How To Make A Real Estate Investment Business Plan, And Why It’s Important

A real estate investment business plan is an important step if you’re looking to get started in the industry. A real estate development business plan can help you decide what form of real estate you’re looking to invest in. Real estate has a wide array of opportunities, so it’s important to narrow your focus. It’s very difficult to be successful in several different areas of real estate at the same time. A business plan can help you decide what it is specifically that you’re doing.

What Is A Real Estate Investment Business Plan?

Put simply, a real estate investment business plan is a document that lays out how a real estate investor intends to run their business. The plan should illustrate the investor’s goals for investing in real estate as well as business strategies and timelines they intend to implement to achieve those goals.

There’s not a specific format you have to follow to create a real estate investment business plan. Instead, you can pick and choose sections that are important to you. A business plan is primarily a document that can help you decide what your business is going to focus on, whether that’s rental properties, investment properties or flipping houses. You can also use a real estate investment business plan to help secure funding from investors or business partners.

Why Do You Need A Real Estate Investment Business Plan?

Having a plan is important because it can act as a blueprint or road map when starting a new business. It can also give it a sense of legitimacy when talking about your business with others. This is especially crucial when trying to attract business partners and investors or getting a small-business loan.

11 Essentials For A Real Estate Investment Business Plan

As we mentioned earlier, there isn’t a specific format you must follow when creating a real estate investment business plan. Plans can be as unique as each company they outline. Here are a few sections that you might consider including in a real estate investment business plan.

1. Executive Summary

An executive summary should illustrate things like the company’s mission and vision statement. Depending on how long your real estate investment business plan is, most people are not going to read the entire thing. So, an executive summary should sum up the investment company as a whole and provide a snapshot of the company’s financial plan, marketing plan and other key factors.

2. Company Description

A business plan should include a description and history of the company as well as the target market. This lets people who read the plan know basic information about the company as well as its principal members. The company description section is a great place to give biographical information about each member of the company’s leadership team.

3. SWOT Analysis

A SWOT analysis looks at a company’s strengths, weaknesses, opportunities and threats. Analyzing each of these categories is important to include in a business plan. This will help you make sure you’ve adequately considered each of these categories, and these are things that potential partners will definitely ask about before investing in your company.

4. Investment Strategy

Detailing a company’s intentions with investment properties is another important part of a real estate investment business plan. Real estate is a broad term that covers a wide variety of different activities. Each of these real estate activities is different and will take a different strategy to be successful. This section will stipulate if you intend to invest in rental properties, flip houses, etc.

5. Market Analysis

You’ll also want to include a market analysis in your business plan. This shows potential investors that you know the real estate market. The three most important words in any real estate plan are “location, location, location,” and including a market analysis will show what conditions are like in the areas where you’re looking to invest. Investing in a high-priced area like New York or San Francisco is much different than investing in a rural area with much lower market prices.

6. Marketing Strategy

Most business plans will also include a marketing strategy. The marketing strategy will show how and where you plan on marketing and attracting new clients. The specific area of real estate you’re focusing on will drive how much you focus on marketing. Someone looking to become a real estate property manager will need to do more marketing than someone who’s buying rental real estate to hold.

7. Financial Plan

Your financing strategy and financial plan might illustrate income and cash flow statements. This could include historical records like bank statements or profit and loss projections. You might also include a balance sheet showing the company’s assets and liabilities. The financial plan section is intended to give potential partners or investors a snapshot of the company’s overall financial health.

8. Organization And Management Structure

A business plan should also include a company’s organizational structure, management team and ownership details. These items are mentioned in the initial executive summary; in this section you can go into more detail about each member of the management team. One thing that is good to include here is a listing of the various qualifications, licenses and/or certifications that each member of the team holds.

9. Real Estate Acquisition Strategy

A business plan should include a strategy for acquiring investment properties, if that’s something that the company plans on doing. There are many different ways to buy real estate, so you’ll want to detail which strategy or strategies you plan on using in your real estate investment business plan. Some strategies may include going through a real estate agent or broker, as well as wholesaling and target marketing.

10. Goals And Timelines

A business plan should clearly state a real estate investor’s goals for their company. One way to show this is to make a 1-year, 3-year or 5-year plan. Detail your plans for the business over a variety of different timelines. You’ll also want to include some strategies and details for how you plan on meeting them.

11. Exit Strategy

Having an exit strategy is important for a business plan. This can include items such as knowing if and when to sell an investment property.

The Bottom Line

Having a real estate investment business plan is an important part of owning a business. Creating a written business plan when you’re starting a business will make your business feel more real.

