How to Create a Property Investment Business Plan
A property investment business plan is a multi-purpose document that acts as a comprehensive investment guide. It allows lenders to learn about your property rental business and its financial health.
As you begin your real estate investing journey, creating a rental property business plan can help you determine what your goals are. Read on to learn how you can achieve them through your rental property.
Recommended: Be sure to read our guide on How to Start a Real Estate Investing Business.
Creating a Property Investment Business Plan
Your property investment business plan contains all of your operational details, marketing strategies, and financial projections. In turn, you can refer to your document in the future as a reference.
Equally as important, you may easily make adjustments to your real estate business plan and keep moving forward if anything changes.
Writing a business plan requires plenty of hard work and research. Moreover, you should dedicate a sizable amount of time to drafting your investment plan.
After you establish your goals, identify potential investors, and get into the right mindset, you can start creating your real estate business plan.
Make sure you're working with mortgage lenders who want to help you achieve your goals. Read our Best Mortgage Lenders for LLC Owners review to learn more.
1. Determine How Much You Need
Before you invest in property, identify the amount of money that you're looking to make. In turn, this will allow you to define how much revenue you need to raise, the number of homes to purchase, and a desirable interest rate.
After that, use these objectives as a framework when you draft your real estate investment business plan.
Your financial goals will enable you to create a detailed timeline. In turn, you can determine when you could expect to reach your desired income level in rental revenues.
This is especially important if you plan on initially investing a limited amount and, as your buy and rent business grows, acquiring more properties in the future. Above all else, working towards a goal and regularly measuring your progress will keep you motivated.
Where to Start
First of all, add up the expenses that you want your real estate income to cover. Many people invest in property so that they can pay off their debts.
Coming up with an estimate will help you create a timeline for when you expect to achieve your goals. Moreover, it lets you know how many properties you need to buy in order to attain your objectives.
To clarify, here are the steps that you should take:
- Calculate your total debts, including your current home/residence's mortgage, auto leases, student loans, and/or credit card balances.
- Determine how much in rent revenues you expect to earn from your investment.
- Add up your buy and hold business expenses per property, including the loan, taxes, insurance, maintenance, and others.
- When you deduct your business expenses from the rental revenue, you will get your net income.
- Next, figure out how much of your debt you can pay off through your rental's net income.
- Based on the previous step, determine how many properties you need to buy in order to cover all of your debts.
Keep in mind that you can set any financial goals that you prefer, such as raising money for retirement, a child's college education, or an annual vacation. Many investors prefer to pay off their debts before pursuing other objectives.
Doing so allows them to lower their personal monthly expenses (once the debts are fully covered) and, as a result, enjoy an even larger net income in the future.
2. Think About the Reader
The way that you write and structure your business plan depends on who will read it. Your initial (and most detailed) version should be for internal use (i.e., by you and your business partners).
After that, you can simply adjust and modify the document based on who you will present it to.
Above all else, your real estate investment business plan should highlight to readers how they can achieve their own goals by funding your buy and rent endeavor.
Here are the two main people and/or entities that will be interested in reading your business plan, alongside the aspects that each of them prioritizes:
- Investors: A potential investor will mostly evaluate your business model, profit margins (revenues vs. expenses), and understanding of the real estate market. They may also ask for your resume and other information about your qualifications. At the end of the day, your real estate business plan should underline the market opportunities that you see and show potential investors how much money they can expect to make if they participate.
- Lenders: When you apply for a loan, banks and financial firms will certainly want to view your business plan. This is even more likely if your buy and hold investment is new and doesn't have profit and loss statements. Lenders will mainly examine your assets, cash-on-hand or savings, expected profits, alongside your and your business partners' sources of income (such as a full-time job). In short, when lenders read your business plan, they are most interested in knowing that you'll be able to pay them back if they give you a loan.
Your Reader-Oriented Real Estate Business Plan
If you are approaching a family member or a friend, show them how they can reach their personal goals when they invest in property.
For example, if your friend recently had a child, ask them about their aspirations for their newborn. Moreover, find out if your friend has any concerns regarding childcare costs, tuition expenses, or even their existing debts.
