Why You Need a Real Estate Business Plan Now More Than Ever
Gone are the days when buying the house next door made you the neighborhood real estate mogul. Instead, widespread real estate investment is the primary vehicle for the upwardly mobile—and it's important that buyers take their purchases seriously. A real estate business plan is an often forgotten tool that many homebuyers completely bypass. But experts say that an overly casual approach to home-buying is shortsighted.
According to Roofstock, individual real estate investors account for 74.4% of rental properties in the United States, which means at some point, the home you live in might generate income for your family. Buying a home with profit possibilities in mind allows you to reach financial goals faster—and to consider the ways that the value of your house can be factored into your growing net worth.
Gut instinct is not enough to turn a profit.
Business coach Rhianna Campbell has more than 20 years of experience in a variety of real estate roles. She says she's seen homeowners make costly mistakes that are hard to undo.
For example, real estate agents selling a family their dream home might hook someone by asking how they feel while touring a house or if they could imagine growing old in this neighborhood. However, those gut feelings are only a small part of the decision-making criteria a homeowner should use.
"When it comes to money, planning has always played an essential role," Campbell says. "Whether you are budgeting your day-to-day bills or saving for retirement, you need to know the goal you are aiming for. Otherwise, you can make some very costly mistakes. Real estate is no different. Not knowing how much a home may cost you to purchase and maintain can land you in very hot water financially."
If you plan to occupy the home for a few years, maintenance costs, interest rates, and utilities are basic numbers you must plan around. Similarly, Campbell says that most people just think about how much rent they could charge if they decide to rent out a room or turn that same home into a rental property later. But when building out a true business plan, you should think more seriously about financial measurements, such as net operating income (NOI), capitalization rate (cap rate), cash flow, and cash-on-cash return.
"These metrics are important for you to understand," says Campbell. "If you don't account for important things like non-payment of rent or vacancy, you can easily turn a seemingly good investment into a very bad choice."
She emphasizes that gut instinct is not enough. Instead, it's best to create a comprehensive business plan that projects all the financial ups and downs that could come over the life of owning the property. "With a solid plan, you can use real estate to help build wealth for yourself and your family," says Campbell.
Planning helps identify the best investment strategy.
Bill Samuel of Blue Ladder Development in Illinois says that most homeowners haven't thought through all possible real estate strategies. There are many strategies to choose from, including a short-term rental during peak seasons, "house-hacking," long-term rentals, fix-and-flip, selling air rights, or renting out for events or television sets. When the average person buys their home, they don't think of all these possibilities, but in the process of writing a business plan, you'd have to.
"My advice for putting together a business plan is to start at the core, which is always how you will get customers," Samuel says. "Of course, if you're marketing your home as a short-term vacation rental, you'll have very different customers than if you plan to rent it out for photo shoots." He advises spending time putting together a comprehensive strategy—including a diverse marketing plan. "Be sure to cover all of the details, like customer acquisition cost, specific marketing mediums used, marketing budget, etc., as this will help you put together a more specific plan on the next steps," he says.
Even if you just plan to find a long-term renter to cover the mortgage and utilities, you have to market to find the right tenant. This might include paid ads alongside background and credit checks—all of which cost you money and time, which you can later build into the rental costs. Samuel says that after you have a general plan of how the business will work, you can realistically forecast how long it will take to get to the point of profitability.
Shift your mindset from homeowner to investor.
When you think of yourself as a homeowner, there are lots of to-dos—rake the leaves, clean the gutters, paint the deck. When you're an investor, though, the list grows to include things such as rental inspections and license renewals, as well as finding a tax accountant or planning for capital repairs. A mental shift naturally takes place in the process of writing a real estate plan that includes all of these new responsibilities.
Robert Milton, a New Jersey-based real estate agent for Coldwell Banker, finds that having a real estate business plan as a young or new investor is important. "It can be used as a tool to help you focus on small steps, set daily tasks, and build the habit of running your real estate business," he says. After you've made the mental shift to an investor mindset, your activities will guide you towards greater opportunities to adapt to your market.
No matter which strategy you choose to increase profits from your home, you will want to be ahead of the competition. To do this, Milton says it's best to have a clear financial goal built into the business plan, so you can determine when to stick to a strategy that seems to be working well—and when to pivot to a new niche that no one else has thought of.