A Business Plan for Real Estate Investing

Having a business plan for real estate investing is an essential part in the success or failure of your real estate investments. Putting that plan in writing is a must and will give you something to go back to over and over again to make sure that you are getting where you want to go.

The business plan should start out with an executive summary that includes general information about your business, its objectives and some initial start up details. General information would state something like “I plan on buying properties that need to be rehabbed because this is where the bargains are located.”. Your objectives might sound something like “I plan on rehabbing four properties per year”. The start up details may say something like “I plan on using brokers in my local market area to find properties for me”.

The next part of the business plan should outline the market area you plan on going into. This can be as small as a particular area of your city or as large as a portion of the United States. Pick the best market area that matches the objectives above. If you are going to rehab properties, then you need to look in older areas yet they also need to be in an area of need.

The next item in your business plan for real estate investing would be your implementation strategy. You might outline your strategy for rehabbing properties and the process you will utilize.

Next, you should tackle your sales strategy. You may want to sell immediately or in 6 months or you may hold onto a property for the long term giving you monthly cash flow, or you may have a strategy that includes both.

Your next area would be a financial plan that would include your projected income and expenses. The financial plan should show your start up costs and the amount of funds you have to get started and then project the money you will need to buy the properties, and then the continuing capital required to pay the expenses of the properties as well as your personal expenses.

The last thing that you will want to do is a summary of the business plan and an outline of the assumptions that you have made in the plan.

A solid business plan for real estate investing should:

• plot your course to show you the big picture and give you long term direction
• help you to become a better decision maker along the way by anticipating problems and allow you to make a more informed decision
• show you what kind of financing you will need
• guide you to be profitable
• allow you to recognize what will be required of you
• raise questions that will inspire solutions ahead of time
• identify strengths and weaknesses while highlighting areas of needed assistance
• act as a guide throughout your development and allow you to measure your progress against your planned expectations

David Morgan is a commercial real estate consultant and author who specializes in the sale of investment property. For more on developing a business plan to buy commercial property,

Real Estate Team

In this big and bold information age you would be hard pressed to name any business that operates from start to finish with one individual.  In fact I would argue it’s impossible to name even one, and I mean from start to finish.  Not even an artist or author works alone.  They purchase key materials made from others.  They do research and gain inspiration from others.  It’s no different with making sure you have a great real estate team.

Your team is actually far more important than the latter examples.  That’s why the first step to investing in real estate is the team assembly.  In this aritcle I will explain the four key figures you need to have for your real estate team.  Read on…

Attorney

Yes, you must have a blood-sucking attorney on YOUR side!  The first thing to do with you Attorney is use him/her to set up your company.  You need to know what type of company to set up in the first place and the pros and cons of the different business types.  From limited liability to the different forms of corporations and also partnerships, your attorney will advise and even do all this for you.  It’s very important for you to create a different legal entity by forming a company.  This eliminates or at least limits your personal financial state if something bad happens with your ventures.

Accountant

Accountants are another key part of your new real estate team.  Unless you have a degree in accounting or are a math wiz, then you need one.  They will do all the number crunching.  I like to call them the bean counters.  Have them do taxes and all the financial statements.  A very helpful team member that will save you loads of time on paperwork.

Broker

This person is your go to guy on finding property and evaluating the market you’re working in.  If you choose to invest in more than one place, then you will need one for each market.  You will want to send them information on what type of properties you’re looking for and they will contact you when they find candidates.  Then you will go around and evaluate the properties with them.

Property Manager

Another key member of your real estate team is the property manager.  After you have chosen a piece of real estate and bought it, these guys go in and manage it for you.  If you want you don’t have to have them and it can save you costs.  In exchange you are going to have to give you time doing what they do:  Dealing with renters, problems with homes, upkeep, etc.  Eventually as your portfolio grows you will need to hire property managers, as you simply won’t have the hours in a day to handle these things.  You’ll be too busy relaxing and counting cash.

Although there are more people you will need to include from time to time on your real estate team, these four are what I consider the top level members.  The people you will use again and again.  Remember to choose these people wisely because the better you pick the better your team and business will be. 

For more information on real estate team members and all things real estate please visit my website called Blue Collar Real Estate.

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No Money Down Real Estate – A Curse Come True

100% Financing or zero down payment on a real estate investment property seems like a fantastic idea. With no money down, it seems you can’t go wrong. But, that is not true.

Recently CMHC (Canadian Mortgage and Housing Corporation), who insures non-conventional mortgages (less than 20% down payment mortgages) in Canada, introduced the 100% financing for investment properties. This same product has been in existence for a couple of years for primary residence purchases but now, if you want to get into real estate investing (and your credit is great and you can qualify for the 100% financing), you no longer need a stack of cash to jump in! The challenge is obtaining rent that’s high enough to cover the mortgage and the 7.25% insurance premium they hit you with! Here’s an example:

* $300,000 purchase price (100% financed)

* 7.25% CMHC insurance fee ($21,750)

* Total mortgage of $321,750

* Amortized over 25 years at a 5.99% interest rate =

* $2,056.67 monthly payment!

So, right off the bat you have negative equity of $21,750. If you wish to sell that property after 5 years, your mortgage balance will be $289,008. The property will have had to appreciate at least 15% over those years just to get a little bit of money out of it (remember there’s sales commissions, legal fees, property purchase taxes, etc. that will also come out of the sale price).

The next challenge is getting the $3,000 in rent each month that you would need to carry this property. Remember, it’s not just about covering the mortgage. You also have:

* Insurance fees (approx. 5% of rent);

* Management fees (approx. 5% of rent);

* Maintenance fees (5% to 10% or more);

* Water, hydro, other utilities (2% to 5% of rent);

* Strata or condo fees, if applicable (10% or more);

* Vacancy coverage (2% to 5%), etc.

From our experience, if you keep your mortgage payment at a maximum of 65% of your rental income, you should be pretty close to having neutral or even positive income. In this example, that means you want to earn approx. $3,200 in rent to cover everything. Not very likely unless you are running a rooming house and that type of property really comes with it’s own challenges. I know as I bought two of them – and they are the only two properties that I have regretted buying (but that is a whole different story).

Now, there are two advantages to using the CMHC program:

1. No money down – you don’t need lots of cash to begin investing; and

2. Potential for a GREAT return on investment (ROI) if the market is on the upswing;

So, it’s not the worst thing to use, but be very aware of what it will “cost” you in terms of potential negative monthly cashflow and negative equity.

Now, what about other forms of 100% financing? Well, there are creative ways of obtaining 100% financing such as Vendor Take Back’s (the Seller holds the mortgage on the property); Obtaining a conventional mortgage (80% loan to value) through a bank or lender and then obtaining a 2nd mortgage from either the Vendor or a private lender and registering it after you purchase the property (you must still have the 20% down payment upon closing); or using your line of credit for the 20% down payment. So, this is not to say that 100% financing doesn’t work or isn’t useful, it’s just quite costly to do it. Costly because not only your monthly debt (mortgage/line of credit) servicing is higher, but usually a 2nd mortgage or line of credit interest rate is substantially higher than a 1st mortgage rate.

I have done 100% financing once and 98% financing another time, and the only reason I was able to was because both sellers were very motivated to sell. Why were they so motivated? Because their properties were beat up and in bad areas. The rent vs. financing was strong in both cases, so I bought. I wouldn’t do it again. As the saying goes, “You get what you pay for”.

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