For private money lenders like us, January is the busiest month of the year. Not in terms of closings but certainly in terms of inquiries about our financing. I swear, making money in real estate must be on many folks’ new year resolution lists. As with many other new year resolutions, they tend to pitter out as time goes on. Only the most determined remain in the game and ultimately make money in real estate. So how do you make sure you are not one of those folks who are full of grandiose plans in January only to be full of excuses by Fall? Human psychology suggests that we are creatures of habit and struggle with maintaining dramatic changes to our behavior. This is exactly why so many diets fail. They call for a complete overhaul of our behavior without addressing our natural propensity to maintain the status quo.
The key is to make small incremental changes we can incorporate (and get comfortable with) over time. Like any other business, real estate investing is more about “blood, sweat, and tears” than instant success. However, it’s the “instant successes” that make for a great story. Because of that, they are often used to motivate, inspire, and most importantly, SELL you some products and services. Unless you are a one-deal wonder flipping a deceased grandma’s property, you will have to make your money the old-fashioned way: by earning it.
So how do you create a real estate investing plan that keeps you focused and motivated not only through the winter but also throughout the entire 2021? Not surprisingly, there are many online resources. Quite frankly, I’ve found most of them to be big on puffery and corporate -speak and low on actionable advice. Much of this advice falls into the category of “paralysis through analysis.”
Start on your real estate investing business plan by eliminating the fluff
To develop a real estate investing plan that means business, do away with things that might be time-consuming but add no practical value.
The majority of advice on developing a real estate investing business plan starts with writing a mission for your business. Really. What about a logo as well? This way you can keep yourself busy without dipping your toes into the real estate business. Let’s face it: mission statements are a delay tactic. This is the last thing you need to start or to succeed in the real estate business. If you insist, here’s are two mission statements you can use with no strings attached. For those looking to fix and flip, it is “My mission is to increase my income by investing in real estate.” For those looking to buy rental properties, it is “My mission is to build long-term wealth by investing in real estate.” Done – you have your mission statement—time to move on.
Another item that you don’t have to formalize is a marketing plan. Whether you are a brand new investor or someone who has two or three flips under her belt, your plan is simple. It’s to leave no stone unturned in pursuit of qualified leads in your price range. It might feel like you’re throwing everything and seeing what sticks. But that’s exactly what you need to do in order to formulate what works for you down the line. Cast the wider net and you can tighten it later on.
Many resources on how to create a real estate investment market plan site a plethora of possible marketing channels. Though they sound sexy, here is the reality check. Many of them would be inaccessible to new-ish real estate investors. For example, Search Engine Optimization, and Search Engine Marketing all require a robust website. A website might be a logical step for someone who has demonstrated repeatable success in flipping homes and has enough money, time, and expertise to create and maintain it. Let’s just say it’s an aspiration and not an immediate action item.
The truth of the matter is that before you start investing your own funds in developing complex marketing channels, you need to squeeze as much potential as possible out of the current listing, real estate auctions, and good ole’ networking.
Developing and Managing Teams
Another way to procrastinate and feel good about it is to spend too much time on building “your team”. Do not take me wrong: the right team can propel you forward. In contrast, working with folks who are incompetent or not reliable will hold you back. But it’s all about how much time you want to dedicate to it, at least initially.
Your team’s three most important members are your private money lender, your real estate agent, and your general contractor. The main challenge with your lender, your agent, or your contractor is that you won’t know how good they actually are until you battle-test them by doing an actual flip. A private lender might sound accommodating before closing but change your loan terms right before settlement or offer poor servicing after your loan closes. (Here are the tips on how to choose the right hard money lender). A contractor might give you an awesome quote but have issues delivering on it. (Here are some tips on how to manage contractors better). A real estate agent might lose focus and not look for deals fitting your criteria as proactively as you want her.
A solution to this challenge is a singular one: find good deals and get them under contract. Only by working on a real estate transactions together will help determine which team member is a real deal and who is full of hot air. While these folks might play a supporting role (at least from your perspective), it’s your ability to source deals that is holding them together. Sooner or later, they will have to make their own decision if you are a profitable client for THEIR business. The bottom line: check-in with them periodically but concentrate on prospecting and making offers.
