Start with the end in mind.
We started buying rental properties 20 years ago and over time acquired quite a few buildings. We started with no clue as to what market cycles were, return on investment, or any of the matrix principles for key performance indicators we track now on a daily basis. It was a few years in before we had our first eviction and realized that we needed to have a better system in place to do what it was we were trying to do.
At that time, we started finalizing the plans to open our own property management business to rent out our apartment buildings. Over the next four or five years we developed all the systems that we needed to run this as efficiently as possible. As we grew we realized we needed better systems. As we built those systems we realized we needed to document all of this. All of this was just for our own property management and for our own rental units.
It was right around this time that we were actively involved in the northern Worcester County landlord association. We were blown away by the expertise of the membership, the Board of Directors, and all of the landlords we met on a monthly basis. We kept learning more and more. Eventually we got involved and started to volunteer and now today I have been the president of the Northern Worcester County landlord association for over 16 years.
Several years ago, we started receiving calls from different members and from different landlords who were asking us all types of a variety of questions having to do with managing their properties. We always did the best we could to give them a straight path to the direction they should take. The calls kept coming and we kept giving out whatever we could to help other landlords. Until finally one day I realized that we could be helping them so much more.
It was at this time that I asked my wife, why don’t we just manage the properties for them? It made sense. We have already been managing our own properties for over 10 years and now we had established all of our systems in place. The last step we needed to take was to write a business plan for the property management company. This was a pretty easy task to tackle as we have previously created a business plan for our holding company that owned all of the properties. That was the real beauty of running our rentals as a business.
What should I do now?
As we started to accumulate more properties we needed to stop doing Fannie Mae and Freddie Mac loans and had to start only doing commercial loans. This was a transition process but after we learned how to do it, it was pretty easy to do. One thing that made all the difference for us was going in to the lending institutions with a solid business plan for how we intended to acquire, run, and eventually dispose of these investments to cash out.
Banks, credit unions, Hard-money lenders, investors, promissory notes, or anyone else that you can creatively think of to fund your deals has one function and one purpose. They want to write you a check, and get a bigger one back when you cash out. The same is true for a mortgage. Pretty much all mortgages are front end loaded on the interest that you will pay at the beginning of the term. Overtime, the positions will switch. At the beginning you were probably paying 2/3 of your monthly payment on the interest and 1/3 on the principal. Then somewhere around the halfway mark of the mortgage those positions switch and the interest payment goes down and the principal payment goes up. The reason I bring this to your attention is because having a great business plan helped us to achieve amassing a huge portfolio and getting better rates for interest from several different lending institutions.
It is true when they say that the process is in the preparation. When you walk into a lender they want to see that you have thought of everything and that you have all of your operations figured out before you ask for their money. Having a great management team, other respected affiliated real estate contacts, lawyers, letters of recommendation, all help to get you the terms and conditions you were looking for. This was one of the biggest differences we found doing commercial loans.
In a commercial loan the terms and rates and interest are all negotiable points. We were able to successfully convince the lenders that we were running this as a business and were professional. This resulted in us being able to obtain loans for a lower interest rate. We were shocked! By having a solid business plan, we were able to prove our business principles and get lower rates on our mortgages.
With the amount of properties, we were purchasing the savings were starting to be significant. For a conventional loan with Fannie or Freddie we had to put down 25%. With the commercial loans being able to negotiate the terms, we were able to put down 20% and get a better interest rate. Think about it. In the long run, if we bought four properties at 20%, then the fifth property was free! So how does that work? If we bought four properties for 20% down then we saved 5% for the down payment on each purchase. By the time we hit the fifth property we had already savings of 5% over four different properties. That equals 20%! We found by having a good business plan with sound business principles written down and were able to prove our investment theories that we were able to get better rates, negotiate better terms, and actually buy four and get one free.
And it got even better after that.
