I want to take this opportunity to advise real estate investors on the importance of creating a business plan for your approach to investing in real estate. As a hard money lender in Los Angeles, I have met many potential borrowers and underwritten many loan packages. A critical component missing in a loan package and in a conversation is a comprehensive business plan, well thought out, and well prepared.
While it is true that a hard money lender looks to the merits of a deal and the value-add potential, a business plan presented during the initial meeting and made a part of a loan package will speak to the creditability and the qualification of the investor.
An investor may know the single-family home asset and the experience of creating value through renovation from work experience, but investing is a business, and every business needs a plan for the benefit of the investor and the potential lender.
The Need for a Business Plan
A business plan that is complete and well-prepared will present the investment goals, strategies, and financial plan. These are the elements that will determine risk.
It must be understood that business plans are not static. Business plans are living documents that need to change as an investor’s portfolio grows or as changes occur in the market.
As a hard money lender, I can affirmatively state that a plan is a guide and a reference tool to use when things go awry. It is easy to set forth a plan for a successful investment, but what is the plan when things go wrong? What are the strategies and mechanisms to apply when delays occur, when labor and materials prices are over budget, or when the scope of a renovation project grows as it nears completion?
The two factors that will negatively affect the investment goals are access to capital and time. I would like to see all business plans address the topics below.
A Description of the Investment Goals
Before an investment goal can be fully described, there needs to be a consensus on the definitions of income and wealth.
- Income is cash flow net of expenses. This is the cash remaining to use toward other investments.
- Wealth is equity, and equity comes from positive leverage. The building of equity provides access to capital and leads to asset accumulation.
These statements may seem obvious, but they are not really. For example, investing in condos will not build equity like other single-family asset types, but more cash will be generated from renting the condo. A single-family home will build equity, but the cash flows will be lower due to maintenance and repair issues.
The combination of income and wealth will give an investor agility, but not as much as a single focus. A goal cannot be described without defining the end result and the method to achieve it.
Simply put: “This is what I want, and this is how I will get it.”
The Choice of Strategies
The strategy needs to complement the investment goals and the investor’s personality. The strategy will define the asset type and the hold period.
If an asset is held under the “fix and flip” model, an investor should have a mindset of sensible projects with the ability to move on to other projects without emotion. If an asset is held under the “hold” model for cash flow, then the investor needs to be of the management mindset.
In the case of the wholesaling model, the investor needs sales acumen and the understanding that churn does not always translate to large profits.
I have provided a chart below to lay out the pros and cons of each strategy.
An investor must know the market regardless of the asset or the strategy. I have listed below questions an investor needs to ask and the important market conditions to research.
- What are the price trends in the market?
- How long do properties stay on the market before a sale?
- What is the owner/renter ratio?
- Will finding tenants be easy?
- Is the market in a growth pattern, stabilized, or shrinking?
The market research must be conducive to the investment strategy and the goals.
The Financial Plan
As a hard money lender in Los Angeles, this is where I focus my attention as it speaks to the feasibility of the entire plan. Too often, I have seen investors begin investing with their cash without leverage, and the investor quickly depletes the funds and is left without any means to access capital.
The most critical aspect of a business plan is realistic financial projections. How much capital will be needed versus how much liquidity is available to invest?
The key to implementing the financial plan is finding the right hard money lender.
An investor’s adherence to a proforma will build income. An investor’s commitment to a business plan will create wealth and financial independence.
If you are a real estate investor with a business plan, then you need to work with a reputable and respected hard money lender in Los Angeles. PB Financial Group is a premier, direct hard money and bridge lender who provides quick funding since 2006 and has closed over 2,700 loans. Our objective is to satisfy your financing needs on important real estate projects throughout California in an efficient manner.
PB Financial NMLS #357614/DRE #01522495