Over the past year, I’ve received dozens of email requests for copies of my full business plans — both my Business Plan for Flipping Houses and my Business Plan for Investing in Multi-Units and Apartments. While I’ve posted parts of those plans on my blog throughout the year, I’ve never made the full business plans available in a ready-to-use (or ready-to-customize) format.

As of today, I’m going to make those plans available, but not for free. While I’ve never been comfortable charging for any information on this blog, I’m going to make an exception in this one case. Part of the reason I’m doing this now is that I’m planning to launch another site (that I promise will be even more informative than this one to up-and-coming investors), and I want that site to have a good bit more multimedia content. So, I’m going to have to buy some video equipment and software, and I figure that any money I can raise from this site to help that one get off the ground would be nice.

Of course, all the prior business plan info that I’ve posted here is still available, so I’m not taking anything away; but for those people who want the full template of the plans in Microsoft Word format, they’re now available for $9.95 each (or $14.95 for both).

I’ve seen a lot of the real estate business plans and business plan templates floating around out there, and most of them are being sold for between $35-80. If you’re looking to put a business plan in place for your real estate investing business, and need something to start with, I think mine is a better sample than any that I’ve seen, and is also much less expensive.

While I still love the idea of apartment investing, and I have little doubt that my long-term focus will be multi-unit properties and other commercial ventures, I’ve come to realize a couple of things recently:

1. Breaking into the apartment market here in Atlanta is going to take time. There are some big-time investors with a lot of experience, capital, and relationships, and as much as I’d like to just jump right in, it’s going to require some work to meet the right people, make the right connections, and start getting involved in the “investor scene” with the multi-unit investors. I’m certainly not giving up, I’m just being realistic that it’s something I’m going to have to work on over time (and I am!)
2. I’m starting to see trends that indicate that the apartment market is slowing around here. Vacancies are up in the past quarter for the first time in several years (mostly due to all the single family homes now on the market as rentals), and rent growth has slowed to almost nothing. I have a feeling the apartment market is going to follow the single housing market in a year or two, and the best deals are ahead of us
3. This is perhaps the best single family housing market in 50 years, and all the financial projections I’ve done indicate that it’s possible to make as much — if not more — in single family houses over the next couple years than in apartments
4. While apartments are my long-term goal and I imagine that’s what I’ll be investing in 5 years from now, the single family market is much less risky, and considering both are offering great returns today, I’d rather focus on the less risky business model

So, given the above, I’m starting to change my main focus from apartments to single family houses. As I’ve mentioned in this blog, I’ve started making offers on properties, have been talking to banks about financing, and have created a new business plan centered on building a highly scalable SFH investing business. While I’ll still be working hard to build those relationships with the apartment investors, brokers, agents, lenders, etc, I’m going to focus my short-term efforts on taking advantage of this great time to invest in houses.

Feel free to take a look, and I’d love any feedback or suggestions (either in comments or via email)…

Thanks!

In the meantime, I’ve outlined some high-level parameters for how I plan to deal with equity partners, and have added that to my business plan:

LISH PROPERTIES BUSINESS PLAN

Leveraging Outside Investments

In order to provide greater flexibility to meet its investment goals of asset accrual, cash flow, asset exchanges, and diversification, the company will look to outside investors to provide additional capital on top of that of the primary owners. A percentage of each property acquired by the company will be opened up to equity partners, and each investment vehicle will operate under a separate partnership agreement specific to the investment needs and the desires of the partners.

Ownership

To ensure the alignment of goals between the company owners and outside investors, the company will generally retain a minimum 33% ownership in each investment. The company may, under certain circumstances, choose to hold an investment on behalf of outside investors where the company has not stake; in these cases, the company will ensure that the overhead associated with these investments poses no tax on other investments or investors.

Partnership Agreements

Each individual investment vehicle will have an associated partnership agreement that lays out the rights and responsibilities of the partners for that investment. The company will attempt to maintain consistency in partnership agreements for the sake of simplicity and overhead reduction, but also recognizes that in certain circumstances, specific terms will be required to satisfy investors within a particular investment. Because each property will have a separate partnership agreement, and because some investors may have a material interest in multiple properties, it is important to note that at no time will the company implement a partnership agreement that poses a conflict of interest towards other agreements or investors, without agreement among all affected investors.

Management of Investments

The company will be responsible for the day-to-day management of the investment properties, and will retain the right to make decisions affecting day-to-day management issues. This includes – but is not limited to – the following types of decisions:

• Whether to use a property management company
• Tenant screening and acceptance criteria/determination
• Property maintenance and repair decisions
• Rent increases/decreases
• Etc.