Not that we’ve eliminated all that sexy-sounding fluff you don’t need, let’s concentrate on creating the hand-on actionable business plan for your real estate investing business. The best thing about it is that it should not take more than a day of work and a couple of phone calls to the experts.
No-Frill Real Estate Investing Business Plan: Core Areas of Focus
Define your real estate investing budget
To start prospective for leads, you must know what you can afford. How much financing you can qualify for will primarily depend on how much of your own funds you are willing to put into the transaction. The more you have, the more you qualify for. Knowing your maximum purchase price will also help to focus your search geographically. For example, the median price of the home in Washington, DC now exceeds $1 million while. Any flip there requires a substantial contribution for the borrower. However, those not able to invest in DC might be able to make plenty of profit investing in more affordable areas such as Frederick county where the median price hovers at around $370K.
The good news is that if you work with a reputable private money lender, pre-qualification is easy. At New Funding Resources, we need 24 hours or less to issue you a hard money proof-of-funds letter. It’s valid for up to six months and makes your offer equivale to cash. You can also use our hard money calculator to see different investment scenarios and how much contribution from a borrower they require.
Decide on what kind of real estate investor you are
Are you looking to fix and flip or are you more of a buy-and-hold investor? The answer typically depends on your own strength as a borrower and the type of real estate opportunity you have on your hands. In recent years, we’ve seen a soaring number of borrowers interested in building a rental portfolio of properties. This is the best strategy to build long-term wealth, however, not all could qualify.
For starters, planning to hold on to the property in the long-term means you need to be able to qualify for a long-term financing. Yes, we are talking about conventional loans with all the entailing underwriting pain points: high minimum credit score requirements and full income documentation. In today’s homogeneous lending environment, unless you have high credit scores and declare plenty of income, you might encounter issues refinancing your hard money loan into a conventional loan.
The second aspect to consider is how much money you have. If you are set to pursue the buy-and-hold strategy, sooner or later you will run out of money. Even if you qualify for a conventional cash-out loan, chances are you would not be able to get 100% of your initial investment back. It might be OK if your goal is to eventually kick-back and collect the rental income. However, if you proactively trying to make money in real estate and book your profits immediately, you might be better suited to fix-and-flips.
Anchor your real estate investing business plan with a specific goal
I am not talking about elaborate word-smithing here. Set a goal that is simple and specific. If you’ve never flipped a property before, a great goal is this: Flip one property in 2021. If you’ve flipped one property in 2020, made money, and enjoyed the process, make it your goal to flip two. If you flipped several properties in the past, make it a goal to maintain your pace and start thinking strategically about expanding your business via digital marketing, direct mail, SEO, etc. If it helps, split your goal into smaller more tactical objectives. For example, you can set a goal of making 5 offers a week.
Dedicate specific amount of time to your real estate business each week
No absenteeism at work. Set a specific number of hours you need to dedicate to your fledgling business each week. Treat yourself as a hired party who is obligated to show up at work, no matter rain or shine. This is where the magic happens and where you differentiate yourself from the majority of aspiring investors. After talking your talk, it’s time to walk your walk.
Spend the majority of the time you set for your business to look for properties and make the offers. If your realtor is not sending you leads, this is not an excuse. This is not their job to keep you busy. Look at the alternative channels such as real estate auctions. In addition, strategically expand your geographic area to ensure that you are not boxing yourself in too much.
Real estate investing business plan: accountability is the key
The competitive reality of the DC-area real estate market suggests that you are not going to find a home to flip within a week. Or two. Or maybe five. Discouraging? Maybe. However, the truth of the matter is that if you give up, you will NEVER find an investment property that is right for you. Someone else with more perseverance, determination, and fire in the belly will get the property that perhaps was meant for you.
At the beginning of each year, we at New Funding Resources write a blog on what we anticipate to see in the local real estate market. Each year we predict for it to remain competitive – and it does. However, also each year, we close more and more loans from the local real estate investors both new and experienced. Somehow they were able to find deals and make a profit. So don’t blame market competitiveness if you are not keeping up with your goals. Work harder and be consistent – and a good opportunity will come up.