Decades ago during a seminar in Dallas, Jim Rohn asked his audience a seemingly simple question:
When should you start building a house?
The attendees weren’t quite sure what he meant, so there were a few moments of awkward silence. Then, after scanning the room with his eyes, he offered this gem of an answer:
As soon as you have it finished!
What he meant, of course, is that before you start constructing a house, you must first have it finished — on paper. You must have exact plans with exact specifications that can be executed by the builder in order to end up with the house you want.
“If you forego the plan and simply start laying bricks and randomly building walls,” Jim quipped, “they might take you away to a safe place.”
The audience laughed, and you may be laughing as well. After all, who would start building a house without plans?
Here’s a fact that might shock you: In real estate investing, the overwhelming majority build their “house” without a concrete plan!
One sunny day, they just step outside and start putting up walls. Their portfolio has no foundation, no load bearing structure, no plumbing system — just a couple of random “walls” built over the years. Just a couple of properties that the investor picked up with the optimistic hope that they could resemble a house someday.
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The Right Time to Make a Plan
We’ve all been told that taking imperfect action is better than taking no action at all. And usually that’s pretty good advice.
But an investment portfolio is a complex structure comprised of many interdependent parts. Some of those parts cannot be built later in the same way that the foundation cannot be built after you’ve built the walls.
If you’re just getting started, you may be tempted to think that big plans are for big shots, and you’re just at the beginning. “I’ll buy a couple of properties, and when I’ve grown my portfolio, then I’ll make a plan,” you might think to yourself.
That’s exactly the wrong way to go about it.
Build a solid plan at the outset, even if you can’t possibly see how you can achieve it. This plan will provide the “placeholders” for your assets of the future.
Then execute with patience and purpose.
5 Key Questions Your Investment Plan Must Answer
The main purpose of an real estate investment plan is to provide clarity and actionable steps to accomplish your income goals. In that context, your plan should answer the following 5 key questions:
- How many properties must you acquire to achieve your income goals?
- How much capital will your acquisitions require?
- How long will it take to complete your acquisitions?
- How long will it take to pay off all your assets?
- What will the portfolio net worth and income be when you arrive at your destination?
Long-term real estate investors are typically after one principal goal: investment income at destination. Further, investment income is a function of asset value and yield. Yield depends on the quality of the assets you purchase. If you opt for quality assets leased by quality tenants like our investor clients do, your yield on free and clear assets will hover between 6.5%-7.5%, give or take a percentage point. Therefore, the only thing you can truly control without sacrificing quality is the value of the assets you acquire and pay off.
Most investors who don’t reach their income goal share one thing in common: They didn’t buy enough assets to yield the income they wanted. A well-crafted plan would have shown them that from the start, and most importantly, it could’ve shown them the path to actually achieve their income goals.
The “Living Document” to Help You Stay on Course
Most of the information on the “first draft” of your investment plan will be driven by educated assumptions. Since we don’t know the exact numbers of any future purchases you might make, we have to assume them so we can run a financial analysis. But then real assets will substitute your assumptions, and your plan should be revised from pro forma to actual.
And if you’re assumptions were pretty conservative like mine tend to be, this is actually a good thing. It usually means you might reach your goals faster.
Further, your plan will forecast the next 10, 15 or 20 years in a very linear fashion. But life is rarely linear, is it? Murphy announces that not only is he moving back in your secondary bedrooms, but he’s also bringing friends! Or on the opposite end of the spectrum, you get a big promotion, and now your greater income will allow you to move at a much faster pace. The greater point is that your plan is a “living document” — in the sense that it should be updated periodically to reflect the most accurate known numbers at the time.
Last but not least, the hardest part about a simple investing strategy is that you must stay the course for a long time. It’s hard to stay motivated and stay on the right track for 10, 15 or 20 years. The highest value that a well-crafted real estate investment plan provides to a long-term investor is crucial feedback on where you are in the larger picture.
Let’s suppose, for instance, that your plan calls for the acquisition of five small multifamily properties. Further, it says that if you make those purchases and apply the Domino Strategy to pay them off one at a time, your first asset should be paid off in five and a half years . The second will follow suit at four years. And so on.
If you’re six years into your plan and your first asset is free and clear, don’t you think that would signal that you’re on the right track? Wouldn’t it also provide the added motivation to carry on and execute on the other assets that follow? Conversely, if you didn’t have a plan, how could you possibly know that you’re on the right track if there no track exists?
Take my mentor’s sage advice, and build your “house” only as soon as you have it finished.
Investors: What does YOUR plan look like?
Share your thoughts with a comment!