The company has authority to make all day-to-day operating decisions, it will do everything possible to optimize both for long-term appreciation and short-term cash-flow for its investors.

Entry Strategy

Prior to purchasing any property, a short-term strategy for transitioning the property to new management will be identified. Entry strategies may include rezoning efforts, improvements to the property, adjustments to rental rates, implementation of marketing plans, sub-metering of the utilities, etc.

Exit Strategy

Prior to purchasing any property, an ideal exit strategy for the investment will be identified. This exit strategy will be agreed upon by the investor partners, and will be documented in the partnership agreement. Typical exit strategies may include (but are certainly not limited to):

• Short-Term Sale (especially for Rehab and Value Plays)
• Refinance to Regain Investment (especially for Value Plays)
• Long-term hold for cash flow
• Mid-term hold for 1031 exchange

During the hold period, investors will have the opportunity to reevaluate the exit strategy for the property; the partnership agreement will clearly identify the rules for determining and executing on the exit strategy for the property.

Conflicts of Interest

While the company may consider adding partner owners at some point who have voting rights towards corporate decisions, it should be clear that investors into specific investment vehicles will have no operating control over the corporate entity as a whole. Instead, investors will have clearly defined rights and responsibilities towards their investment vehicles as defined in the specific partnership agreement that governs the investment. Additionally, the company will ensure through contractual agreement that at no time will it undertake a business strategy that presents a conflict of interest with investment partners without agreement from affected partners.

That said, here is the next part of my business plan:

LISH PROPERTIES BUSINESS PLAN

Equity & Financing Strategy

The company aims to maintain a balanced investment strategy that uses a reasonable level built-in and purchased equity to protect against decreases in property values, while at the same time using the leverage made available through traditional real estate lending practices to maximize the asset acquisition and income production of the company overall.

Equity Strategy

In order to maintain a relatively low-risk profile across our entire asset holdings, it is the goal of the company to maintain at least 15% equity in all property holdings at all times (some exceptions may be made for value play opportunities where highly-leveraged bridge loans may be used strategically for short periods of time).

Additionally, for fundamental investments, the company will operate with the long-term goal of owning each investment outright, and will therefore only remove equity from a property when all partners in the specific investment agree that it is in the best interest of the company and partners overall.

We will attempt to accomplish these goals using the following core investing principles around equity management:

• All new asset purchases will be made for a maximum of 85% LTV, based on both appraised and bank assumed values of the property (assuming both are available). This will be accomplished by either purchasing a property at below market value and/or ensuring that at least a 15% down-payment is made on the property at acquisition
• Once a property is acquired, it will be the goal of the company to ensure that at least 15% equity is retained in the property at all times. This will be accomplished by ensuring that money will not be taken out of a property until there is at least 30% equity in the property, and that any money taken out of the property at a future time (via refinance, HELOC loan, etc) will still leave at least 20% equity in the property. This should protect the property equity in the case of a market downturn, except in those situations where the downturn immediately follows asset acquisition, in which case equity in the property may fall below 15%
• Where all investors agree that it is in the best interest of a specific investment to accrue equity more quickly than the loan amortization period, the company may accelerate equity accrual by directing some or all positive cash-flow back into the property

Financing Strategy

The company will, whenever possible, use traditional financing methods to purchase assets. Specifically, the following guidelines will be used when financing properties:

• Traditional financing options such as mortgage brokers or banks will be used to acquire funding whenever possible
• Except in special situations, all acquired financing will be in the form of fixed-rate loans with an amortization period of between 15 and 30 years.
• Situations that might warrant non-fixed rate loans would include: financing intended to cover short-term holding of “value play” and/or rehab properties that will be refinanced or sold or non-traditional financing necessary to satisfy seller requirements

LISH PROPERTIES BUSINESS PLAN

Criteria for Investment Location

As noted previously, the company will use well-defined financial and demographic criteria for making investment decisions. This section will lay out the demographic investment criteria to be used specifically for short-term “value play” investments (as longer-term “fundamental” investments will be less dependent on real estate cycles).

The following is a set of demographic and economic conditions that should be examined when considering a location for property purchase:

Population Trends

Population growth or contraction is likely the strongest indicator of near-term vacancy rates, and therefore should be considered a primary decision driver for the company when considering entering into local markets. Ideally, the company would like to see a contracting population due to a temporary and well-understood circumstance (loss of jobs, natural disaster, etc), with the likelihood of expanding population in the near future. Ideally, the population loss has affected property owners and has created a situation where high vacancy is causing price depression in the local area.