Armed with a solid business plan we were able to start to attract investors who wanted to get a bigger check at the end of the deal. We were able to sit down with several different private investors who wrote promissory notes based off the business plan. And it was pretty simple. All we had to do is stick to the plan, collect the rents, keep the properties in good shape, and we were able to see the returns that we had planned on. Emphasis on that we had planned on this to happen. We also were able to cross collateralized our promissory notes. We were able to have private investors write us a check and secure their loan based on a property we owned out right. There was no additional paperwork, closing fees, appraisals, none of that needed to happen. We just stuck to the plan.
The first benefit to having a solid business plan was being able to negotiate better mortgage rates, interest rates, and terms based on treating this like a business. The second benefit we found to having a solid business plan is we are now able to attract investors.
The third benefit we found from having a solid business plan is that you can actually go into a bank and get a business loan for your business! Having to buy computers, or equipment, or other things that you need to set up shop, you may now be able to finance with a business loan. Obviously, you can always do things on a shoestring with a credit card but when you get large enough and need more equipment and more trucks and things like that it always helps to get resources wherever you can.
The one caveat to getting a business loan is that you’re probably going to have to stick it out for the first three years to establish a track record of being profitable. Any institution or lender that is going to write you a check wants to make sure that they will be able to get paid back. So here are three good reasons why you should do a business plan.
The fourth and probably one of the most important reasons to have a business plan is it will show you how to run your business like a business. With a solid plan in place with procedures in operations you will know what to do when things hit the fan. It also provides the opportunity for you to scale and grow your business which is huge. The biggest bottleneck most businesses run into is that one person is responsible for a given task. Creating a business plan with an operations manual allows you to flip-flop that equation. Now instead of having a process centered around a person, it is centered around a procedure. When you document, you can duplicate. Later if things don’t work out you can always replace that person and have a system in place where they can be up and running the first day.
How can you create your own business plan?
A quick Google search can give you all you need to get started to create your own business plan. With just a few clicks in just a couple of minutes you can have a template on your desktop and get started. When we started out we looked around at all types of examples for different types of businesses and finally ended up purchasing a template for about $97 that seem to be just right for what we were trying to do. It came in a simple word document with lots of instructions and it was all linked together so whatever titles we put as section headers automatically became the table of contents no matter how many pages we added. It took some of the work out of the process but a little bit of a learning curve to learn how to use it.
The first business plan we ever wrote for our holding company was a little rougher. But it did the trick. It was able to show lenders that we had a grasp of the business and knew where we were headed. That alone helped us to achieve the buy four get one free trick. Are used to have fun bringing the business plan into the conference room and dropping it onto the table to make a loud side. One credit union that gave us several mortgages told us they had never seen a business plan so thorough. The vice president actually came into the conference room and told us they work with several larger developers who have never provided this much market insight into their business or where they were headed. Lenders feel much better giving you money when you can prove to them you know your business.
I encourage anyone reading this to take a quick Google search and see what’s out there. If you can find something you like for free then by all means start writing today. The plan we purchased walked us through several elements that a joint venture capitalist or lender would look for in your business plan. Your typical business plan will run 5 to 10 pages to give people the general idea that you know what you’re doing. Unfortunately, our “book” came out to 200+ pages. Once I got started I just couldn’t stop. There was so much data and information relevant to proving our business model that I put it in there.
You do not have to go down that path and write 200 pages. A simple 5 to 10 will suffice. At the bottom of this article I am providing you with the table of contents from our business plan. Hopefully this will guide you on the path in the right direction to your own professional business plan. Enjoy the journey!
Example outline for your business plan
Table of Contents
- Executive summary
- Target market
- Target customers
- Pricing and position strategy
- Distribution plan
- Your offers
- Marketing materials
- Promotions strategy
- Online marketing strategy
- Conversion strategy
- Joint ventures
- Referral strategy
- Retention strategy
- Financial projections
There you have it! The rest is up to you. Figure out what it is that you’re trying to achieve and start to write it all down and start to plan. I’m sure there are so many more benefits to having a solid business plan that are not mentioned here but go with your core four from above and you are sure to be leading the field in your industry with a professional business plan.
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