Most good things in business start with a plan. Without a plan it is easy to veer off course in times of desperation. You will find yourself looking at deals and markets where you have no business being in. While taking action is always important taking action blindly will often do more harm than good.
Before you get too far in your business you need to take the time and develop a business plan. This plan doesn’t have to lengthy or overly formal. You aren’t writing it for a presentation in order to finish your last class in college. You are putting it together to give your business a vision and a direction for both the short and long term. Here are four areas that you need to address to help create the ultimate business plan.
- Time Commitment. Almost everything in your business revolves around how much time you are willing to commit. There is a huge difference in someone investing while keeping their day job and someone who has all day to find deals. Both ways can yield success but require different paths to get there. The investor who retains their full time job has a certain hurdles they need to address. How are they going to find deals? Do they have a team in place to handle the small daily tasks that come up? Can they communicate with their real estate agent and attorney during the day if they need to? Are they willing to work weekends and after hours? How these questions are answered will go a long way to figuring out a starting point for their business. Even if you can commit to real estate all day you need to establish a daily routine of where and when you get work done. As the most successful real estate investors say it is not about how hard you work but how efficient you are. Having eight hours a day to work is only good if you can take advantage of them. When coming up with a business plan the first order of business is to establish how much time you have available.
- Specific Deal Strategy. Business plans have a way of evolving over time. What you think today may be completely different in a few months. Until you get to that point you need to have general strategy for every prospective deal. Start with the most basic of questions: are you looking for a return in the short or long term? Do you want the long term security that rental properties bring or are you looking for rehab and flip properties? How quick you want your return will impact the properties you search for and even where you look for them. It impacts the team you need in place and how much capital you should have. There is nothing saying that you can’t do a mix of both over time but when just starting out it is best to focus on just one type of property. Whatever type of property you focus on you need to spend hours researching to determine how you plan to acquire is actually realistic. Anyone can make a plan but if you need several things to fall into place you may be asking too much.
- Available Capital. How much capital you have, or have access to, impacts the type of deals you can pursue. You don’t necessarily need to be flush with cash to start but you need to have access to funding. It is no secret that cash offers tend to get accepted at a higher rate over lender financed offers. As part of your plan you should have at least a few different options for financing. Even if you don’t plan on using them you should have a lender prequalification, hard money lender and a few potential private money lenders you can use in a pinch. Getting an offer accepted is only the first step in the process. You will also need capital once you take ownership. Obviously, this is more pronounced if you are looking to rehab but capital is important even for rentals. It is not enough to say that you can find the capital after you take ownership. Any offers you make should be based on the capital you have available. You can make it work with whatever you have but you need to know where you stand before you get too far.
- Market. As you are just getting going you want to take the path of least resistance. There is plenty to think about as you are looking for your first few deals. It is easy to get pulled in several different directions. To combat this you should focus on one, maybe two, local markets. This will reduce the amount of deals you pursue but will greatly increase your knowledge of the area. The more you know about a market the easier it is to act when a deal comes your way. Instead of spending time on demographics and whether or not an area is strong you will already have this figured out. You will also reduce the time you spend driving to and from properties. Driving a half hour to a property that you pass on can start to become demoralizing. A few empty trips and doubt can start to creep in. By sticking to a few local areas you will start to see patterns in the market and begin to sort out what you really want in a property.
Your business plan should be the document that you revert back to in times when you may be searching for answers. After you are finished with it ask an investor you trust to take a look and see where there may be holes. Don’t be afraid to take constructive criticism. A business plan is there to help accelerate your growth, not to demoralize you.