Free Tools for Commercial Real Estate Brokers

Contact Winston Rowe and Associates

248-246-2243

Check out these free tools for commercial real estate brokers, they are not affiliate links.

Yes, they are all free no credit card needed.

Compstak Exchange

Free for brokers, appraisers and researchers, CompStak Exchange is a platform for real estate professionals to exchange lease comps in an efficient manner. Exchange comp information you have to get credits and redeem those credits for comps you need, when you need them. Simple.

LeaseMatrix Office Space Calculator

Quickly calculate how much office space you need by inputting the quantity of each type of space you need within your office. You’ll enter the number of private offices, cubicles, meeting rooms, receptions areas, and kitchens. There’re default dimensions for each type of space, but these can be changed. After your data is entered, you’ll see your total usable area and total rentable area.

LoopNet Trends

This widget from LoopNet allows you to get customized market trend graphs based on location and property type. You can get the code and use it to paste these graphs on your website or blog to show how current prices and rents compare to historical data. All you have to do to get access is sign up for a free LoopNet account.

The News Funnel

The News Funnel is a news aggregator and content platform for the real estate industry. You can sign up for a free customized news feed so that you see the real estate news relevant to you.

Customize your feed by filtering for market, industry segment, areas of interest, or keywords. It’s also a great distribution platform for real estate companies to upload and showcase their press releases, videos, blogs, and market research.

PRLog

You can set up your own press room for free and issue multiple free press releases monthly. PRLog has distribution to all of the major search engines with numerous RSS feeds. You can also distribute to your own RSS feeds. It integrates well with all of the social sharing and media platforms.

Valuate

This is a web-based CRE tool that will help you expedite asset valuation and investment analysis. You can use it on its own, or with your existing Excel, but they have plenty of reasons listed on their site why you should use Valuate over Excel.

You can try it out without creating an account and interact with the slick interface to edit Cap Rate, Square Footage, Holding period and more. You can also create a free account to get even more access, all without a credit card.

Waterstone Defeasance

This company specializes in the defeasance process when you’re selling a property or refinancing a loan. The free calculator available on their website can give you a quick estimate of your defeasance costs by entering a handful of data related to the loan.

Commercial Property Loan Calculator

This tool figures payments on a commercial property, offering payment amounts for P & I, Interest-Only and Balloon repayments — along with providing a monthly amortization schedule. This calculator automatically figures the balloon payment based on the entered loan amortization period.

Commercial Property Balloon Loan Calculator

This tool figures a loan’s monthly and balloon payments, based on the amount borrowed, the loan term and the annual interest rate. Then, once you have calculated the monthly payment, click on the “Create Amortization Schedule” button to create a report you can print out. This calculator automatically figures the loan amortization period based on the desired balloon payment.

Developing A Business Strategic Plan – Winston Rowe and Associates

A strategic plan is a roadmap to grow your business.

 

Executive Summary

The Executive Summary is important since it will help other key constituents, such as employees, advisors, and investors, quickly understand and support your plan.

Elevator Pitch

An elevator pitch is a brief description of your business. Your elevator pitch is included in your strategic plan since it’s key to your business’ success, and often times should be updated annually.

Company Mission Statement

Your company mission statement explains what your business is trying to achieve.

Goals

They key is to first identify your 5 year or long-term goals. Next, identify your one-year goals; that is, what you must achieve in the next year for it to be successful and to put your company on the right trajectory to achieving your 5-year goals.

Key Performance Indicators (KPIs)

Great businesses understand their metrics and KPIs. By tracking your KPIs, you know exactly how your business is performing and can adjust as needed.

Target Customers

In this section of your strategic plan, you will identify the wants and needs of each of your target customer groups. This is important in focusing your marketing efforts and getting a higher return on investment on your advertising expenditures. This is because the more you can “speak” directly to your target customer wants and needs in your marketing, the better you will attract them.

Industry Analysis

Your industry analysis doesn’t have to be a comprehensive report on what’s going on in your market. However, you should conduct an analysis to ensure the market size is growing (if not, you might want to diversify), and to help identify new opportunities for growth.

Competitive Analysis & Advantage

Similarly, to your industry analysis, your competitive analysis doesn’t have to be a thorough report listing every detail about every competitor. Rather, in addition to defining who your key competitors are, you should list their strengths & weaknesses.

Most importantly, use this analysis to determine your current competitive advantages and ways to develop additional advantages.

Marketing Plan

In addition to your strategic plan, I recommend you develop a comprehensive marketing plan describing how you will attract prospects, convert them to paying customers and maximize your lifetime customer value.

