Buying your first investment property is an incredible adventure, but whether you want to fix and flip or buy and hold, you need to have a solid real estate investment business plan.
Thank you for reading this post, don't forget to subscribe!In this article, we will discuss the general requirements of any business plan such as the budget and financial projections as well as the capital required. We’ll review less common, yet equally important, items such as investment strategies, market analysis, asset acquisition and time commitment.
Parts of a real estate investment business plan
- investment strategy
- market analysis
- asset acquisition
- time commitment
- budget and financial projections
- financial needs
- exit strategy
investment strategy
Whether it’s cash-flow, short-term rental, fix and flip, speculation, or wholesaling, your real estate investment business plan should start with the strategy you want to pursue.
Each investment strategy has its own benefits and risks. Upfront investment, time commitments, return and difficulty all need to be considered when you are choosing your real estate investment strategy.
| strategy | advance investment | time commitment | annual return | long term returns | Difficulty |
| Bulk | , | , | Not Applicable | ||
| cash flow | , | , | , | ||
| short term rental | , | , | , | ||
| fix and flip | , | , | Not Applicable | ||
| Estimate | , | Not Applicable | , |
Reviewing the chart above, you can see that cash-flow investing is a great option if you’re looking for an easy strategy that will allow you to own assets free and clear in 20 years. However, cash-flow investing may not be the best strategy if you want to generate immediate income or if you want to make real estate investing a full-time career.
Wholesale real estate investing is a great option if you are looking for short-term opportunities to enter the investment industry by leveraging your existing skills as an agent. Short-term rentals and fix-and-flip projects are much more labor-intensive, but they’ll both pay off much more quickly than speculative deals.
market analysis
The next part of your real estate investment plan is determining the location or locations in which you want to invest. You must then determine whether the market conditions in those locations are right for your strategy. One of the biggest mistakes real estate investors make is using a strategy that doesn’t suit the market conditions or sector.
Success in real estate investing often depends less on the skill or talent of the investor and more often on timing the market. The saying “a rising tide floats all boats” comes to mind. The following market indicators can give you insight into the direction of the real estate market.
| market indicator | why is it helpful |
| Population | The growing population supports rents and property values. It is great for cash-flow investing and speculation. Declining population is good for fix-and-flip and wholesale investments. You can see whether the population is increasing or decreasing on the US Census website. |
| rent and vacancy | Rental and vacancy rates are important for both cash-flow and short-term rental investments, increasing the accuracy of your projections. This is less important for other types of investing, such as flipping and speculation. |
| long term appreciation | Long-term housing appreciation in the area will give you an idea of what your real estate investment may be worth over time. Average US housing appreciation since 1968 has been about 5%, so avoid using exaggerated appreciation rates from recent years. |
| active housing list | Active housing inventory establishes whether the housing market is a buyer’s market or a seller’s market. Inventory under three months benefits sellers and inventory over six months is a buyer’s market. This is of little concern for a long-term buy and hold strategy, but is very important for flippers and wholesalers. |
asset acquisition
As a real estate professional, you are likely to come across investment opportunities every day. What’s different about becoming a serious real estate investor is having a business plan that outlines how you will identify, vet and acquire properties. Therefore, your business plan should reflect how you plan to identify, review and acquire assets.
Many novice investors think they can just contact a local agent and choose from the available properties in the MLS. The cold truth is that the best deals are found off-market, or outside the MLS. This means you may need to create a plan for marketing to homeowners in foreclosure or divorce and bankruptcy attorneys.
Once you have a steady stream of investment opportunities coming in, you’ll also need a process for quickly evaluating whether each asset fits your investment strategy. Luckily, we’ve created guides to help you analyze both fix-and-flip and cash-flow real estate investments.
time commitment
Another consideration for a real estate investing business plan is the amount of time you have available to contribute to the investment. Each of the above investment strategies will require some time commitment from you. If you are limited on time, you may need to hire someone to manage your investments.
If you’re doing fix and flips and have a lot of free time to manage contractors, you may be the best person to manage the project. However, if you’re buying a cash-flowing property in another state, it’s a good idea to have a property manager in the area to find tenants, handle emergencies, and collect rent.
If you plan to hire people to help you with your investments, you need to remember to factor the associated costs into your budget and financial projections.
budget and financial projections
The next part of your real estate investment business plan is to create an estimate of the fixed and variable expenses you can expect to incur from your investing activities, as well as a projection of potential revenue.
expenses
When estimating expenses, be sure to include expenses related to the property — such as taxes and utilities — and expenses that are related to managing a real estate investment business, such as employees, software and property management services.
Revenue
Then, estimate your revenue. Returns will vary greatly depending on the type of investment strategy you are using. If you are a wholesale investor, you can buy and resell multiple properties throughout the year, generating substantial revenue. If you’re making a cash-flow investment, you’ll get steady revenue from rental income. And speculative land investments can’t generate any revenue until it’s sold – and that can take years!
financial projection
When you add up your expenses and revenue projections, you’ll be able to estimate your financial projection. A financial projection is a five- to 30-year estimate of your budget that will also take into account other important items such as appreciation, principal reduction and depreciation.
The overall goal with your budget and financial projections is to accurately estimate the capital and funds needed to execute your real estate investment business plan.
need money
Funding requirements are a combination of cash, financing, hard money or private financing that you will need to execute your real estate investment business plan. Once you work out your financial projections, you can easily estimate the total investment required.
One major advantage of real estate investing over other types of investments is the ability to leverage. In many cases you can finance 60% to 80% of the acquisition price, and some money lenders will finance repairs as well.
In any case, you want to make sure you have enough money on hand to withstand the ups and downs until you’re ready to exit. Most business plans anticipate cash-on-hand in excess of 20% of the agreed-upon purchase price.
exit strategy
Any good real estate investment business plan includes an exit strategy. Sure, you can say you’re going to keep your assets forever, but the truth is, you still need to have the ability to get out if your plans change.
Selling doesn’t require an exit strategy; This is the point in your investment plan that gives you an exit option when you decide. Seasoned investors know that you can only really control when you buy; Due to unforeseen circumstances, you cannot always control when you must sell.
To identify your exit strategy, review your financial projections and identify points where your balance sheet reflects high cash and equity as well as low liabilities. These are good exit points. For fix and flip and wholesale, the exit strategy can be months or even weeks for each asset; It may take five to 10 years for speculation and cash-flow.
Bottom-line
Real estate investing can be fun and very profitable. To ensure your success with real estate investing, start with a well-thought-out plan. As they say: “Failing to plan means planning to fail!”
If you have great real estate investing advice, please share in the comments below.
