If you want to invest in commercial real estate and build significant wealth, it’s going to require that you take the time to think things through. It requires planning, patience and persistence – or, in other words, it requires you to develop a strategy or business plan. Think of this as your road map.
Your first step in buying commercial real estate should include a mission statement. This is where you clearly define your purpose and should include some benefits that will be derived. Don’t spend a lot of time here at first, just put together some general concepts.
Secondly, you should set some goals. This step is the why am I doing this. Do you want to quit your current job or do you want to retire early or set up a way to pay for your kids college education or do you just want some extra spending money for that new car, dream vacation, etc. Set these out and refer to them often. I like to set short and long term goals. Short goals so that I can achieve them and have some immediate gratification and long term goals so that I always have something to look forward to. Your goals should also include how many properties you are going to buy or that you want to make $5,000 per month if that is your goal. The key thing in goals is to write them down and adjust or update them as you achieve them.
The next thing to do is to set out time frames within which you want to achieve your goals. Be realistic in this aspect, but also stretch yourself. State when you are going to buy those properties or when you are going to be making the money that you want or when you will take that vacation.
The next item to tackle would be to think about your strategy. There are many, many ways to make money in commercial real estate. If you want to buy a property a year, write that down. If you want to flip a property every 3 months, write that down. Your strategy is how you will be using real estate to accomplish your goals. Note that this can be an evolution over time, but you need to start somewhere. The key thing is to write down a strategy, then adjust if you need to as you go along. In the beginning you may think that you want to buy and hold apartment buildings, but you may find out that your preference is to buy apartments, fix them up, then flip them. The key thing is to work within a specific niche such as apartments or nnn properties or office buildings or shopping centers, etc. It’s best to start out in a particular niche, because you will have a learning curve to go through. It’s easier to learn about one particular type of real estate than to try to tackle all of them in the beginning.
Your next step is to define your market area. Most beginning investors start in their own backyard, because you already have some knowledge about that area and you can easily drive it to find properties or locate brokers to call, etc. Once you have completed a couple of deals you will find that you can expand your area and look into other cities around you and then other areas of the state and so on.
To me this is the most important thing that you can do for your investing business. Sometimes the best deals are the ones that you walk away from. In this step you are establishing the return on your time and money. Setting your financial parameters as well as establishing the type of property you want to buy are the keys to setting up your success in this business. The financial items that you will want to consider are maximum purchase price, cash flow requirement, return on investment, loan to value ratio, maximum cash outlay, max rehab costs and time frames. Deviating from your criteria can be disastrous for you. By having clearly defined criteria you will be able to recognize your deal faster and let others know exactly what you are looking to buy. If you are not finding deals you can look at other markets or adjust your strategy. Always ask yourself “What is this property worth to me?”, not “What is this property worth?”. Also, remember that you want make your money when you buy the property. If you’ve bought outside of your criteria you didn’t make money when you bought the property, you have already put yourself behind.
Here is the point where you need to consider how you are going to finance your deal. You are not looking for specifics here, you are looking for concepts such as will you be using conventional financing, private money financing, seller carryback financing, hard money financing, using a lease option, using partners or some other type of creative financing. In my opinion, if you want to purchase several properties you will need to seek out private money financing so that you will have a never ending supply of cash available, however you typically need to establish yourself with a couple of deals first.
This is where you need to state how you plan on attracting deals. How are you going to find the best sellers which are motivated sellers? Will you be using brokers or newspapers ads or direct mail or doing online searching through companies like LoopNet or just driving around or all of the above. Once you have established how you are going to find the deals, then you will want to clearly define your purchasing process. This should include submittal of the offer, acceptance of the proposal, putting up the earnest money deposit, submitting loan documents, commencing due diligence, review title, agreement to all terms and conditions and closing the deal. During this thought process you will want to define your team. Will you need an attorney, a construction or maintenance person, an accountant, an insurance agent, etc. You don’t need to know or state any particular people, but you do need to know your own strengths and weaknesses and how people on your team can help make your deals go smoothly.
Another very important step is to define your exit strategy. Beginning investors should have more than one exit strategy. If you want to buy and hold, define the number of years that you want to hold and the return that you are seeking. While your preferred choice is to buy and hold, you may want to consider flipping the deal or wholesaling deal if you get into trouble with it. There are many ways to exit a deal other than just selling it. Some of them include 1031 exchanges, sell it on a note, sell the entity holding title or doing a lease option. Having back up plans is a must in the real estate game.
Prepare a current personal financial statement and then project it into the future for five or ten years based upon the goals and strategies that you have plotted out above. You are going to want to update this as often as needed, but at least once per year. This is the fun part, projecting your wealth as you grow your portfolio.
Always remember that this business plan is a guide, not a hard and fast rule. You have set this up to guide and motivate you. If you fail to plan, you plan to fail.
As I have said before, if I may be of assistance with your real estate questions please contact me. I truly want to help. My way of giving back is to give away my knowledge. Thank you for reviewing this blog.