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Having a well-written business plan can mean the difference between obtaining funding and closing deals or sitting on the sidelines. These five steps show you exactly how to write a rental property business plan to help you propel your real estate business.
Why develop a business plan?
A business plan is a valuable tool that helps give prospective business associates a detailed picture of who you are, what you do, and how you do it. It's a document that defines your long-term goals using high-level plans. As you scale, leverage, and grow your rental business, eventually, lenders and investors will ask for your business plan -- and it will be an integral part of getting your rental properties financed.
5 steps to writing a rental property business plan
A business plan is a very personal document. Its job is to relay who you are as a real estate investor to a prospective client or partner, and it is catered to your specific goals and investment strategies. You want your plan to be thorough, specific, and professional. Any well-written rental property business plan will:
- Explain who you are and what you do.
- Define your market.
- Outline your business model.
- Describe your plan.
- Present your need or objective.
Explain who you are and what you do
The first page of a real estate business plan is typically an executive summary, which is an overview of who you are and what you do. Think of it as a one-page resume for your rental business.
If you plan to invest in rental property as a company, explain how the company is structured, who the principals are, the experience of the principals, what the mission statement or goal of the company is, and any other pertinent information you feel the reader should know. It's common practice to include your business logo and a picture of the principals.
Define your market
Next, you will define your market and area of focus. This includes the type of rental real estate you are pursuing and the demographics on the geographic location you are targeting including:
- The supply and demand of your property type.
- Average vacancy rate.
- Average rental rates.
- Economic statistics including main job sources, population, median income, and percentage of renters to homeowners.
- Any planned development that could positively or negatively impact your market.
Outline your business model
From there you need to explain your specific business model with a thorough but brief summary of how your business works. For example, you could:
- Explain your due diligence process and how you identify potential investment properties or specific criteria of an investment property.
- Outline your acquisition model or funding model.
- Clarify whether you work with Realtors and whether you have an established bank or loan broker that you will be working with.
Take this opportunity to explain the overall flow of your business from acquisition to disposition.
Describe your plan
Most rental property business plans will be focused on a specific investment property you are trying to acquire. The plan may be used to find syndication partners or private investors or to obtain financing from a lender. This is the section that will give specific details about the property and the plan you have for it. It's the "meat and potatoes" of your business plan and should include:
- Current financials: How is the property performing right now? Include the occupancy and vacancy rates, current gross rental income, expenses, and net cash flow.
- Renovations or capital expenses: Will the property be renovated? If so, how much will it cost, who will conduct the work, and how long will it take?
- Pro forma financials: Detail the property’s projected or "ideal" income and expenses, including gross rental income, net operating income, and debt coverage service (if applicable). Explain your plan to reach pro forma projections, including how you plan to increase rental rates, decrease vacancy, and improve marketing or management.
- Property management: Who will be the property manager? How will it be managed: on-site or off-site, with a full-time or part-time manager? Will it be a third-party company, or will you be managing it yourself? Will any software be used?
- Holding period and disposition: How long do you plan on holding the property, and what is the plan for selling? What happens if market conditions are less than ideal at your desired time of sale? What is the backup plan?
A thorough plan shows prospective clients that you have meticulously thought about your business, are targeting areas of opportunity, have a strategic plan of action, and had the forethought to identify potential problems.
Present your need or objective
The final section of your rental property business plan will present your objective. For example, "ABC company is looking to raise $200,000 for the acquisition of 123 Main St., providing XYZ in return."
If the goal of this business plan is simply to inform the reader of who you are, you can summarize future opportunities to collaborate or work with you. Everyone needs something, whether that’s contacts for a quality project manager or contractor, potential leads for off-market inventory, or simply to develop relationships with strategic partners for future acquisitions. This section should clearly state your needs or goals.
You can make writing each business plan easier by writing a general business plan, unrelated to any specific rental property, that you can adjust and enhance for prospective clients when an investment opportunity arises. It's a good idea to update your business plan as you gain more experience, reach certain goals, or adjust your investing model.
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