The popular sayings abound: “If you fail to plan, you are planning to fail.” “Proper prior planning prevents p***-poor performance.” There are many others – and you can make up your own!
That said, too many people go into the real estate investment business without a plan. Buying a house may be the biggest purchase they’ll ever make. They commit to mortgages worth many times what they earn in a year at a day job, and for some reason, too many people think they can fly by the seat of their pants. Then again, a lot of people aren’t in this business anymore.
Maybe it’s thanks to shows like “Flip This House.” But shows like that are heavily edited. They follow a flipper around for a month with a camera crew, and then edit it down to an hour of the most interesting bits: moments of conflict, drama, or key decision points. Left on the cutting room floor? Long hours of careful planning and budgeting.
Why Make a Formal Plan?
Every business needs a business plan – and the flipping side of real estate investing is no exception. In fact, because of the large amounts of money involved, flippers especially need a detailed, well-thought out business plan.
Just the act of putting your plan on paper will have important benefits:
- It will crystallize your intentions – turning vague ideas into concrete specifics.
- It will force you to think deeply about things you have been glossing over.
- It will force you to come up with the all-important exit plan that every entrepreneur needs.
- It will force you to consider ends and means – and whether you can make them meet.
- It will force you to pay attention to risk management.
- It will help you get the all-important “buy-in” from your spouse. If your partner isn’t fully in, it will be that much more difficult for you to make it.
- It will force you to consider your strengths and confront your weaknesses as an investor.
A detailed, well-thought-out plan can also help convince others that you’re serious. If you’ve got some credit issues, for example, or if you’re trying to put a deal together and you’re a borderline case for financing, having a solid business plan can help convince a skeptical loan officer you’re serious – and that you are a safe bet for his investors’ and depositors’ hard-earned money.
Elements of a Good Business Plan
There’s no right or wrong way to put together a business plan. But according to the Small Business Association, any good plan will directly address the following subjects:
Executive Summary. This is the one-page version of your business plan. If a loan officer has time to read only one page of your plan, this should be it. It should provide an overview of your market, but be very specific about any unique advantages you can bring to the table. Keep it short: This is the 30 seconds-or-less version!
Market Analysis. This could be a summary of your targeted neighborhood or communities. You could include recent comps for the types of homes you invest in, demographic data, recent trends in real estate sales prices and volume, and any longer-term issues such as gentrification, planned development in the area, etc. Why is this area such an attractive investment?
Flipper Description. Tell your lender, investor, or other prospective stakeholder about yourself and your business. This is where you can go into greater detail about your unique competitive advantages. What sets you apart from other investors? Lay it out here!
Organization and Management. How are you organized? Are you a sole proprietor? Partnership? S-corporation? C-corporation? Limited liability corporation? Consider carefully, because the business entity you select can have a big effect on your ability in the future to attract investors, raise capital, and protect yourself and your assets from lawsuits.
This is the place to include a brief bio of yourself, any partners you have, and other principals or key individuals in your business. If it’s just you, so far, that’s fine. If you don’t have a lot of experience, you may want to recruit a partner or backer with a bio with a bit more gravitas. Their presence can help attract capital, you can benefit from their experience and knowledge and they can benefit from your energy.
Marketing and Sales Management. As a flipper, you have two primary functions: Buy property low and sell property high. This section of your business plan should address both: How will you find properties to buy? How will you close the deal? And how will you prep houses for sale, and to whom? Where are your markets, where you can talk to buyers and sellers on a favorable basis? And what systems will you create to make the process as smooth and replicable as possible?
Tip: Include a section on social media marketing, advises Rieva Lesonsky, CEO of GrowBiz Media, a media consultancy. From a property-flippers point of view, a good social media presence can help you build top-of-mind awareness among your own all-important network of contacts. When one of them knows someone who needs to sell or buy a home quickly, chances are good your name will come up.
Service or Product Line. Do you plan to concentrate on any specific segment? Duplexes? Condos? Single family homes? Spell it out, along with whatever benefits your investment will bring to the people in your market.
Funding Request. This is where you get specific for your lender, equity partner or other third party. How much money do you need to invest it? Why? What will you do with it? Remember – all lenders worry about safety of principal above everything else. Address this issue prominently: How will you pay the loan back? What collateral is offered and what is its fair market value?
Spell out how much of your own money is in the deal as well. This leads directly to a discussion of loan-to-value ratios – a vital measure of the lender’s risk exposure.
Financial Projections. For you, just starting out, this should be a realistic, quarter-by-quarter and year-by-year analysis of your expected future cash flows and expenditures. When applying for financing for a specific property, or an equity partner for a specific opportunity, you may consider amending this to focus on just that one project.
Be honest with yourself and be detailed. After all, you know the old saying: “Garbage in, garbage out!”
Appendixes. This is the place to put your supporting documents. Examples include copies of leases, recent financial statements, bank statements, deeds, and anything else a lender or potential equity partner may require to make an informed decision about whether to get involved with your project.
Where to Get Help
The Small Business Association provides a free, bare-bones template to help you get started, along with a free online training seminar. There are a number of valuable resources on the SBA.gov site about a wide variety of business topics.
If you want to dig a little deeper, consider contacting SCORE, an organization made up of experienced retired business executives who act as mentors to entrepreneurs, such as yourself. You can use one of SCORE’s very detailed templates from their template gallery to flesh out your plan. You can also contact a mentor who can go over your business plan with a gimlet eye, and give you a valuable reality check – generally free!
This is a valuable process: It will help you avoid getting blindsided by the thousands of things that can derail a new business or investment enterprise – especially in those very vulnerable early months and years.
Meeting with an experienced SCORE mentor is an important dress rehearsal for meeting with a lender or partner, as well. And your mentor may have a network of contacts and referrals of his own that can help you succeed.
Jason Van Steenwyk is a veteran financial industry journalist who has been fighting to make the world safe for the retail investor since 1999. He lives at Ground Zero of the real estate bubble in Fort Lauderdale, Florida.