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Real Estate Business Plan Sample

I believe that having a written real estate investing business plan is useful, regardless of what type of personality you have. I mention personality because some people just tend to do fine in life without planning. With real estate though, the process of having a written plan can do three important things: First, by seeing your plan on paper, you can more easily spot any flaws or idealism in your plan. For example, if you plan to buy three houses every year, you'll need to plan where that money is going to come from. If your plan says you'll need sixty-thousand dollars for down payments over the next three years and you make twenty-five thousand, you've got a problem to solve. Second, showing a written plan to your spouse or partner can help ease their fears. Fear generally comes from the unknown. When it's there in black and white, along with an illustration of the long-term benefits, it can bring a great deal of comfort to your partner. And finally, a good, simple plan can help keep you stay on course. You won't be as likely to buy a four-unit on a whim if your plan says you're going to buy a house every three months for five years. That being said, I did waver from my plan a little bit.

The first divergence was deliberate; I decided that I wanted to own multifamily in addition to single-family homes. The second was an experiment, but it violated one of the core parts of my plan and ended up causing a lot of extra work and hassle. If I had to do it over again, I wouldn't have bought it. The mistake I made was buying a firmly entrenched class C building because I wanted at least one building that cash flowed more than what I had already. I let my banker influence me as well. He thought it would be a good idea to diversify into the town where this building was located instead of having all my eggs in one basket. It was an eight-unit low-income building that had been run into the ground by a slumlord of the highest magnitude. Parking was difficult, any upgrades that had been done over the years were shoddy, and the building had such a bad reputation that when we advertised a vacancy, and people called to inquire, they often hung up when we told them the address. I don't know how we did it, but three years later, we literally have nothing but retiree "lifers" and blue and white collar working people there. I would not do it again. It was a miserable first year, a heinously difficult second, and just plain hard the third. We did get better cash flow, but not enough to compensate us for the hardship.

But it was an experiment. It taught me a lesson, and now I have a pretty good building that not only cash flows well, but gives a thirty-percent cash-on-cash return because the special deal I made with financing required only ten percent down. That being said, if you have a sound plan, stick with it. Don't wander too much either side of the path you're on. You worked hard, presumably, on your plan. You asked questions, read books, and came to solid conclusions based on your knowledge, temperament, and assumptions. Don't throw that away just to do something else that you haven't properly analyzed or doesn't fit your plan or temperament.

What follows is our written plan, with some commentary along the way in italics & updates in red. Note: When I talk about cash flow after deducting an eight percent management fee, I mean that even though I manage the building myself, I deduct (on paper) eight percent for management so that I can see what my properties will cash flow if someone else were managing. I talk about this concept in much more detail later.

Phase One Start of plan, 2009: Purchase single-family homes in the Waterville-Winslow area, at a minimum 15% discount to market value, in desirable neighborhoods, in-town, that need little or no work to bring to "move in" condition, and that will generate an average of $600 per year minimum net cash flow averaged over five years, after deducting for 8% management fee. Favor will be given to single story ranches, or at least those with a first-floor master bedroom, to appeal to older tenants. The major portion of the income will come later from appreciation and equity either in the form of cash-out refinancing, selling and holding first mortgage, selling outright, or simply from the increased rental cash flow once mortgages are amortized. If owning appeals to me after second home is purchased and rented, I will move forward with owning 10 units at the rate of no more than one per month. I will have the option of branching into Multi-family properties before reaching ten single-families, as outlined below:

Notes: Started Feb. 2009, bought three houses, a two family, a four family, and a seven family by the end of first year. By the way, I'd suggest not getting distracted by the notion of buying real estate at a certain percentage below market value. Whatever you buy a property for is most likely its market value. If you paid $50,000, then that's its market value. However, you might be able to get a lower price by giving better terms (like all cash and no inspections, for example.)

I was advised to buy single story houses, like ranches, because older people would prefer those because there were no stairs to climb as they got older. This is one way to expand your buying audience. If you buy capes, you might lose a few retired folks as possible buyers because they know they won't be able to climb stairs in the future. Buy ranches, and you automatically increase your future selling pool.

We didn't expect much cash flow, but were looking at it more as a retirement plan. Doing cash out refinancing or selling outright to get our "pay day" was the plan. I also put a back door at the end, allowing me to move into multifamily if I survived Phase One.

Phase Two
Multi-Family: Purchase multi-family (two to four units) buildings in the Waterville-Winslow area, in decent neighborhoods, in move-in or near move-in condition that generate at least fifty dollars per unit per month cash flow, on average, over five years, accounting for an eight percent management fee. Favor will be given to buildings with tenants who pay their own heat, or at least have separate heating systems or the potential to easily upgrade to these conditions (i.e. easy to install extra furnace or one-bedroom units for easy addition of monitor heat). Areas would include: Mayflower/Pleasant St. area, nicer streets off Upper Main in Waterville, nicer areas off Clinton Ave. in Winslow.

