A residential rental property business plan is a valuable tool for planning, tracking and improving investment performance of your rental properties. A written plan should not only get you on the right path to maximizing your property’s investment potential, it should also provide a means of measuring performance so that mid-course corrections can be made throughout the year. With regular plan reviews, minor problems can be identified and addressed before they become major problems. Let’s look at a common approach to creating a residential rental property business plan.
The business plan format we’ll discuss includes five sections: Property, Market, Goals and Objectives, Management and Financial (see Appendix A for an outline). Let’s take a brief look at each of these sections.
Rental Property Business Plan Section 1: Property
Describing the property is the first step to determining how it should be managed and estimating its potential for return on investment (ROI). Noting the property’s type, features and location provides a basis for comparison to other properties in the market to determine its competitive position. This section may seem elementary, but it is vitally important to establishing the property’s realistic market potential and an appropriate management approach.
Rental Property Business Plan Section 2: Market
The Market section identifies the managed property’s market and how our property compares with competing properties. This information supports decisions regarding rent levels, marketing strategies and long term positioning of the property within the market. A Market Rent Analysis (MRA) should being included to provide comparisons to direct competitors (similar properties) and indirect competitors (other types of properties that potential tenants might prefer if the managed property is not competitive in terms of price, location and/or amenities).
The Market section identifies the target market (preferred tenants) for vacancy advertising and strategies for reaching that market effectively. Understanding the needs of the target market also supports decisions regarding the potential ROI of future property upgrades and some management procedures (e.g. whether to offer online rent payments).
Rental Property Business Plan Section 3: Goals and Objectives
In simple terms, goals are a measurable what and objectives are the reason why. A business plan could have several dozen goals, or perhaps just a few, depending on the property, its market and how it will be managed. But each goal should have at least one objective.
Let’s look at a simple example of a goal and its objective:
“Goal: $29,000 or higher net operating income. Objective: Meet or exceed ROI compared to other available investments.”
Let’s say we have a more specific reason for earning a minimum ROI and a 2nd objective that is dependent on the first:
“Goal 1A: $39,000 or higher net operating income. Objective: Achieve minimum acceptable ROI.”
“Goal 1B: Increase balance of reserve fund from $90,000 to $100,000. Objective: Increase investment safety from unexpected expenses.”
We might also have a goal of repositioning our property in the market:
“Goal: Remodel to add new master suite. Objective: Increase the property’s income potential.”
Some owners and managers prefer to develop objectives first, and then formulate goals that support achievement of those objectives. Here’s an example:
“Objective: Improve property to increase gross rental income. Goal: Install new kitchen stove, refrigerator and dishwasher before renewing current tenant lease.”
The important factor in each of these goals is that they are measurable, either with a numerical value or by answering a yes or no question. The corresponding objective should represent a strategic improvement to either the property or its performance as an investment.
Rental Property Business Plan Section 4: Management
A business plan should not be confused with a manager’s Standard Operating Procedures (SOP, see Note 1). A plan is a list of tasks, while procedures describe how those tasks should be done. The Management section will identify recurring and non-recurring tasks and who will perform them. These include leasing, tenant care, property care, and improvements.
For example, Section 4.B, Inspections, could include the following:
“Full exterior/interior inspections will be conducted semi-annually and per the Management SOP.”
What does the Management SOP say about inspections? That depends on the manager’s standard practices. Most commonly, the SOP will stipulate the types of inspections that will be performed in the usual course of managing a property, such as weekly drive-by exterior inspections. The SOP may also describe inspections to be performed under special circumstances, such as a tenant complaint about a specific problem, complaints from neighbors, notification of a nuisance on the property by law enforcement, suspicion of illegal activity on the property, suspicion of abuse on the property, or habitually late rent payments (see Note 2).
If there is a plan to make capital improvements, the Management section is a good place to describe them. There should, however, be a separate Project Plan for each improvement that gets into the details of what is to be done.
A Property Management Schedule, either in list form or graphic (e.g. Ganntt chart), should be used to identify and track progress of all recurring and non-recurring management activities.
Rental Property Business Plan Section 5: Financial
Financial plans can be either simple, such as a single page spreadsheet, or consist of hundreds of pages that include detailed descriptions of each income, expense or financing item. For most single unit or small multi-unit owners and managers, a spreadsheet reflecting an Operating Budget like the example below should suffice (see Note 3).
Rental Property Business Plan: Tracking Performance
Tracking performance against the business plan is the ultimate purpose for having it. The primary tracking tools are the Management Schedule and the Operating Budget, which we created in the Management and Financial sections. Establish regular reviews (monthly, quarterly, etc.) and write a brief analysis of your performance to the plan – even if you are the only person who will read it. Your analysis is feedback that should prompt you to take action in response to changing market conditions.
Rental Property Business Plan: A Few Final Words
The business plan we’ve been discussing is applicable to a property or small group of properties, typically condos, single family homes, or small multi-family complexes. As with all plans and procedures, the format and content of the document should be tailored to your specific needs. In most instances, rental property profit or loss is just one part of an owner’s total financial picture. When this is the case, the rental property business plan should be incorporated into a broader company or family financial plan.
If you’re an active investor, you may find that drafting a business plan for a potential investment target provides a great analysis tool.
Hope you found this review of the residential rental property business plan helpful. For answers to your questions or for help with California real estate investing, sales and property management, please use Contact Us.
- Most professional property managers have written Standard Operating Procedures (SOPs) that they either apply globally to all properties under their management or adapt to each property individually. It is common for managers to either reference their existing SOP or attach an SOP tailored to a client’s property to a property management contract.
- We offer “Problem Tenant Services” that include inspections when special circumstances warrant them.
- Financial plans and the bookkeeping system used to track financial performance should support the information requirements of your accountant and tax adviser. Consult with these professionals when drafting your operating budget.
Appendix A: Residential Rental Property Business Plan Outline
- Target Market
- Market Rent Analysis
- Goals and Objectives
- Maintenance and Repairs
- Capital Improvements
- Operating Budget
- Capital Budget