Employment Trends

Employment growth is a key driver of vacancy rates, and should be considered a key indicator and decision factor when evaluating local markets. In addition to employment growth trends, the company will take into account the type of jobs being created/lost, and whether new or lost jobs will directly influence the property vacancy. For example, new white-collar jobs will likely have a smaller impact on Class C/D buildings than they would on Class A/B buildings.

Building Cycles

Multi-family residences go through cyclical periods of expansion and contraction in both income and value, and it is important to not only understand what cycle the local markets are in, but to buy at the appropriate point in the cycle to ensure appreciation and income improvements. Specifically, the company will look for apartments in areas where there has been a recent price/value depression, and where a turn-around is either beginning or on the horizon. While the company should wait until after the “bottom” of the cycle, it should be willing to get in shortly after this point, and be willing to accept short-term losses during the recovery phase of the market.

Additionally, the company should be aware of the history of building in the local area, including number of issued building permits, number of new units, and number of conversions. Markets tend to peak around the time of maximum overbuilding, at which point values begin to depress and buying opportunities start to become available (though it may take months/years to reach market bottom from point of maximum overbuilding). The company should use building information to help determine the point in the market cycle, and use that information to help drive timing decisions for buying.

Socio-Economic Trends

Trends in number of households and household income play a key role in the vacancy and income rates experienced in the surrounding markets. By keying in on these socio-economic trends, the company should be able to better determine the direction and strength of the market. It should be noted that household income trends that are very strong may indicate a move from apartment rentals to individual property ownership, which will ultimately negatively affect vacancy rates.

While some investors may not decide beforehand on their specific criteria, I think this is dangerous, as it requires the investor to make impartial assessments of the value of an investment while in the middle of evaluating that investment. Too often, once you put some effort into evaluating a deal, you start to look for reasons to make it work, because you don’t want to feel like you are doing all that due diligence for nothing. So investors that don’t have pre-defined criteria may tend to make up criteria on the spot that will help them justify the deal, even if it’s not a good one.

I don’t want that happening to me, so I spent some time thinking about my specific investment criteria, and writing them down as part of my business plan. Most of the criteria are defined in financial terms (minimum cap rate, minimum ROI values, and minimum cash flow), and are based on comparisons to other types of investments and their level or risk.

LISH PROPERTIES BUSINESS PLAN

Criteria for Investment

The following is an outline of the minimum criteria – both financial and demographic – that must be met before a property will be considered for purchase. While these criteria are necessary to be met before an investment will be made, they are not sufficient; each property will be analyzed for all upside potential.

The criteria for long-term “fundamental” investments will differ from the criteria for short-term “value play” investments, and therefore each will be addressed separately. Each property analyzed by the company for potential investment will fall under one of the these categories, and will be analyzed based on that set of criteria.

“Fundamental” Investments

Any property being considered as a fundamental investment by the company must meet the following criteria; additionally, it must meet the criteria based on actual financial data, not pro-forma data or “after-improvement” financials:

• Property must have a Capitalization Rate of greater than 8%
• Property must have a Year 1 cash-on-cash return of greater than 8%, and subsequent year cash-on-cash returns of greater than 12%
• Property must have a Year 1 total return of at least 18% (assuming 0% appreciation). Total return consists of cash-flow, equity accrual, appreciation, and tax benefits
• Property must have a DSCR of at least 125%
• Ideally, property must have a minimum cash flow of at least $6000/year, and at least $100/month per unit for larger properties (8+ units)

“Value Play” Investments

Any property being considered as a value play investment by the company will undergo three pro-forma analyses. The first pro-forma analysis will describe the current financial situation of the property using actual historical data; the second pro-forma analysis will describe the expected financial situation of the property after one year; and the third pro-forma analysis will describe the expected financial situation of the property at the earliest expected time of sale, using conservative market data and the company’s plan for improving the property.

The first pro-forma will be used to value the property and will be used to determine an offer price should the company decide to pursue the investment. The first pro-forma analysis (the current analysis) is less of a “pro-forma” and more of an income statement, as the line-items should be based on actual operational data, not pro-forma or anticipated income/expense data.

