Guide to Creating a Real Estate Investing Business Plan
Are you ready to bring your exciting idea for a real estate investment business to life? Or have you already launched your company, and now realized you need a real estate investing business plan that outlines your vision so you can focus on executing your goals in the coming year and beyond?
Whether you’re a new real estate investor who wants to get started, or an established real estate investor who needs to recalibrate your business plan, you can use this simple blueprint to map out the best approach for your goals.
Keep in mind that every business is different and requires its own unique plan for success. While it is necessary to look at what your competitors are doing and how leaders in other businesses steer their companies toward success, your business should have its own plan that’s specific to your goals and vision.
5 Key Components of a Real Estate Investment Business Plan
A real estate investing business plan will enhance your ability to make smart strategic decisions, while giving you a living document to help convince potential partners and investors that your business vision is worthy of their participation. Use these components to start creating your business plan:
1. Executive Summary
While the phrase “executive summary” might sound a bit stiff and unexciting, this is the part of your plan where you vividly summarize the goal of your business and outline a high-level vision for how you will succeed. Start by answering the following questions:
- What’s your business about?
- Why are you doing this?
- How are you going to make your business succeed?
- What types of properties are you going to invest in, and how will you earn income?
Even if you’re planning a sole proprietor business that uses your own financing, it’s still worth going through the exercise of writing an executive summary. You may think you have everything mapped out in your mind, but putting it on paper will help you see the possible shortcomings in your idea and brainstorm ways to improve.
Being able to sum up your business and pitch it quickly to others will also help make you more confident in selling the value of your vision. In addition, it can be helpful to review this section as you move forward with new initiatives to determine whether you’re staying focused or drifting in the wrong direction. Are you staying true to your business vision, or do you need to re-adjust?
And don’t worry if, over time, you decide to chart a new course with your real estate investing business! Your business plan can always be revised and updated. In fact, if you’re doing things right, you will likely need to re-adjust and refocus your business plan several times along your road to success.
2. Business Description, Market Landscape, and Competitive Analysis
The next step in outlining your real estate investing business plan involves reviewing current market conditions, analyzing what other investors are doing and determining how you can compete on their level. You might think you have a solid understanding of your local market just because you’re familiar with the area. But even if you’ve lived in a real estate market for 20 years, you still need to dig in and look at the data that investors use to make determinations for the types of properties you want to invest in.
Some of these types of market data include:
- Average selling price
- Average year-to-year price increases
- Average time on the market
- Analysis of which neighborhoods are showing the biggest gains in home prices
- Analysis of which neighborhoods are more stagnant
Make sure you understand the comparable prices of properties so you can manage your own expectations for which investments are the most promising, as well as avoid overspending on properties that are unlikely to recoup the investment.
3. Organizational Structure
Believe it or not, this aspect of creating a real estate business plan is often overlooked. If you don’t structure your real estate investment entity in the smartest way possible, it could cost you at tax time. In addition, a mistake here could create unwanted liability for your personal assets in the event you are sued by a tenant or one of their guests.
It doesn’t matter if you own one property or 100 — you should legally separate your properties by creating an LLC for each one. This will shield each property from legal liability if something happens to another one. Some states also offer the option to create a “Series LLC,” which lets you manage several LLCs under an umbrella entity. Each series has its own bank account, credit cards, bookkeeping, members and operating rules. This newer type of organizational structure for business entities has worked well for those who own multiple real estate properties.
Forming a legal business entity for your real estate investing business might seem a bit confusing and expensive, but it doesn’t have to be. Since 2004, Incfile has provided LLC formation services for thousands of business owners who have multiple companies and real estate properties. If you’re stuck on this step, contact Incfile to learn how we can help you move on to the next phase of your plan.
4. Financial Planning and Projections
Are you building your real estate investing business with a small business loan or by partnering with investors who have capital? It can be easy to jump in and start investing if you see a deal that seems like a no-brainer…but many things can happen along the way to success. Whether you’re using your own cash or working with investors, make sure you have enough financing to handle market changes and recover from worst-case scenarios.
This is also where you should look into insurance options that make sense for your specific type of real estate investments. Structuring your LLCs the right way may protect you from certain legal liabilities, but having insurance can be a lifesaver as well when disaster strikes. Make sure to cover all your bases when it comes to finances.
5. Operations and Management Strategy
Once you get your real estate business off the ground, how will you operate on a day-to-day basis as you move forward? How will you continue to analyze your business each month, each quarter and each year? How will you create new goals and benchmarks for success? How will you adapt to sudden changes in the market?
These questions can be overwhelming, but they need to be thought out. Make sure you have a plan for managing your business in the short term, as well as a plan for stepping back and looking at the big picture. This is especially true for sole proprietors, who can wear many hats on any given day. This is when you can assess whether you’re still working toward your goals, or if you need to re-analyze your vision for the direction of your business.
Keep Your Business Plan Relevant
Once you create your real estate investing business plan, don’t put it in a drawer and let it collect dust! Continue reviewing it while you execute your real estate initiatives. Your business plan should be a “living document” that changes and evolves along with your business.
As part of your business planning, consider talking with a more experienced investor or small business mentor. Tap the knowledge and experience of those who have been successful in this world of real estate investing, and keep learning along the way! Maintaining an open, teachable mindset is an essential quality of success that often gets lost. Remember, the market is always changing — so you should always be learning!