Completed same year as Phase one - we did not keep to the "pay own heat" wish except for one or two units and all SFHs. Many places we own would be perfect for monitor heat though. I wanted 2-4 unit buildings that retained a lot of the benefits of SFHs (Separate heat, nice neighborhoods, etc.). As it turned out, that was not easy. There weren't many four units with four separate $7,000 boilers! (Though it's easy to find two-units with two boilers). Furthermore, it's really not an efficient way to heat a building. Two furnaces in an over and under duplex will use more oil than one heating the whole building. However, having that setup will appeal to an owner-occupied buyer down the road. They'll know they won't be paying their tenant's heating bill. This will be comforting to a first-time multifamily buyer. Investors will also notice a building with separate heating systems. It transfers utility bill risk to the tenant.
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Phase Three
If the nature of ownership appeals to me after one year, I may move toward owning 36 to 50 units within five years, with the intention of generating at least $4000 per month average cash flow after accounting for eight percent management. I can increase or decrease the amount of money we make based on the amount of maintenance and management I have the time and willingness to do myself vs hiring out. To enhance our cash flow, we will focus on larger apartment buildings, five units and up, that are also in decent neighborhoods and cash flow an average of $75 per unit per month after accounting for management. These buildings will be mostly "working class" type, giving us "75% of the cash flow for half the hassle."

In other words, if I haven't ended up in the looney bin or prison, I can go full tilt into my plan and just get it done. This part of the plan was added at the end of year one. As for cash flow per unit, many lower income property owners set their sights on one hundred dollars per door per month cash flow. In keeping with my "seventy-five percent five percent of the cash flow for half the hassle" scenario, I put a more conservative goal of seventy-five dollars monthly. I didn't want my cash flow goal to be too low, but I thought that if I set it at a hundred or higher, I might be tempted to buy lower class properties to achieve that goal.

Because we plan to travel extensively within a few years, all properties MUST provide excellent cash flow after all expenses so that the buildings will be self-sustaining when management is outsourced. In addition, we are looking for a minimum of twenty percent return on initial equity, which is defined by the sum of cash flow, mortgage pay down, projected appreciation and tax benefits divided by all acquisition costs. Acquisition costs are down payment, out-of-pocket rehab and buying costs such as inspections, etc., but not initial repair funds that are borrowed.

I realized I wanted real estate to replace my lawn care business as our primary source of income. We wanted to travel, and so this made sense. We reasoned it was much easier to run a real estate business while traveling vs a lawn care business. I also reasoned that we needed to abandon the SFH plan and stick to multi-units for enhanced cash flow. This was no longer just a retirement plan; it was a career change. We needed to get paid now as well as later.

I also raised the bar on what I demanded for a return on my money. I'd talked to enough "real" investors who were making twenty, thirty, and even fifty percent on their money here in this area as well as nationwide. Once I truly believed I could do it, I refused to settle for less. My goal was for each successive building to have a better "income story" than the previous one. This very demand got out of hand at one point, and led me to buy the eight unit I wrote about before, so it's important to keep a plan in front of you and not let yourself be guided blindly by a single factor, like cash flow.

Phase Four
We have accelerated our plan somewhat, and are currently expanding to fifty-three units after the two-year mark. We've found a clear niche in four to eleven-unit buildings. Despite some drawbacks to owning larger "five plus" buildings vs 1-4 units, we value the ease of management and economies of scale built into five-plus unit buildings. One furnace, one roof, one yard; and a vacancy creates nothing more than a slight hiccup in profitability over the course of a year while in a SFH or duplex, a vacancy can mean the difference between red and black ink for one or more years. Replace a furnace and you might've just spent ten years of cash flow. Additionally, by intelligently using our cash flow proceeds (i.e. saving and investing vs spending it all) we can more than compensate for any appreciation we might be giving up by foregoing SFHs and high end duplexes.

After a while, I really discovered that owning a seven-unit was not much more hassle than a three or four. The disadvantage was financing. For five units and up, the financing tends to be a bit more restrictive, with pre-payment penalties, the requirement to show financial statements every year, and higher interest rates. They also get inspected more often by the fire department for code violations because there're more families' lives at stake in a seven-unit vs a duplex. On the plus side, when you have a vacancy in a seven unit, your building will still make money. That's not so with a two unit, and maybe not even with a four. I decided that cash flow now was more important than appreciation later.

We have now burnt out just a bit and have decided to stop at 49 units, sell Dunbar and the Elm Terrace house, and afterwards buy 4-8 more units and "call it a day." We will then perfect and hone our strategy, find a property manager, put the finishing touches on our team and later simply become "adjusters of sails" vs "rowers." We are also putting an extra thousand dollars each month toward our highest interest rate mortgage, retiring it in seven vs twenty years, then snowballing that into the next one and so forth. Hence we will increase our cash flow via mortgage payment elimination vs acquisition from this point on.

We did stop at 49 units, after selling our first house for a slight profit. We just sold Elm Terrace using seller-financing, and it looks like we might be doing a lease-to-own with seven Dunbar vs selling it. We have no intention, however, of buying four to eight more units. We're calling it a day now, and even have our portfolio up for sale for a fair price if anyone is interested. Otherwise, we're very happy with it, and will keep it forever, passing it down to our daughter one day. (Whether she will be happy about that remains to be seen!)

