So what the heck is a Real Estate Investment Business Plan and why do I need one?
When I speak with most beginner investors I often ask them what got them interested in investing in real estate. What was their motivation? And why now? etc.
The most common answer is that they want high cash flow from the properties if they were to start investing. If you were to start a business, your chances of success are much higher if you have a business plan right? Well, this is no different. It is highly recommended that you have a Real Estate Investment Business Plan before you start buying properties.
Why I started my own real estate investment business plan
When my wife and I first started investing, we used to think the same way. We wanted the highest cash flow possible as our primary motivation. It was our intention to replace our employment income. We wanted enough money coming in from cash flow to replace our employment income, however, we did not have a real estate investment business plan.
After investing for 7+ years, we realized that this was the wrong type of thinking. Because we were so focused on the cash flow, we ended up buying properties in bad areas. This attracted bad tenants, which had very high repairs and maintenance bills. It all looked very good on our spreadsheets. The price of the property was low. The rent was decent for the price of property. On paper we were supposed to be making very good cash flow.
In reality, the high tenant turnover, the lower income tenants and extra wear and tear on the property all took a bite our of our cash flow. The abuse in utility bills actually gave us much lower than anticipated cash flow. Not to mention, we used to have many sleepless nights, huge unexpected maintenance bills, severe damage to properties etc. At the end of the day it was not worth it at all. We clearly did not have a successful or sustainable real estate investment business plan.
Why you need your own real estate investment business plan
Back then, we used to buy multi-family properties from Duplex (2-Family) to Fourplexes (4-units). Our thinking was that the more tenants in one property, the higher the cash flow going to be. We did not pay close attention to location, condition of property, or tenant profile. We were all about the numbers, especially cash flow. I kept telling my wife, the cash flow will come once we stabilize the property. After a few years of owning them, some properties performed, most didn’t.
Although I have no regrets of this experience, I learnt a great lesson. Cash flow is not how you make big money in real estate. I was not a sophisticated investor at the time, however that is all I knew at the time from the American Guru’s that came to Canada for seminars. I was trying to run my real estate as a business but did not have a solid real estate investment business plan.
Over the years, my strategy evolved and I became a more sophisticated investor with a long term view on Real Estate Investing. I started buying properties in good locations which attracted good quality tenants. My tenants respected the property, paid on time, and I had less issues to deal with. The cash flow was less however it was more stable and I was perfectly ok with that. We eventually created a great real estate investment business plan and had systems in place for acquisition, renovation strategy, marketing, tenant selection, repairs and maintenance, tenant turnover etc. We are constantly working on improving our systems for operating our real estate business so it runs more efficiently.
So until next time, happy Canadian Real Estate Investing.
Jose Jafferji, REIA