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Regardless of whether you’re investing as a career or for a part-time/passive income, the amounts of cash involved in a real estate investment means that you should be treating your endeavours as a business rather than a hobby. And like all businesses, the first step to success is creating a rock solid business plan. This list will take you through the essential points you should include as the skeleton of your document.
Mission Statement —
Your mission statement is your “why.” Why are you investing? What is the fundamental purpose of this business? Putting pen to paper and formulating a mission statement will help you clear your mind and crystallize your overall ambitions.
Short and Long Term Goals —
What do you want real estate to help you to achieve? Where do you want your business to go? Keep in mind that a goal should be quantitative and temporally specific. “Making a successful investment” is not a goal. “Making $5000 in profit within the first year” is. Writing down your goals will give you something to look forward to and will motivate your actions.
How will you accomplish your goal? Will you apply a buy & hold strategy, a fix and flip strategy, or a wholesale strategy? Will you invest in commercial or residential real estate? What will your exit strategy look like? Remember that the strategies you choose don’t have to be limited to a single one, and they are likely to change throughout the course of your career.
Time Frame —
Set a clear and realistic time frame to accomplish your goals. It’s probably best to have a series of short term goals for each year, and a long term goal that will spend over 5 years or more.
Defining your market is a crucial aspect of your business plan. Will you be targeting young professionals or families? Low or high income? As a beginner, choose an area you feel most comfortable with. Many first time investors choose a unit that is relatively close to home. The familiarity with the area will help you understand the local opportunities and demographics better.
Negotiables and Non-Negotiables —
Before you go out and start looking for deals, you need to establish the criteria which those deals must fall in. Define your loan to value, cash flow requirements, max purchase amount, max rehab amount, max timeframe, and so forth. One of the most important lessons you can possibly learn is to stick to your criteria and walk away from any deal that does not meet your criteria. It is very easy to become emotionally attached to a deal, but by sticking to your criteria, you take the emotion out of the picture.
Marketing Plan —
It may be that you’ll choose to do your own marketing rather than hiring a broker or property manager to oversee your rental. If this is the case, make sure you look into all the communication channels that are available to you, such as google advertising, MLS, social media, and email marketing. Once you’ve narrowed in on a target demographic, the challenge will be figuring out how to reach that demographic and make them aware of your offering.
Financing Options —
How do you plan on acquiring your deals? Are you using conventional, hard money, private money, equity partners, seller financing, lease options, or some other method? If you’re opting for a traditional lender, which type of mortgage plan will you choose, and what will your amortization period be?
If you’re pooling resources with a group of friends or other investors, make sure your teams are clearly defined and delineated. Who will handle what? Are the tasks fairly distributed? Define the systems you will use to delegate and automate tasks. While thinking of teams, remember that you might create trustworthy links with an attorney, an accountant and a broker before you finalize your investment plans.
Exit Strategies & Backup Plans –
A well defined business plan should have several clearly defined exit strategies. This is especially the case for new investors. An exit strategy outlines how you are going to exit the deal. Will you flip, lease option, wholesale, bird dog, sell the note, sell the entity holding title, rent and hold, or some other technique?
And finally, your business plan should include an elaborate description of your financials. Start by writing down your current financial situation. How much of your savings are you willing to invest? How much equity can you use? Continue by looking at estimated costs and projected income.
The plans you make in your business plans are not die-hard rules, but rather roadsigns to go by which help prevent unexpected risks and obstacles in your business endeavours. Just because your plans are likely to change in the future doesn’t mean you shouldn’t write them all down and research all your options before you start.