Although it is likely that no one will ever see it, it is essential that you create a business plan for your real estate business. You are treating your real estate investing like a business aren’t you? Just the process of putting the plan together is extremely valuable. You will be forced to ask yourself questions and come up with solutions for problems that you don’t even know you have. At the very least, it will expose some threats to your business or identify potential opportunities, so you are aware of what is around you.
Here are four reasons why you need a business plan:
Evaluating your strategy
There is no process that will teach you more about your business. When you are done with the plan, you will have a clear understanding of your SWOT (strengths, weaknesses, opportunities, and threats.) With this information, you will be able to accurately plan for success. Creating the business plan should take a fair amount of time and there are some key areas you will be focusing on. These include your product, your competition, the market and of course your numbers.
I love numbers, so going through the financial section is one of the most important pieces of the business plan in my opinion. You will want to tie in your financial goals with your plan to narrow down what your margins need to be and how many deals you need to be doing. Of course these are all projections, and a business plan is a breathing document which needs to be updated throughout the year.
Several times through the year you need to run your financials and update your business plan. Read about your industry and check into your competition. Stay on top of what is going on. It is easy to over look this and get caught up in the everyday business operations, but without keeping current, you will not be able to make necessary changes to stay or become successful.
Let’s say you are really focusing on flipping properties in Thornton. Thornton becomes saturated with investors and wholesale pricing starts to increase. Prices for materials are also increasing, but you are not seeing higher resale prices. Your plan calls for $15,000 profit per property, but you are now making $5,000 or $10,000. The sooner you identify this and research other neighborhoods, the closer you will be to staying on track with your yearend projections.
Locating your target market
Most of the successful investors we work with focus their business. With real estate, it is most often focusing on location. I met with an investor yesterday that only buys houses in Washington Park. He never adds square footage, but does full renovations. He does this over and over and makes a couple hundred thousand dollars a year. This is great because he knows the area and makes offers on almost all properties that come on the market. He buys houses that no one else knows about because he markets his business in this area. He knows the market and the competition.
Other investors really focus on a type of seller and market to them. Some of my best deals were when I was marketing to probates. Direct mail to probate was a big part of my business plan. Looking at the different opportunities should be part of the business planning process so you will be forced to look for your target market.
Attract partners and investors
This is rarer than you might read about on the internet, but it is a true benefit of your business plan. I have never been asked by my banker or a vendor to supply a business plan, and I have borrowed millions of dollars. Where it really does come in handy is when you are dealing directly with individuals for funding. This could include private lenders or partners. Investors need to know how we run our business and how they are going to benefit. For this reason, we share our full business plan with them when they consider us as an investment option. This proves that we have done our research and have a solid strategy for growth.
Our business is a little different than an individual investor, but anyone investing in your company has the right and will probably require you to share your plan.