Welcome to Part 2 in my series about getting into the rental property business. In Part 1, Considerations, we asked ourselves questions regarding our motivation for getting into the rental property business and took stock of the resources we have available to help us do so. In Planning, we’ve made the preliminary decision to move forward and now its time to write things down. We aren’t ready to launch our business – we’re still in the exploratory stage – but it is time to nail down specifics about what we want to do and how we’re going to do it.
As with any business, the first thing to write down in our plan is our mission, goals and objectives. Our mission may be as simple as “to build a profitable portfolio of single family rental properties within twenty miles of home.” Some companies create five page mission statements that address everything from how they treat their employees to how they will help save the planet – even though their business is just manufacturing shower curtain hooks. My recommendation is to create a one-line statement such as the example I provided. The best use of a mission statement is to bounce any decision off it to make sure the proposed activity actually contributes to achieving your mission. A simple mission statement makes decision making simple.
For example, if a ten unit apartment complex comes on the market and we have the means to buy it, should we? Given my mission statement example, probably not. That complex is not a single family home and all of our operating resources are geared for managing single family properties. Should we expand our mission statement to include multi-family properties? Sure, as long as we have the resources and the investment is profitable. If we have the skills and resources, we might want to revise our mission statement to “build a profitable portfolio of residential rental properties within twenty miles of home.” If we don’t have the resources to manage that complex profitably, we might leave our mission statement as-is and pass on the opportunity.
Once we have our mission defined, we’ll look at goals and objectives. These terms are often thought to mean the same thing, but the subtle difference is important. A goal is a measurable achievement. An objective is the purpose and result of reaching that goal. For example, the initial objective of our rental property business may be to create sufficient income that we can quit our day job and work on our portfolio full time. That’s a very simple objective, but lacks specifics. Our goal, specifically, could be to set aside cash reserves of $250,000(1) and earn an average net income above $100,000 from our rental property business for three consecutive years. Since it will take at least three years to achieve that goal, we’ll need to establish specific annual goals, perhaps ramping up our net earnings over several years until we reach the first year of $100,000 net income.
Finding rental properties that meet our needs is not always guaranteed. Rather than buying risky properties that could hurt us financially, it’s better to keep looking until we find the right properties. For this reason, our annual business plans need to be flexible. I recommend a simple, one page business plan that states your mission, goals and objectives and describes the parameters you use to evaluate properties. Keep in mind that a plan is not a procedure. If you have recurring tasks you want performed uniformly, put them in a Standard Operating Procedures document.
As rental properties are acquired, prepare a business plan for each that describes the property’s mission, goals and objectives, plus budgets and schedules. For more information, see my article: Writing A Residential Rental Property Business Plan.
Finally, take stock of your support vendors. Create a database of suppliers that will support your operations. It’s not good enough to have a plumber who can fix leaking pipes, you will need at least one who provides 24 hour emergency service. The same goes with several other trades. Most property managers have at least three vendors on their list for each service type.
Also consider one especially valuable resource – those who will help you acquire properties. If you plan to work with real estate brokers or agents, decide if you want to work with more than one. Having several agents scanning the market and screening properties based on criteria you provide increases the chance you will find good acquisition opportunities. As a courtesy, let each agent you share your criteria with know if you are working with other agents, too. They will appreciate the honesty. Keep in mind that agents who work with investors may have several buyers they can bring a property to when the come across a rental property gem. If you want them to bring properties to you first, consider how you can show them the same loyalty they show you.
Once have a draft business plan that fits your specific needs – review it. Do all the pieces add up? If your mission, goals, objectives and resources align in a plan that makes sense, you’re ready to prepare your launch, which we’ll cover in Part 3 next week. Subscribe to this column (see sign-up in right margin) or check back on our home page.
Note (1): I recommend keeping business and personal reserves separate and having a savings goal for each.
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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 (CalDRE License 01370983). Contact John with questions or comments regarding Real Living or real estate in Wine Country/North Bay, East Bay and Silicon Valley.
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