Do You Have a Real Estate Business Plan?
It is common knowledge that 70% to 80% of new businesses fail within their first year. This factor may be higher when factoring individual real estate investing businesses. And even if you have moderate success your first year, half of all businesses or individual real estate investors who survive the first year will fail within the next four years. Why is this so common?
The primary cause is lack of business planning. We are all familiar with the saying: entrepreneurs and business owners don’t plan to fail, they fail to plan (which causes them to fail).
There are basically two types of business plans. There is the business plan companies create when initially starting a company. This includes, among other things, market research to determine market size to ensure the opportunity is big enough to pursue; analyzing customer segments to confirm whether customer needs match the company’s proposed product and/or service offerings; plus the analysis of the competition to determine how your company will position itself to gain market share, and how you will most effectively compete.
This is standard for start up businesses.
If you are a real estate investor, let me ask you a question:
Why do so many individual real estate investors jump in virtually blind into their local or (worst in this case) out of town real estate markets without doing the proper market research to understand whether or not their business will actually work in that particular market?
From a strategic standpoint, doing market research to understand the market you are choosing to work in, understanding who your customers are (tenants, end buyers), where they are currently located and what they actually need is critical to business viability and long term success.
Your real estate business plan must also document your marketing plan (how you will find properties/deals, tenants and buyer/sellers), your human resources plan (who you will hire to help you) and your operations plan (how you run your day to day business and your vision (what key milestones have you put in place and when will you accomplish them).
When you’re done, your business plan will confirm your market opportunity and give you a road map to follow. It will also help you should you wish to gain funding from lenders or joint venture partners, which segues into the second part of this plan.
We all know, unless you have won the lottery, every real estate investor ultimately runs out of their own resources. For most, it’s after acquiring 1, 2 or 3 properties.
This type of business plan is more of a “strategic plan”, in that it is targeted specifically at potential investors. Investors are key to your property portfolio growth. Using YOUR knowledge is the key to building an investor database and a real estate portfolio without using many or any of your own funds.
Specifically, this strategic plan needs to identify precisely:
1. Where you want your real estate business to be in five years
2. What you need to accomplish within the next year to progress you (and your investors) to an acceptable point, and…
3. What your strategies you will use to complete your key milestones in the next 12 months i.e acquiring properties!
In determining the optimal strategies, you need to consider your knowledge, strengths, plus a have true understanding of the real estate market you have chosen to work in to the point where you can recognize the opportunities within that market which can be best leveraged.
If you don’t take time to do this, you risk becoming a potenial danger to yourself and your investors. That is, you continue to use the same tactics that the masses use, the potentially more exposed you are to circumstances outside of your control.
So, spend time figuring out the best strategies to follow based on the market you are in and document this in your business plan…the plan which you present to your potential investors. The good news is, if you’ve already proven you can successfully do a real estate deal, you can build on that experience.
To start, you need to create your real estate business plan. Importantly, your marketing plan should always be adding new marketing channels (e.g., direct mail, print, search engine optimization, etc.) to find more properties, tenants, sellers etc.
Next, consider your human resources strategy. What new people will you need to hire to accomplish your key goals in the coming years? And finally, you need to develop your operations strategy. Figure out what key tasks and milestones you need to accomplish over the next year to locate more investors and more deals.
Creating a business plan when you start your company, and annually creating strategic plans to grow your company is absolutely essential to your success. If you want to avoid failure, make sure you are continuously updating and following your business and strategic plans.
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