know right away is how many rental properties you have to own in order to get that much in cash flow. You can worry about how you are going to fund them all later; for now just worry about figuring out the magic number. Once you know that, you don’t necessarily have to know exactly how you are going to get them all, just start buying!
Now, there are some exceptions to not needing all of those details. With rental properties, for example, there are limits on how many mortgages you can get. So some of your planning may need to take into considering that limitation and how you are going to maximize what you can within that limit and what you are going to do after you reach that limit. But really, I’d say initially just have a basic plan on how you want to maximize within that limit.
Here is a short, generic list of things that may useful in a strategic plan (in order of what to start with and working backwards into more detail):
- Financial goal (eg. $5,000/month passive income or $75k in income from flipping over two years)
- How many properties, and at what returns, will it take to accomplish said goal?
- In what timeframe should each property be acquired, if there is a time goal associated?
- What are the options for financing the properties?
- What is the next move?
As mentioned, don’t worry about any of these before you do a little diving in, trial and error, and really feeling out what seems like it is or is going to work for you. Then just worry about the first two things — your financial goal and what it will take to get there — more than anything. The next three steps are optional for your plan and they really just depend on your situation as far as how helpful they will be for you.
Once you start out with your goal and how to get there, as you keep moving further and further along in the process, revisit your goals and do any refining that may be useful for you. Maybe this is a refinement of how many properties you see feasible to obtain, or maybe it’s a processes refinement.
For Real? Why Such a Lack of Planning?
Are you exhausted by me stabbing you over and over again with this idea that a plan doesn’t matter? I don’t want you to think that is what I’m conveying at all. I know it sounds like it, but the reason I’m being overly pushy about the lack of importance of a plan is because I want you to realize two major things that I don’t think a lot of soon-to-be investors realize:
- You just don’t know what is going to resonate with you. Therefore, you are just wasting time making a detailed plan for something that might not even stick. Finding what goes along your natural grain is imperative for success, and this can really only be found with some trial and error.
- Plans change. One of the biggest keys to success is flexibility. What is a great plan today may not be a great plan tomorrow. Now, a caveat to this is that you can take this too far. If you are constantly moving your target, you will never hit any target. So it’s not your goal you want to constantly change (although sometimes there is some room for altering that), it’s your method as to how to get there. If you build organically day-to-day, you will figure out what really works. For some reason people think they can determine the exact path that will get them to their goals, but it’s rarely the case that that path is what works.
Are you hurting yourself by making a detailed plan? No. Is it good practice? Yes. Will anyone rag on you for making a detailed plan? No. Just realize you don’t necessarily need one to succeed in real estate investing. Like I said in the beginning of the article, I can’t even tell you how many “plans” I detailed out that were certain to get me to my success but then what I actually did succeed in, I didn’t even so much as have a note on a napkin for!
Yes, some people require more planning than others, and that is completely okay. Do whatever is most comfortable for you, and my point is not to criticize anyone who writes out a full business plan. I just want to offer you a different perspective on how to make something work. (Which I guess would be quit planning and just do it! Then do a little planning later…)
For all you experienced investors out there — How did you get to where you are? Did you make a business plan, did you have more of a strategy plan, or did you succeed with no planning at all?
Leave your comments below!