When I first started in the rental industry (about a decade ago), I didn’t have a clear strategy. My goal was to act like a squirrel and gather as many nuts as possible. Understandably, this tactic seemed a little risky and immeasurable to my wife (which it was), and without a business plan in place, I had no way to measure success or evaluate risk tolerance.
My only goal was to get to about 10 rental properties, but once I was there, it didn’t seem like enough, and I decided to go for 15. Besides, I finally had some hard-earned momentum built up and wanted to capitalize on it. At the same time, I knew I needed some direction, so I hired a business coach. The first thing he asked me was “Can I see a copy of your business plan?” Well, I didn’t have one. Not an official one at least. In response, he paraphrased a famous line from the Cheshire Cat, “If you don’t know where you’re going, any road will take you there.” With this, he introduced me to the components of a business plan and its importance to the success of a business, both of which I will discuss in more detail here.
Disclaimer: This is only a brief introduction to a business plan. There is a never-ending supply of business plan books, articles, and websites that are readily available to you. The Small Business Association (SBA) in particular has some great resources that I would recommend if you’re looking for a deeper understanding of a business plan.
Components of a Business Plan:
A business plan outlines the vision of your business.
A business plan helps you think through what success looks like for you and your business. Is success 5 rental properties? 10? 20? What financial goals are you shooting for? What kind of values do you want to operate by?
A business plan explains how you’re going to accomplish your vision.
This component may be more important than the first. You’ll never reach your goals if you don’t establish a mean or method by which to get there.
For my company, there are two “how” components to our business plan (yours may vary, of course):
- Build new properties to create long-term appreciation and strong cash flow.
- Buy older, undervalued properties and remodel them to fit a strong cash flow model with long-term appreciation.
We can confidently say that we have employed both of these strategies over the years, and it has been critical in getting us to where we are today. Your business plan can do the same for you!
A business plan identifies the key relationships of your business.
There are multiple relationships that are essential for achieving your vision. Relationships with bankers, real estate agents, property managers, CPAs, attorneys, title companies, administrators, and contractors are all necessary for the success of a business. To read more about some of these relationships, click here.
After identifying who you need to have on your team, it’s a good idea to write a paragraph about each relationship within the pages of your business plan.
A business plan defines your property criteria.
It’s important to know what kind of rental properties you’re interested in. Therefore, you should at least define some financial and physical parameters to help guide your purchasing decisions.
After defining what kind of properties you want to buy, you’ll be surprised by the amount of clarity and confidence you have when shopping for/building rental houses. I would suggest sharing these criteria with your real estate agent and working with him or her to find properties that satisfy your parameters.
A business plan frames your geographic area of interest.
It’s up to you to outline the geographic region you prefer to work in. For us, we decided to conduct our business in the county we live in. For you, it may be the same, or it may be some other area where you can find good resources and feel that you have some expertise.
It’s important to note that a business plan is a living document, not a static one. Over the past decade or so, my wife and I have made necessary changes to our business plan. As we’ve grown to understand our business and opportunities more, we’ve revised our expectations and goals every couple of years. While you shouldn’t change your business plan every week or even every year, there are legitimate reasons to revise your plan as your business develops.
Why a Business Plan is Important:
When you’re first starting out in the rental property business, it’s essential to have some guiding ideas, values, and principles of where you’re going and how you’re going to get there. Fortunately, a business plan covers all of those and more, making it valuable for the resulting reasons:
1. A business plan produces a high level of agreement between you and your partners.
By sharing and/or creating your business plan with others, you can communicate with your spouse, business partners, and other involved parties about the details and direction of your company. If everyone understands your business plan, they will also understand your goals and objectives, which in turn deepens their trust in your vision.
2. A business plan gives you buying confidence.
Those who fail to create a business plan upfront may struggle being decisive when it comes to making a deal. But if you clearly outline your property criteria in your business plan, you can have confidence in your purchases.
3. A business plan helps measure success and failure.
If you outline your goals and objectives, it’s easy to identify success and failure. Designated ambitions give you something to work toward and help you correct your path along the way.
Creating a business plan is essential, especially if you don’t know where to begin. Speaking from experience, you will never regret putting in some due diligence to get your business started on the right track.
In Summary:
- A business plan is critical to the success of your company, especially if you’re starting out.
- A business plan outlines the vision of your business and how you’re going to achieve it. The plan outlines key relationships, property criteria, and geographic area of interest.
- You can make necessary changes to your business plan as you grow and adapt as a company.
- A business plan produces a high level of agreement between all involved parties, gives you decisive buying confidence when you’re making a deal, and helps you measure success and failure.