Include a summary of your marketing plan in your strategic plan.

Operations Plan

Your operations plan helps you transform your goals and opportunities into reality. In this section of your plan, you will identify each of the individual projects that comprise your larger goals and how these projects will be completed.

Financial Projections

The final section of your strategic plan is your financial projections. Your financial projections help in multiple ways. First, you can use a financial model to assess the potential results for each opportunity you consider pursuing.

You should develop your complete strategic plan each year, and then update it monthly as actual results come in and you gain more clarity and intelligence. While you will rarely achieve the precise goals established in your strategic plan, scores of research show that you’ll come much closer to them versus if you didn’t plan at all. So, develop your strategic plan today, and achieve the goals you desire.

 

Annual Property Operating Data [APOD] Real Estate Analysis Explained

Annual Property Operating Data

The APOD is arguably one of the most popular real estate analysis reports investors, agents, brokers, and others engaged in real estate investing use during the investment decision process.

Although the word “APOD” can be misleading, the word itself is really just an acronym for Annual Property Operating Data (i.e., A-P-O-D), and the report concerns the rental property’s annual financial performance for the first year.

Popularity

Real estate analysts like the APOD primarily because it gives a one-page “snapshot” of the property’s financial performance over the course of the first year. Many, in fact, regard the data as a mini income-and-expense-statement because it includes the projected annual income, operating expenses and cash flow.

Personally, I like the APOD. During my tenure as a realtor, it was the one report presented to real estate investors I was meeting to discuss a property for the first time, and in most cases, it proved to provide enough data for the investor to decide whether or not there was enough profitability to pursue the investment further. So, it “cut to the chase” and saved us both valuable times.

Structure

There are four sections of the investment’s annual property operating data that essentially comprise an APOD. Rental income, operating expenses, debt service, and cash flow. It is structured as follows:

Gross Scheduled Income (GSI) – The sum of all annual rents as if the units were 100% occupied. Apply any rent you wish (perhaps a market rent) to units that are vacant. The idea is to show the potential when all units are rented and all rent collected.

Vacancy and Credit Loss – The potential rental income lost do to unoccupied units or nonpayment of rent by the tenants. I recommend nothing less than 5%.

Effective Gross Income (EGI) – This is gross scheduled income reduced by vacancy allowance and represents the amount of rental income you realistically expect the asset to generate.

Other Income – The amount of income (if any) you expect can be collected from other sources such as coin-operated washers and dryers, storage rooms, garages and so on.

Gross Operating Income (GOI) – The actual amount of income available for you to start paying the bills.

Operating Expenses – The expenses required to keep the rental property in service such as property taxes, property insurance, utilities, trash, repairs and maintenance, property management and so on.

Net Operating Income (NOI) – The amount of income remaining to service the debt once all the operating expenses are paid.

Debt Service – The annual sum total of all mortgage payments.

Cash Flow – The cash available after all cash inflows are reduced by all cash outflows. In this case it is cash flow before taxes (CFBT) which means it is money still subject to the owner’s income tax liability.

Or,

Gross Scheduled Income

less Vacancy and Credit Loss

equals Effective Gross Income

plus, Other Income

equals Gross Operating Income

less Operating Expenses

equals Net Operating Income

less Debt Service

equals Cash Flow

Rule of Thumb

The APOD is not perfect because it only evaluates the first year of a rental property’s annual property operating data and does not include consideration for tax shelter or time value of money. Nonetheless, when populated with accurate and realistic numbers it will provide real estate investors with a concise and easy-to-read report that will benefit initial real estate investment decisions.

How To Analyze A Real Estate Deal

When you’re considering the purchase of commercial income property you need to know as much as you can about the income and expenses before you even consider making an offer.

There are Four calculations that every real estate investor should utilize to determine a potential income property’s investment quality.

They are the ensuing:

1) Gross Rent Multiplier

2) Net Operating Income

3) Capitalization Rate

4) Debt Service Ratio

Gross Rent Multiplier (GRM):

The gross rent multiplier is a simple method by which you can estimate the market value of a commercial income property. The advantage is, this is very easy to calculate and the GRM can serve as an extremely useful precursor to a serious property analysis, before you decide to spend money on an appraisal.

To Calculate the GRM:

Gross Rent Multiplier  =  Market Value  /  Annual Gross Scheduled Income

Transposing this equation:

Market Value  =  Gross Rent Multiplier  X  Annual Gross Scheduled Income

Net Operating Income (NOI):

Net Operating Income is a property’s income after being reduced by vacancy and credit loss and all operating expenses. The NOI represents a property’s profitability before consideration of taxes, financing, or recovery of capital.

