Help Needed Reviewing Early Draft of My Business Plan

[Jon Passow]

I've been researching REI hard core since November (it's become a full time job basically) and I've put together a very early draft of my business plan. I would love people's thoughts on the feasibility of my plan or things I should look out for. Bellow is the early draft (doesn't seem to be an attachment link on this forum). Just a reference, I live in California and will be investing out of state. Once again, this is my first pass at my business plan and everything in it is subject and open to change. I know I still have a lot of work to do on it :)

Real Estate Investing Business Plan

Mission Statement: To generate enough passive income to fuel my creativity and also be flexible with my schedule.

Goals: The long term goal is to have 556 out of state rental units generating $150 each a month in cash flow. This can work out to being owning 4 apartment complexes with 150 units in each of them. The short term goal is to be earning $50,000 a year in passive income by December 2020. To do this I will need to own 30 units that each generating $150 a month in cash flow (which could be as simple as owning 7x 4-unit multi-family homes and two single family homes).

Strategy: Start off by purchasing multi-family homes and rent them to generate passive income. Eventually working your way into apartment complexes and renting those to generate passive income. With each of these purchases, I will renovate them (BRRR Strategy) to increase their equity and then refinance them to both recoup my initial investment and also generate some extra cash to be used towards my next investment property.

Time Frame:

Year 1 (2018): Purchase 5 units (Generate $9,000 in NEW Passive Income A Year)

Year 2 (2019): Purchase 10 units (Generate $18,000 in New Passive Income A Year)

Year 3 (2020): Purchase 15 units (Generate $27,000 in New Passive Income A Year) FINANCIAL FREEDOM REACHED!

Year 4 (2021): Generate $90,000 in New Passive Income A Year (Purchase 50 units?)

Year 5 (2022): Generate $135,000 in New Passive Income A Year (Purchase 75 units?)

Year 6 (2023): Generate $1800,000 in New Passive Income A Year (Purchase 100 units?)

Year 7 (2024): Generate $1800,000 in New Passive Income A Year (Purchase 100 units?)

Year 8 (2025): Generate $1800,000 in New Passive Income A Year (Purchase 100 units?)

Year 9 (2026): Generate $1800,000 in New Passive Income A Year (Purchase 100 units?)

Year 10 (2027): Generate $55,800 in New Passive Income A Year (Purchase 31 units?)

Market- I will purchase properties in desperate need of renovation in C+ to B- neighborhoods. These properties will be located in Kansas City, MO (alternative markets: Indianapolis, Indiana and Columbus, Ohio).

Criteria- Not Completed

Flexibility- Not Completed

Marketing Plan- I will locate properties through word of mouth, MLS, real estate websites (realtor.com loopnet). Deals will also find me through the network that I will create during daily conversations with bankers, real estate agents, and other real estate investors.

Financing Deals-For the first four deals I will be getting interest only private loans to purchase through my LLC (thus building my LLC's credit) and renovate the properties, then refinancing through a local bank. After that I will need to switch over to a portfolio loan and eventually involve other investors for larger purchases. Other alternatives will be going to lenders that do Freddie Mac loans (up to 10 properties). Most likely I will have to move up to Commercial Lending/Loans after 4 properties anyways because I will be possibly purchasing 5-plexes on up at that point. Another alternative is seller financing.

How Will I do My Deals- Once I purchase a property, I will have my team renovate both the inside and outside of the property. If needed I will upgrade the wiring, replace all plumbing with PEX piping, install a new furnace, and if needs be, replace the roof (which will almost guarantee me 10 plus years before I have to do any maintenance work on major appliances thus increasing the revenue generated by each property). Total cost of renovations should be $50,000 or less (for 4-plexes or smaller). After the renovations are complete (8-10 week timeline), I will get a new appraisal and refinance the property for 75-85% of the new appraisal (if seasoning period applies, I will pay the monthly bill on my interest only loan myself and with cash flow from renter). This will provide me funds for paying off the original hard money loan and provide some extra cash for myself (which will be put back into the business minus a small cut for myself). After renovations I will have my local property management company place a renter in the property to start generating cash flow.

Teams and Systems- (section not complete)

- Mentor

- Mortgage Broker/Loan Officer-

- Real Estate Attorney-

- Escrow Officer or Title Rep-

- Accountant-

- Insurance agent-

- Contractor-

- Realtor-

- Property Manager-

- Great Handyman-

Exit Strategy and Back-Up Plans- Main strategy is to sell the property(s). If there is not a rush to sell a property my first strategy will be seller financing so that I can still generate some income and return on investment through interest. If time is more of an issue I will sell through a real estate agent to the general public.

[Matt K.]

You're going to need a lot of capital/income to qualify for these loans... Even if you got on the low end (and no added costs which isn't really achievable) 50k a unit going to put you at 750k by year 3. It's more likely you're going to see costs probably closer to 70+ a unit which takes you over a million...

Let's just use a constant, to get an idea of what kind of capital you'd need. Let's use 75k per door (probably too cheap early on, but whatever). Let's assume 25% down, and 2% for closing costs. It's likely a lot more for Hard Money.... 

Year one: 375k, 93,750 for down payment, 7500 closing costs. Total Needed:101,250. Income produced: 150x5, 12 mo = 9,000. (92,250 spent)

Year Two: 750k, 187,500 for down payment, 15,000 closing costs. Total Needed 202,500. Income produced 9,000+ 18,000= 27,000 (175,500 spent)

Year Three: 1,125,000, 281,250k needed for down payment, 22,500 for closing costs. Total Needed 272,500. Income Produced: 27,000 + 27,000 = 54,000 (218,500 spent)

Year Four: 3,500,000 875k down payment, 70k closing costs 945k Total needed 945k, Income produced 54,000 + 90,000= 144,000. (801,000 spent)

So to get to year 4 (and assuming you get full 150/mo door *12) you're looking at needing 1,287,250 in capital. If you don't use the income (150 mo) you'd need: 1,521,250.

Now, that's probably a tough sell to investors w/ 4 years experience. Years 6-9 ea would be almost 2 million.

Then we still have to take into consideration that lenders will want cash reserves of probably somewhere around 6-12 mo for each loan...