How to develop a rental property business plan
Developing a business plan is an essential issue for every real estate investor. This is important for both beginners and experienced investors. A business plan is vital when you are starting investing in real estate and also when your goal is to expand the portfolio.
A real property business plan is a strategy that allows dealers to acquire and manage their investments in rental property. With a well-designed business plan, the real property investor has more chances to succeed in the industry. We suggest you some effective techniques to develop your own efficient business strategy.
Developing A Rental Property Business Plan
The best way to achieve success in any business is to set clear goals. According to a well-known quote, “If you don’t know where you are going, any road will get you there”. If you do not set goals and deadlines, you will not be able to evaluate the progress.
To set the realistic and working goal, you may stick to the SMART approach. This technique allows turning goal-setting into a simple step-by-step process. The SMART goal is specific, measurable, attainable, relevant, time-bound. Note that before goal-setting you need to determine the vision statement and your mission.
When you complete the initial stage of setting goals, you need to develop a strategy that helps you to reach the goal. For instance, if your aim is to earn a certain sum of money by October, you need to think of the ways to do this. You may adjust the price, put some effort into receiving better reviews, post-high-quality photos and think of the other marketing approaches to sell your property at the best price. If you end up not reaching the goal, it means that you had set an unattainable aim.
Prepare A Rental Strategy
The next stage after defining the goal is selecting the most suitable rental strategy.
There are two main strategies of investing in real estate:
- traditional or long-term;
According to the long-term strategy, the period of rent should be not less than half a year. In case of a short-term strategy, you can rent out the property on a per-night basis.
A rental strategy that you choose is one of the key factors that influence your future business plan. Analyze the advantages and disadvantages of both approaches and then choose the one that is the most appropriate for you.
The short-term strategy has gained popularity during recent years. This has happened due to the travelers’ demand for more flexible and affordable vacation rentals. The short-term rental strategy offers the investors a possibility for high profit, low barrier to entry, lesser need for maintenance and upfront payments. On the contrary, the real property investor may face local restrictions, unstable income, the requirement of furnishing the property and paying utility bills.
Long-term rentals provide the opportunity to gain consistent profit, the opportunity to avoid paying the bills, financial protection, smaller maintenance need and the lack of furnishing. On the other hand, you may need more time to find the long-term tenants, in comparison to short-time property investment. In addition, the barrier of entry is higher and demands a larger amount of the initial funds, the investor has less control over the house or apartment and the pricing can not be easily changed.
The rental strategy choice will depend on the market you are investing in and also your final goal in the real estate industry. Besides these options, the type of real estate you are investing in – residential or commercial – is the factor that matters too.
Organize Your Finances
You need to think of a strategy that helps to finance the rental property investment. Financial planning is crucial in the real estate business to estimate the investment income. It is necessary to calculate the expenses and positive revenue – these are the indicators of profitability of the rental property. You should include all expenses that can affect your
investment in the future, even if these expenses are not guaranteed.
The typical list of expenses generally consists of:
- mortgage payments;
- water and electricity bills;
- property management.
If you are investing in real estate through mortgage financing, the main point of your plan should be the mortgage payments. Thus, your expenses should necessarily include the mortgage.
The main condition of the financial plan is to make sure that the income from the rent per month is greater than the monthly mortgage payment. In this case, you will receive a positive cash flow. You can calculate your cash flow according to the following formula:
Cash Flow = Income – Expenses – Mortgage Payment
Plan The Marketing Strategy
While you are writing the business plan, do not forget to include the marketing strategy. This is one of the most important elements that define whether your sale transaction would be successful or not.
The marketing strategy highly depends on which rental strategy – long- or short-term – you choose. You can use online or offline advertising. Also, you may apply traditional marketing means like the word of mouth (WoM) via your real property network and other means like magazines and newspapers. If your target audience is millennials, you can promote your business through social media and digital marketing.
Nowadays, internet marketing is a very popular, simple and efficient way to find renters. There is plenty of ideas on how to market your property through the internet. You can create the business website, create email marketing campaigns, try pay-per-click advertisements on Google or Instagram, start a blog about real estate and many, many others. Hire a professional photographer who helps you to market your property online by creating an appealing announcement.
It is vital to identify your target customers, create an attractive offer with unique benefits. After you run the marketing campaign, you should estimate the performance, in other words, are the promotional activities effective or not. Of course, you need to include your expenses on the marketing activities into your budget.
Create A Real Estate Team
Creating a real estate team will be the next point in your business plan. First of all, you need to outline the clear structure of your team and dedicate different tasks to team members. If it is your first investment in the rental property, then you may not have the team yet, you can skip this point. However, if you are going to invest in multiple properties, creating a reliable team of professionals is a must. Your team may include the lawyer, the property manager, the real estate agent or realtor and the contractors.
Before hiring the real estate team, think of the answers to the following questions:
- Will your team include the buyer’s agent?
- Is there a separate listing agent?
- Will the compensation for all members of the team be the same?
The real estate market is a very competitive sphere. The success in this field depends on establishing goals and developing a clear strategy. We have listed the steps to create a perfect business plan. You need to adhere to the SMART goal-setting strategy, define the most suitable type of investment – long- or short-term. Then create the financial plan, think of the marketing strategy and build your own team of skilled specialists.