7 Tips to Creating a Business Plan

The old axiom goes like this: “Nobody plans to fail, people just fail to plan”.   I’ll take it one step further and say that failing to plan is planning to fail.   Also, when looking to establish partnerships, joint ventures, or raise capital, people will want to see your business plan.

The successful real estate investor has already established his or her vision and strategy and now needs to plan out how to execute and turn the vision into a reality.  The following are basic steps on how to create a business plan:

Step 1 – Establish your mission statement.  Why is a mission statement necessary if a vision statement has already been created?  Consider the mission statement to be the action and your vision statement to be the results.  If your vision statement is to be sitting on a beach in Hawaii sipping margaritas while collecting rent checks via the mail, then your mission statement is going to tell you how you’re going to do this.  I like Joel Barker’s quote from the Power of Vision, a training video for organizations who need examples about how individuals and organizations use vision for their success.  “Vision without action is merely a dream. Action without vision just passes the time. Vision with action can change the world.  If you have just a mission, the action written, – and not the vision, you will not know where you’re going or if you have arrived.”

Step 2- Define yourself and your team.  This part will answer the question ‘Why should anyone want to work with you (if you are just starting out?)’  Describing your background will allow you to establish your skills sets, experiences, & successes.  Also, associating yourself with others who are experienced will allow you other to have more credibility.  Examples of team members are Title Agents, Attorneys, Contractor, Marketing Company, Funding Group, Real Estate Agents, etc…  For example, if you have no experience physically performing repairs on a fix and flip but you have a contractor who will be working with you, leverage his or her real estate experience.

Step 3- Choose your strategy (s).  Do you want to focus on fix n flips, wholesales, purchasing subject to, short sales, etc…?  It is important to identify what you want to accomplish in business and match the strategy to your goals, resources, and skill sets.  The 6 important factors to consider when determining a strategy are your financial budget, how quickly you need to get paid, what skill sets you possess and don’t possess, the complexity of the deal you wish to focus upon, your team’s skills, and your credit requirements.  For example, if you have a credit score of 550, then the buy and hold strategy is not for you.  Also, if you need money quickly but are poorly organized, the short sale strategy will not be your best choice.

Step 4- Establish your criteria.  Ever wonder how some experienced investors can look at the financial of a transaction and make a decision to pursue or discard an opportunity in seconds?  They understand clearly their definition of a good real estate transaction and take action when they see one that fits their criterion.  What is a good deal for you?  Many new real estate investors think a good deal is any deal that someone says ‘yes’ to!  However, this can lead to many first, and ONLY, transactions.  What are examples of criterion in which to establish?

• LTV- Loan To Value is the ratio depicting the amount of the loan to the value of the property.  The lower the LTV when buying, the better chance for a successful transaction.  The Real Estate Millionaire will determine what the lowest acceptable LTV is for a transaction and will not go below this percentage.
• Investment-How much of an investment are you willing to make in a transaction.  Different strategies require different tolerance levels of repairs and holding costs.  The Real Estate Millionaire will not invest in properties that require a higher than planned investment.
• Cash flow- If your strategy includes holding onto property and cash flowing, the Real Estate Millionaire will set that monthly rate and not invest in properties that do not fit that criteria.
• ARV- ARV is the After Repair Value for a property.  Some investors will focus on larger, higher end home.  While the holding costs are considerably higher, the end results may be more profitable.  Some investors may focus on cheap homes for the purpose of minimal investments and a quicker flip.  The Real Estate Millionaire will define his or her criteria and act upon only those that meet the requirements.

Step 5- Define Your Target Market.  What area will you be working in?  Is it city wide, specific zip codes?  How far away from your market are you willing to go?  Are you willing to go out of city or out of state?  Define the specific areas in which you are willing to buy and sell properties and stick with it.

Step 6- Create Your Marketing Plan. The marketing plan is extremely important.  This plan will allow you to budget funds and time in order to turn your vision into a reality.  The remainder of this chapter will be dedicated to detailing the most commonly used types of marketing for investors focusing on pre foreclosures.

Step 7- Generate your financial statements.  Create a projection of cash flows, an income statement, and profit and loss sheet.  It is recommended that you invest in a software system, such as Quicken or Quickbooks, in which to create your financials and update on a weekly, if not monthly basis.  Then, if you ever need to provide your financial information for lending requirements, they are already created and can be printed quickly.

Once you have created your overall business plan, you will have the thorough understanding of what a good deal is or isn’t instantaneously.  For example, if you have established that a fix and flip is your strategy and you are looking to pick up properties with an LTV of 65% max with a 7% repair to ARV ratio in the eastern or southern part of your city that has an ARV no larger than $200,000, then analyzing properties is pretty simple.  If a bird dog comes up to you and offers you a house for $160k that has an ARV of $225 and requires $25k of repairs, you will be able to determine whether or not this fits your requirements instantly.