The second pro-forma will be used to identify the worst-case financial situation associated with the first-year ownership of the property; because the value play investment will likely be going through a transitional phase in year one – creating capital requirements, tenant turnover, loss of income, etc – the company must be prepared for all expenses and holding costs associated with that transitional period. In order for a property to be considered for purchase as a value play, the second pro-forma analysis (the one year analysis) must indicate that the property will be at least cash flow neutral (i.e., break-even) after year one.

The third pro-forma will be used to define the anticipated at-sale value of the property; the company will use this analysis to determine the return on investment that can be expected from the property. In order for a property to be considered for purchase as a value play, the third pro-forma analysis (the at-sale analysis) must meet the following criteria:

• Property must meet a minimum annualized rate of return (total return) at the point of sale, with that annualized return relative to the time the property has been held. Specifically, the annualized ROR should at least meet the following criteria (investment returns increase each year due to the need to tie up capital for prolonged period of time):

       o 1-Year Hold: 30%

       o 2-Year Hold: 35%

       o 3-Year Hold: 40%

       o 4-Year Hold: 45%

       o 5-Year Hold: 50%

• For analysis calculations, property must be assumed to have an “at sale” capitalization rate comparable to the average cap rate for recent sales of similar properties in the same area. This is regardless of the cap rate of the property at purchase
• It should be assumed that a property will never have an improved vacancy rate higher than the local average (i.e., the company shouldn’t assume it can get the vacancy lower than the surrounding average)
• It should be assumed that the average “Annual Operating Expense Increase” will never be lower than the average “Annual Revenue Increase”

Below I continue with that section of my Business Plan, adding detail about the other type of investing strategy I plan to pursue — “Value Play Investments”. I talked a good bit about the Value Play in a previous post, and this part of my strategy reiterates many of those ideas.

LISH PROPERTIES BUSINESS PLAN

Short-Term “Value Play” Investments

When available, the company will make “value play” investments to generate short-term (1-5 years) capital gains. The key to the value play will be purchasing mismanaged properties in temporarily depressed areas at well below current market rates; the goal will be to add short-term value and resell for large capital gains. These types of transactions will provide the working capital needed to acquire additional longer-term “fundamental” investments.

These opportunities will generally result from the convergence of the following circumstances:

1. Poor real estate performance in a localized area due to temporary economic conditions leading to population or job losses. In order to qualify as a “value play,” indicators should point towards a reversal in population decline (i.e., population increase), reversal in job decline (i.e., job increase), and/or a strengthening of the local economic framework (e.g., increased salaries, etc);
2. Poor management by the current owners – often brought about by the negative economic indicators above – that result in high-vacancies, below-market rents, or high recurring expenses;
3. The existence of short-term property improvement that can be carried out to quickly increase the value of the overall property. These types of improvement include – but are not limited to – the following:
   • High Vacancy Due to Poor Management
   • Below Market Rents
   • Extensive Cosmetic (not Structural) Repairs
   • Master-Metered Properties that can be Converted to Sub-Metered
   • Ability to Add Income Producing Services (Laundry, Vending Machines, etc)
   • Ability to Protest High Tax Assessments

By focusing on rectifying the underlying issues that have contributed to the poor performance of the property, by making short-term property improvements, and by leveraging the improving localized economic trends, there will exist a great opportunity to acquire and quickly increase the total market value of the under-performing property.

When evaluating a property as a short-term value play, the entry and exit strategies for the property will be carefully considered. Properties without substantial upside potential from these added values will not be considered for purchase unless they also meet (prior to purchase) the minimum financial criteria defined for long-term “fundamental” investments.

I actually came up with two specific investing strategies I plan to employ — Fundamental Investments and Value Play Investments. These two investment strategies complement each other very well, and between the two, my goal is to be able to generate short-term capital gains (via Value Play Investments) that will allow me to buy long-term assets that will provide enough cash flow to retire in style (via Fundamental Investments).

The rest of this post and the following post is taken directly from the “Investment Strategy” section of my Business Plan, and lays out the high-level strategy I will employ for my real estate investments. Below is the section of my Business Plan where I discuss my strategy for “Fundamental Investments” and my next post will discuss my strategy behind “Value Play Investments.”

LISH PROPERTIES BUSINESS PLAN

Investment Strategy

The company recognizes that there are many strategies that lead to real estate investing success. As such, we will use a variety of investing strategies, as appropriate, to achieve a variety of end-results. The company will first focus its efforts on two strategic investment strategies – Fundamental Investments and Value Play Investments – as defined below.