After that, determine how much money your friend should invest in order for them to reach their financial goals.
When You Are the Reader
Keep in mind that you are the main reader of your own real estate investment business plan. When you start drafting it, do so in a way that makes it easy for you to track your progress and remember the technical details.
Highlighting certain parts, for instance, is one method. To give another example, try to use spreadsheets and formulas when you make financial calculations. This will certainly make future revisions simple and quick.
3. Research the Real Estate Market
When you study local and national trends, you can identify the best time and price to buy property. In turn, your monthly loan payments will go down, which increases your net income.
The same concept applies to future interest rate projections and rental prices. Your research will tell you if closing a property is more profitable in the immediate future or whether it's financially wiser to wait until prices go down.
When you research data about home prices, here are the main details that your property investment business plan should include:
Seasonal Trends
This is important because it tells you when home prices are at their annual peaks and lows. In most cases, values go up during the summer because demand is higher. During the winter, on the other hand, housing prices decline.
If this is true in your area, find out how much you would save in monthly loan payments when you buy in the winter vs. the summer. Looking at historical data can help you come up with an estimate.
Past Values
Over the last few years, have property values gone up or down? How much have they changed?
Average price changes might indicate how your buy and rent property value might increase or decrease in the future.
Future Projections
Study what national and local analysts are saying about the housing market. More specifically, research the main factors that are driving the changes in property prices. Do real estate experts expect them to continue in the future? What about other trends?
Based on your findings, determine how these factors may impact your investment and future profits.
Rental Prices and Trends
Investors should also research rental price trends.
- Firstly, look at historical changes and whether rents have been going up or down in your property's area.
- Secondly, study the demand for rent and if it's expected to increase in the future. For example, find out if more people are moving into your area from another city or state. Similarly, examine additional factors that may impact the demand for rental properties.
- Thirdly, calculate how those changes might impact your future profits. If rental prices are increasing, your revenue will also go up. Keep in mind that you may be able to raise your rent (and, therefore, your net income) from one year to the next.
Your property investment plan and future calculations should account for these potential changes.
Interest Rates
Lastly, but certainly not least, you should account for interest rate fluctuations. Several aspects will impact your interest payments. This includes the policies of the Federal Reserve, who set the interest rates that banks across the United States abide by.
Look at their current rate and study what Federal Reserve officials are saying about potential future increases and decreases. Similarly, examine local factors that may impact the interest that lenders charge. Sitting down with a loan officer is a good place to start.
Learn more about the different types of home loans available to LLC owners. Read our guide to Types of Mortgages for Business Owners.
4. Identify Potential Renters and Connect With Them
When you understand who your renters are and where to find them, you will save plenty of time and money on marketing. In fact, you could even rent out the property (and start earning revenues) sooner than expected.
The following techniques can help you identify who your potential renters are:
- Drive around your rental property's neighborhood and look at the houses. If the buildings are new and modern, it means that the renters in the area are willing to pay a relatively higher rent.
- Keep an eye for items that may indicate household and family sizes. For example, if you see pools in the yard or “kids at play” road signs, your renters are most likely to be new families with young children.
- Find out if there are malls, restaurants, and other attractions in the area. Those are great places to hang brochures and flyers to advertise your rental property.
5. Determine How You Will Operate
Your property investment business plan should outline how you will handle day-to-day operations. Doing so at an early stage will minimize delays, ensure that you and your business partners cooperate smoothly, and, above all else, it keeps your renters happy.
Here is how you can create an effective operational plan:
Assign Roles
If you are working with other investors, determine who will be in charge of collecting rent, handling maintenance requests, and marketing. Consider if your budget allows you to hire a management company.
Similarly, you should also assign shifts based on your and your business partners' schedules. This is especially useful if you have a full-time job and/or other time commitments.
Figure Out the Details
Your property investment business plan should outline the type of payment methods that you will accept, how renters can communicate with you, and other technical details.
When you get started and rent out the property, you should revisit your real estate business plan. After that, ensure that all of the important technicalities (such as payment processing apps) are taken care of.
If you forget anything, your document should serve as a reminder and an overall guide.