We stopped buying because we realized that although we can manage this many units while we travel, we'd much rather not have more responsibility than we already have. Also, I feel too much of our net worth is in real estate. Our mortgages are variable rate, and this puts our cash flow at risk if rates rise very much. I want to get our mortgages down to the point where I can pay them off all at once if rates do rise.

The rest of our plan centers around education, management, where we'll get our down payments, etc.

I will attend the local REIC meetings and ask good questions, both at the meetings and outside. I will always avail my services to the people who give me valuable advice and mentoring. I will do my best to give more than I receive. I will adopt the attitude of a student, no matter who is speaking, and glean whatever knowledge I can (i.e. focus on the message vs the messenger). Update: This has been difficult in that, here I am writing a book, creating a website dedicated to real estate investing education...I still have SO MUCH to learn, but I sometimes forget to put my student hat on.

We will solicit bids for insurance every two to three years, switching only if savings is substantial or current providers have given us reason to switch. We value loyalty and will not switch just to "save a few bucks," but we will switch certainly to save a few hundred bucks. We will continue to cultivate our "team" so that we have solid systems in place for finding deals, estimating repair costs, executing repairs, placing tenants and amassing wealth.

We will endeavor to take care of valid resident complaints quickly and properly and build a reputation as the "best landlords in the area." Our feedback thus far, as evidenced by testimonials on our website, show that we're reaching this goal. Update: We couldn't be happier with this part. My wife Deb has done a stellar job of wowing prospects, having several relocated and take apartments "sight unseen", citing Deb's personality as the deciding factor.

We will focus on providing neat, safe, comfortable housing for people at market rates, or slightly below. We will strive to always have something desirable that other buildings don't have (well preserved antiquity, garages, ample storage, decks, beautiful landscaping, etc.) so that we can charge near or full market rent but still have near 100% occupancy. One thing to keep in mind is American's pre-occupation with stuff. This preoccupation is growing, so it's important to give more weight to buildings with ample storage and living space.

Our lawn care company offers a unique synergy with our real estate business in that we can cross train workers, and possibly save money by having all maintenance and repairs done in-house vs sub-contractors. Currently, we use a mix of less expensive, but well-rounded handy-men and higher priced finish carpenters. Our plumbing and heating contractors give us very good prices in exchange for the amount of work we give them. Update: Our lawn care business closed in November. We're now officially "semi retired".

Initially, we will use current savings for down payments, and local banks, whenever practical, for financing. In addition, we will use the proceeds from the sale of any buildings to finance new purchases.

It must be evident to both Deb and I that moving money out of savings is a "no brainer." In other words, it must be clear that money taken out will always outperform money left in. At some point, the buildings should generate enough cash flow to allow us to save for the down payment on another building every 2 plus years. This will allow our savings to recover nicely and our real estate holdings to grow from within.

I'm particularly proud of this part. We bought our last two buildings, (an eight unit and seven unit) with funds saved up from cash flow and the sale of a single-family home. We ended up taking some out of savings later, to make some large-scale upgrades to one of the buildings, but to know that the business was finally supporting itself in some measure was a huge victory to me.

To help us sleep at night, we will endeavor to use no more than seventy-five percent leverage (i.e. 25% down payment). If an opportunity presents itself to use more leverage, such as owner financing coupled with a low price, Deb and I must agree that it is in our best interest.

Exit Strategy
Exit Plan A is to sell as the market and other conditions allow. For example, one of our tenants approaches us with an offer to buy the building he's renting from us, or maybe someone makes us an offer we can't refuse for our entire portfolio.

Exit Plan B is a "hybrid" of plans A and C. We remain landlords but on a much smaller scale. We have an idea of which buildings we would like to keep, but in general we sell whatever we can sell until we have just a handful of units, the exact number to be decided as we go. This allows us to decrease our mortgage exposure and lessen our day-to-day responsibilities while still keeping some of our assets in direct-owned rental real estate. The overriding goal of this plan is that by using the equity of buildings sold to pay down mortgages of buildings kept, we will have a small, well-performing, mortgage-free portfolio. Update: We've just closed on the sale of one of our duplex' & two of our single-family homes. We're now down to our most desirable 29 units plus one decent single family which we're holding onto simply because it's rented to someone who's expressed a desire to possibly own it in the future.

Exit Plan C is no exit at all. We hold forever, and continuing to be landlords with the option of taking equity out of the buildings if needed. If we feel a building will need excessive capital improvements at the "wrong time" (i.e. just as we're beginning to travel), then we will sell that building in a way that minimizes or eliminates taxes. (1031 exchanges, etc.) We would anticipate using plan C only if the seller's market was unfavorable, or it was disadvantageous to sell for other unanticipated reasons.

Our acquisition strategy of buying 20% or more below historic market value, during a period of depressed real estate prices should help ensure such good cash flow, that we can outsource our management and maintenance and have a fairly "quiet" ownership experience in our "Golden Years."

That's our plan in a nutshell. It serves as a set of loose instructions, a guide map, and a reminder of what's important to us. Sometimes a plan serves to move us forward, other times it prevents us from doing something silly. Both are important. Defense can be as important as offense.

Happy Planning!


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