I had no plan when I bought my first rental property.
It was a disaster...
Luckily I deployed to Afghanistan and we had the money to cover those unplanned expenses. But, guess what I got to do on my two weeks of leave.
Did I get to visit family and friends? No.
Enjoy peace and quiet away from the combat zone? Nope...
I got to work to fix damages that bad tenants had caused while I was gone.
I spent my entire leave period doing work on the rental because I failed to plan. It's kind of ironic - my job in the Army was to plan (I'm an Infantry Officer). I guess I deserved my punishment.
The next part is worse... Keep reading.
The deployment was over and I was on my way home! Very exciting. We were planning a road trip for vacation for a couple weeks as soon as I got back. I really couldn't wait to finally relax.
Turns out we had a leaky toilet for 4 or 5 months in one unit and nobody ever checked. We had to cancel the vacation just to pay the bill. I wish I had planned to do inspections, read meters, or do something that could have discovered the problem 3 months prior. But I didn't.
I got screwed - twice, because I didn't plan beforehand.
My story was not enough to convince you?
It does seem counter-intuitive that an investment requires a business plan. Investments are passive, right?
A business plan provides background, market analysis, and strategic vision to an entity. So, even if you are able to start out and have full-time, on-site property management, you should still have a plan.
You might want to call it an Asset Management Plan, or Investment Strategy, or any other catchy phrase, but it's still a plan that you use to provide direction. Call it whatever you want, it's essentially a business plan.
Regardless of what you call it, you will be more successful with it:
Honestly, it's so important that I use LivePlan for my business plan and to track my monthly goals against it.
You don't have to get software for your business plan, you can use something as simple as Microsoft Word, but it's quite a nice piece of software and it actually makes writing it very easy, and you get started for only $20.
Your business plan is the most important thing you can do before you start up. Do not skip this step!
There are probably hundreds of different investing styles, so it's impossible to give precisely what should be in every business plan. I do think that a few things should be mentioned at a minimum.
You can also check out my article on writing your real estate business plan.
It's important to know exactly what you want. The criteria should give a broad overview of the types of properties. The most important part of this section is your financial criteria.
You can adjust and refine this over time, but you should know what geographic area you want to operate in. You should first look at the fundamentals of the area: jobs, vacancy rates, rent/price ratio, projected growth etc.
You should look at what neighborhoods you plan to invest in. Are you looking for prime class A neighborhoods, or perhaps some solid blue collar C+ neighborhoods. People can make money in any category, but it's important to define what you want before you buy into it.
It's especially important to know your market area and neighborhoods because many of the hidden risks of investing can arise from failing to plan this.
You should also know what types of property you plan on investing in. Do you want to buy and rent single family residences, or multi-family properties? Perhaps you would prefer mixed use? Maybe small commercial plazas? Are they fixer-uppers or stabilized properties?
You can make money in any area of real estate, just not all of them at the same time. Pick your niche and become an expert.
Finding great deals is not easy, which is why I have a whole page dedicated to finding real estate deals.
It's essential that you have a strategy in place to find deals. Anybody can kick tires and browse endlessly to find a needle in a haystack. Instead, you should have a specific strategy, along with the different ways you plan to fill your pipeline.
This is probably the hardest part for new investors. It is essential to establish yourself financially long before you plan to invest.
If you are brand new, you may consider an FHA loan in a multi-family property with the property becoming your primary residence. It is the easiest, most lenient method to acquiring your first property.
If you are going to flip, are you using hard-money, private money, or your personal money? How will you fund repairs? What happens if you need more money?
You should also know if you plan to Flip or Rent the property, and have a defined exit strategy if you plan on selling.
You cannot forget to think about what you will do once you actually have the property. What strategy will you use when dealing with tenants? Will you require renters insurance? How will you screen tenants in order to avoid the bad ones?
Will you be the property manager and if not, then who? How often will inspections be done, maintenance be complete, and what about your lease agreement?
I hope I have raised some questions you haven't thought of yet. Even if you have thought of these, do you have a specific, written plan to deal with each of these questions and more?
That's why you need to start working on your business plan immediately.