Choose a Business Structure
There are different types of business structures that you could opt for. The main ones are sole proprietorships, general partnerships, LLCs, and more complex corporate structures.
In general, we recommend creating an LLC. This is because an LLC minimizes your liability and gives you access to certain tax advantages.
An LLC is also ideal because it is simple to create, regardless of whether you are working alone or with other investors. In fact, if you are starting out as the only investor in the property, LLCs make it easy to add new co-owners in the future.
To find out more, read our article on the main benefits of forming an LLC and how you can create one.
Baselane offers a banking platform designed with real estate investors in mind to easily collect revenue, maintain books and file taxes so you can focus on running your real estate investment business.
6. Put Together the Financials
Now that you researched market trends, studied your audience, and figured out the operational details, you can put together the relevant financial documents.
The financial section of your property investment business plan should include the following:
Projected Revenues
How much will you charge for rent? Ideally, you want your numbers to be based on rental pricing trends and the preferences/income of your potential audience.
For example, if your property will be in a high-earning neighborhood, your rental rate can exceed your city's average prices. Just as importantly, after you look at historical trends, price-in potential rent increases during the upcoming years.
To clarify, you should calculate your potential revenues for each of the next 5-10 years, depending on how you expect rent prices to change. In turn, you can get an idea of what your long-term income will be, even if you have to make some adjustments over time.
Expenses
Here are the main expenses that your property investment business plan would include:
- Monthly and annual loan payments
- Interest expenses
- Insurance
- Marketing costs
- Property and income taxes
- Maintenance
At times, you may incur more or fewer expenses. For instance, your state's property taxes might change over the next few years. Moreover, some states may charge a sales tax. Others, meanwhile, will only levy an income tax on your earnings.
Check your state's applicable laws and tax rules. Doing so will make your financial projections even more accurate.
Net Income
After you define your rent revenues, deduct your business expenses to figure out what your expected net income will be.
For instance, if your monthly rent revenues are $1,500 and your total expenses add up to $1,000, your net income is $500.
To take a step further, compare this figure to your original goal. As an example, if your total monthly debts are $1,500, you need to invest in 3 properties to fully cover this personal expense.
Break-Even Analysis
When you first get started, you will incur one-time costs. The most prominent example is the downpayment. If you plan on renovating the property, include the related expenses as part of your overhead costs.
Your break-even analysis defines when you will make that money back.
To illustrate, let's assume the following:
- An investor paid a $3,000 down payment and another $2,000 for renovation. Their total overhead costs are $5,000.
- The investor also expects to make $1,500 per month in rental revenues. Their monthly expenses, meanwhile, are $1,000. The investor's net income is $500.
- Therefore, it would take them about ten months to make back the $5,000 that they originally spent on the downpayment and renovation.
Follow the same steps above to determine when you will break-even. After that, include this information in your property investment business plan.
7. Create an Executive Summary
While this should be the first section of your property investment business plan, you only need to work on it after you complete the previous steps.
Your executive summary will give the reader a brief overview of what the document entails, alongside your business plan outline.
More specifically, include the following information in your executive summary:
- Overview: A shortened description of what the document entails and where the reader can find specific pieces of information. This should be drafted based on who you will present your property investment business plan to.
- Mission: In a few words, describe what your overall objectives are. For example, some investors are passionate about providing housing opportunities to underserved markets.
- What You Need: Specify why you are asking the reader to view your real estate business plan. If you are applying for a loan, determine the amount that you need and how you plan on using the funds. The same logic applies when you approach potential investors.
8. Review and Repeat
Once your property investment business plan is complete, refer to it in the future as an overall guide.
In other words, your document contains all the relevant details that you need to remember as time goes by. This includes market trends, future revenue projections, and operational details.
Equally as important, you should always modify your property investment business plan, especially when you expand and acquire new rental homes.
It is also important to adjust your predictions (such as those related to rental rates and property appreciation) in the future.
Moving Forward
Now that you know how to write a rental property business plan, it's time to begin moving forward on finding properties to rent. We recommend you begin by forming an LLC for your property rental business.
