There are many benefits to drafting and using a rental property business plan, whether your investment portfolio includes units for 1 tenant or 1,000. In our first Real Living article of 2018, we’re going to examine briefly what a rental property business plan is, what should be in it, and most of all the benefits of having one during the three stages of rental property operation: before, during and after.
A basic rental property business plan describes the property under management and identifies measurable goals and objectives for its operation as a business. It is not a set of operating procedures that describe how the property will be managed – I’ll get into those next week. The elements of a basic plan are shown in the outline to the right. For more about how to put a plan together, see my article Writing A Residential Rental Property Business Plan.
Why create a business plan for a small number of rental units, or even just one? It helps organize your operation, set goals, and create a tool for accountability. Here are specific benefits.
The two times a business plan should be drafted are 1) before buying a property and 2) before the beginning of each operating year. Information about a property and its neighborhood can help us make better decisions regarding which properties to buy while also supporting our negotiating strategies. Benefit:
Current/Future Market Conditions: A Market Rent Analysis (MRA) prepared prior to purchase or at the beginning of each new operating year identifies the competitive position of the property compared to other rentals in the neighborhood. It helps us determine the amount of rent that can be charged, which is critical in estimating market value, ROI, and future net operating income. It should also tell us if a neighborhood is declining or appreciating in market value.
A business plan is a living document, which means it should be updated during the operating year if market conditions and operating assumptions change. Operating results should be compared to forecasts at key intervals, usually monthly, quarterly or semi-annually. Benefits:
Income Maximization: Did market conditions just improve due to a change in the neighborhood, such as the opening of a new shopping center a mile away? If tenants are on month-to-month leases or up for renewal soon, consider near-term rent adjustments based on those improved conditions.
Accountability: Are you an out-of-town or hands-off rental property owner who has hired a professional property manager to operate your property? Goals identified in the business plan can help you track the manager’s performance in specific terms.
The answer to what happened? during an operating year is often obvious, but not always. Reviewing the business plan can help to identify how various performance indicators contributed to the property’s bottom line. Benefit:
Basis For Improvement: Whether your rental property exceeded, met or failed to achieve its goals during the previous operating period, reviewing the business plan afterwards provides a basis for understanding just what happened so that improvements can be implemented in the following year.
Have questions about drafting or using a rental property business plan? Need help creating one for your rental properties? Drop me a line: Contact Us.
About Real Living with Broker John™
Each week Real Living with Broker John™ provides innovative tips and information regarding all aspects of owning, buying and selling real estate. John Souerbry is Broker/Owner of Cordon Real Estate, a full service brokerage in California’s San Francisco Bay Area (CA License 01370983). Contact John with questions or comments regarding Real Living or real estate in Wine Country, East Bay and Silicon Valley.
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