Long-Term “Fundamental” Investments

“Fundamental” investments will serve as the cornerstone of the company’s exit strategy. By purchasing properties with the ability to generate consistently strong cash flow over the long-term, the company can ultimately allow its investors to retire, while continuing to receive passive income into perpetuity.

Properties considered as fundamental investments will meet a strict set of minimum financial and cash flow criteria. Additionally, properties considered for fundamental investment will ideally be located in areas where long-term growth (population, job, income, etc) is expected to thrive.

Because fundamental investments are expected to be held long-term, exit strategies for these types of investments aren’t as important as for other types of investments. That said, there are a number of strategies that the company will follow when evaluating and carrying-out fundamental investment opportunities.

Among them are the following:

Demographic / Economic Trend Analysis
The company understands that local and regional trends, as well as economic and demographic changes contribute to the long-term value (or lack therefore) of an investment property. For example, properties in areas that are experiencing population and job growth are more likely to generate capital appreciation than properties in areas where unemployment is rising and population is declining. Using information gathered from federal agencies as well as local government/chamber-of-commerce sources to help understand economic and demographic trends in potential investment locations, we will be able to make informed investment decisions.

Asset Accrual
While the company will opportunistically leverage short-term “value plays” when they present themselves (see below), it will chiefly focus on a buy-and-hold strategy to generate long-term asset accrual. Long-term asset accrual serves several purposes for the company, including: wealth generation through market appreciation of the properties, tax benefits associated with long-term capital gains, and the free-and-clear ownership of assets paid by occupants of the properties.

Cash Flow
Through market-driven rental increases and the ultimate pay-off of property loans, it is expected that the cash flow generated by the company’s holdings will be substantial, and will allow investors recurring passive income for as long as the properties are held. Because only positive cash flow properties will be considered as investment vehicles, it is expected that cash flow will be generated from the outset, and will be returned to investors based on pre-defined payment schedules.

Trading Up for Value
In real estate, it is often the case that “bigger is better.” More specifically, properties with more units tend to benefit from economies of scale and, in general, generate larger cash-on-cash returns than properties with fewer units. To leverage the higher returns of bigger – and therefore more expensive – properties, the company will use 1031 exchanges whenever reasonable to acquire larger properties with the equity and appreciation of previously owned smaller properties. Through the use of 1031 exchanges, the company can defer capital gains and use accrued value to “trade up” and increase returns for the company and its investors.

Diversification
The company will use a strategy of property diversification to reduce long-term risk associated with investing in a single asset class (real estate). While in the short-term the company will focus relatively common investments such as duplexes and 4-plexes, the long-term strategy of the company will be to diversity into less common – but more lucrative and still low-risk – investments such as apartment buildings/complexes and commercial real estate vehicles.

Here’s what the Business Plan calls for in terms of building a team:

LISH PROPERTIES BUSINESS PLAN

Investment Team

It is clear that in real estate investment, a key differentiator – and often the difference between success and failure – is the ability to put together a great support team. Using networking contacts, referrals, and detailed research, the company intends to put together a great team prior to making a first investment.

At very minimum, the following team members will be identified and consulted with prior to making a first purchase:

Key Team

Real Estate Attorney

• To define and create an initial business structure and entity for the company
• To help define and create partnership agreements for each investment vehicle
• To create contracts to control property during due diligence

Certified Public Accountant

• To define and create an initial business structure and entity for the company
• To help create methodologies for tracking revenue and expenses
• To help identify tax strategies
• To complete annual taxes

Real Estate Agent

• To provide access to available properties (and MLS, if necessary)
• To provide insight into the local markets
• To identify and analyze available investments

Property Management

• To support due diligence process during acquisition phase
• To provide day-to-day management of investment properties (where desired)

Due Diligence & Acquisition

Property Management

• To support due diligence process during acquisition phase

Property Inspector

• To provide inspection services prior to purchase
• To help define cost of repairs and improvements
• To make strategic recommendations on improvements or repairs

Appraiser

• To help define comps and reasonable market value when dealing with non-typical properties or non-typical investments

Mortgage Broker or Lender

• For all financing needs and future finance planning

Title Company

• To clear title for acquired properties

Insurance Agent

• To provide insurance on investments
• To provide recommendations on insurance strategy for investments and tenants

Improvements & Repairs

The following maintenance and repair companies/people should be identified prior to making a purchase:

• General Contractor
• Landscaping
• Handyman
• Plumber
• Electrician
• Cleaning Services
• Carpenter