To Calculate the NOI:

Net Operating Income  =  Gross Operating Income less Operating Expenses

Capitalization Rate (Cap Rate):

The capitalization rate is the rate at which you discount future income to determine its present value. The cap rate is used to express the relationship between a property’s value and its net operating income (NOI) for the coming year.

To Calculate the Capitalization Rate (Cap Rate):

Capitalization Rate  =  Net Operating Income  /  Value

Transpose this formula to solve for the ensuing variables.

Value  =  Net Operating Income  /  Capitalization Rate

Net Operating Income  =  Value  X  Capitalization Rate

Debt Service Ratio (DCR):

Debt service ratio is the ratio between the property’s net operating income (NOI) for the year and the annual debt service (ADS).  Potential mortgage lenders look carefully at the DCR and its future projections, basically they want to know if the property can generate enough income to pay the mortgage in addition to cash reserves and a profit.

To calculate the Debt Service Ratio (DCR):

Debt Service  =  Annual Net Operating Income (NOI)  /  Annual Debt Service

Winston Rowe & Associates really wants to be able to find a way to help everyone who comes to them find a funding solution that meets their needs.

That’s why Winston Rowe & Associates actually wants to speak with clients, so they can truly understand your business and its distinct needs.

The best funding solutions occur when they combine data with consultation and common sense.

They can be contacted at 248-246-2243 or visit them online at http://www.winstonrowe.com

Commercial Mortgage Ratios Explained For Business Loan Underwriting

Real Estate Investing

Underwriting commercial real estate loans, there are three main ratios to us to analyze the quality of a financing request.

Loan-To-Value (LTV) Ratio

Debt Ratio

Debt Service Coverage Ratio (DSCR)

The first ratio is the Loan-To-Value Ratio:

The (LTV) equals the amount of the commercial mortgage divided by the market value of the property as determined by a commercial appraisal.

The Loan-To-Value Ratios for commercial real estate loans are capped at 75% or 80%.

The Debt Ratio:

Is the amount of personal monthly debt a borrower has divided by personal monthly income. In commercial lending, rarely does a commercial lender analyze the borrowers personal debt-to-income ratio, rather the underwriter focuses more on the property’s income and expenses.

Debt Service Coverage Ratio (DSCR):

The final ratio used in underwriting a commercial mortgage loan request is the Debt Service Coverage Ratio (DSCR). The DSCR equals annual net operating income divided by annual debt service. Net operating income is the gross rental income minus expenses. Most commercial lenders require a minimum DSCR of 1.25x.

Winston Rowe & Associates is a commercial real estate consulting and advisory firm providing financing solutions nationwide through their strategic relationships.

You can contact them at 248-246-2243 or visit them online at http://www.winstonrowe.com

Detail Items For Commercial Lease Agreements

You’ve purchased a rental property, and now you’re figuring out how to get started as a landlord. Failing to specify all of your requirements and expectations in the lease is one of the more common landlord mistakes.

Commercial real estate investors know the best way to safeguard their investment from potential tenant trouble is to craft a solid rental lease agreement that includes these key things:

1. The basic clauses. Every rental lease agreement must list the parties to the agreement, which would be you and the tenant, along with the property’s address.

2. Security deposit clause. Your lease should require the tenant to put up a security deposit that matches one month’s rent or more, depending on the value of furnishings and repair costs if something goes wrong.

3. Maintaining the premises. The lease should specify that tenants are required to maintain the premises, abide by noise control rules and not change the locks without your written approval.

4. Warning of concealed defect. In some jurisdictions, you have a legal duty to warn of a concealed defect known to you, or a defect that it is reasonable for you to know about.

5. Subleasing clause. At some point, most landlords have a tenant who wants to sublet the apartment to a friend or stranger. To avoid trouble, make sure your lease agreement includes a subletting clause that requires the tenant to obtain your written permission before turning the rental over to someone else.

6. Termination. The best practice is to know your jurisdiction’s rules on terminating a lease and include those details in your rental lease agreement so your tenant will not be surprised.

7. After the tenant leaves. Would you ever hold a tenant’s personal property for unpaid rent? In some states it’s against the law for a landlord to confiscate a tenant’s property and demand rent money in return.

Include these important clauses in your rental lease agreement and you will be well on your way toward building a successful real estate investment business.

With a core focus on flexibility, Winston Rowe & Associates really wants to be able to find a way to help everyone who comes to them find a funding solution that meets their needs.

 

Commercial Loan Due Diligence & Underwriting Winston Rowe & Associates

Commercial Loan Due Diligence

Winston Rowe & Associates
248-246-2243
processing@winstonrowe.com

Winston Rowe & Associates is a no upfront fee commercial real estate advisory and due diligence firm specializes in the financing of commercial real estate transactions.

For more information about Winston Rowe & Associates and their commercial loan programs, they can be contacted at 248-246-2243 or visit them on line at http://www.winstonrowe.com

They have prepared this article to provide a general overview of the due diligence and requirements for commercial real estate.

Commercial loan financing is underwritten on a case by case basis, with every loan application as unique and evaluated on its own merits with an approach and methodology considering worst case scenarios.

The Application:

All commercial loans begin with some sort of an application that the prospective borrower must complete. It’s critical that borrowers do not misrepresent any material facts pursuant to the proposed transaction. This will only result in your loan request being declined down the road when the loan file enters the due diligence phase.

Common misrepresentations made by applicants are; questionable appraisals, source of down payments, personal credit scores, environmental issues, prior offers or letters of interest, use of proceeds, monies invested to date and bankruptcies.

If your honest and upfront about the negative issues concerning your proposed transaction. Most professionals in the commercial lending business will work with you in providing the best options available.

Debt Service Coverage Ratio (DSCR):

A key component in making an underwriting evaluation is the debt coverage ratio (DCR).

The DCR is defined as the monthly debt compared to the net monthly income of the investment property in question. Using a DCR of 1:1.10 a lender is saying that they are looking for a $1.10 in net income for each $1.00 mortgage payment.

Typically they will determine the DCR ratio based on monthly figures, the monthly mortgage payment compared to the monthly net income.

The higher the DCR ratio is the more conservative the lender. Most lenders will never go below a 1:1 ratio (a dollar of debt payment per dollar of income generated). Anything less then a 1:1 ratio will result in a negative cash flow situation raising the risk of the loan for the lender. DCR’s are set by property type and what a lender perceives the risk to be.

Today, apartment properties are considered to be the least risky category of investment lending. As such, lenders are more inclined to use smaller DCR’s when evaluating a loan request. Make sure that you are familiar with a lender’s DCR policy prior to spending money on an application.

Ask them to give you a preliminary review of the investment property that you want to purchase. Information is free, mistakes are not.

Loan to Value:

Unlike residential lending, commercial investment properties are viewed more conservatively.

Most lenders will require a minimum of 20% of the purchase price to be paid by the buyer. The remaining 80% can be in the form of a mortgage provided by either a bank or mortgage company.

Some commercial mortgage lenders will require more than 20% contribution towards the purchase from the buyer. What a bank/lender will do is subject to their appetite and the quality of the buyer and the property. Loan to value is the percentage calculation of the loan amount divided by purchase price.

If you know what a lender’s LTV requirements are, you can also calculate the loan amount by multiplying the purchase price by the LTV percentage.

Keep in mind that the purchase price must also be supported by an appraisal. In the event that the appraisal shows a value less then the purchase price, the lender will use the lower of the two numbers to determine the loan that will be made.

Credit Worthiness:

For businesses less than three years old, personal credit of principals will be evaluated. This may hold true for longer periods of time for tightly held companies.

For corporations, business performance and credit ratings will be evaluated with a proven track record.

As with all lending, business and personal credit plays an important role. As business professionals we are all taught to shop for the best deal in the marketplace,

This is not true when applying for business credit. If you submit your loan request to too many potential lenders in a short period of time (less than a year), you will be deemed a high risk and most likely have your loan request declined or be forced to pay very high interest rates. This creates a high risk profile because most bank fraud is done through the shot gun approach.

If this may be an issue for you, let your prospective lender know upfront and provide them with all past offers for financing that you received with a letter of explanation. Lenders are business people like you and will review the reasons for rejecting valid and invalid offers for financing.

Property Analysis:

Fair Market Value and Fair Market Rent will be analyzed. Special use property may require additional underwriting. Age, appearance, local market, location, and accessibility are some other factors considered.

Report Costs:

Every commercial real estate transaction requires reports which include; appraisals, environmental, certified financials, property inspection and engineering just to name a few.

Reporting costs are not generally part of the loan amount, so expect to pay for these in advance to the funding of your commercial loan.

At Winston Rowe & Associates, their primary objective is to provide the most reliable and efficient means of sourcing both debt and equity for your commercial real estate loans.

Winston Rowe & Associates provides no upfront fee commercial loans in the ensuing states.
Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine,  Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia,   Washington, Washington DC, West Virginia, Wisconsin, Wyoming