When thinking about investing in real estate, you tend to think about the future incoming cash flow and how to avoid costly repairs and tenant disasters. The often forgotten, less glamorous, more proactive, and completely necessary aspect of real estate investing is writing a commercial real estate investment business plan.
Here's what you need to know about creating one.
Why a CRE Investment Business Plan is Important
While planning may not be for every one, it should be for every investor. With every great entrepreneur and every entrepreneurial success, comes a multi-page document outlining how they got there. Investing in real estate is just like investing in any other business venture, and should be treated as such. That means being a '(wo)man with a plan.'
In a nutshell, a commercial real estate investment business plan is a document that details the way in which an investor intends to run their business or property. It paints this big picture with individual brush strokes of specific details like investing strategies, investing timelines, and investing goals while providing a roadmap that guides future investment decisions. It also gives a sense of legitimacy when trying to attract additional investors and business partners. Before a bank, search fund, or private lender provides a dime for your commercial property investing dreams, they'll want to see your long-term plans for the investment.
The end goal of your commercial real estate investment plan is to inform your target reader of who you are and what you do well enough to secure their financial backing. According to real estate investing experts at Millionacres, in order to do that, your plan should show the reader that you:
- have thought about how you want your real estate business to grow;
- have a plan of action to reach those goals; and
- have the forethought to prepare for potential challenges, including how to overcome them.
The original draft of your investment plan will follow you throughout your real estate investing journey, growing and adapting as you and your business do.
What to Include
Real estate investment plan requirements are no different than that of any other business endeavor of any other industry. While it is not a one size fits all, there are seven elements — give or take — to be included.
Executive Summary
The hard work and detail that you put into the following six sections of your investment plan need to be summed up into one opening document. Think of it as the resume of your commercial real estate investment business plan that highlights all the need-to-knows, and gives a glimpse into what details are to come in the later sections.
An executive summary of a successful CRE business plan would include these seven key points:
- company name, including your entity structuring;
- when you were founded;
- where the company is based;
- who the principals or owners are;
- your investment area of focus or specialization;
- why you can invest in this property type, including your experience or education;
- your mission statement.
While the executive summary serves as an introduction and comes first in the investment plan lineup, a smart real estate investor will often write it last, after organizing all of the other information in the plan.
Organizational Structure / Business Model
This short, yet still important, section provides a background into you and, if relevant, your real estate investing team composition. You'll find some overlap with the executive summary when it comes to company history and mission statement, but will go more in depth about individual roles in the investing process, the guiding company principles and values, and the legal structure (i.e. if you are the sole proprietor of the business or a business entity).
Market Analysis
The market analysis section demonstrates your knowledge of the real estate market in your area and shows where you fit into it compared to your competitors.
Conducting a market analysis does one of two things: gives insight into how your future property will perform, and helps you identify your target market, target properties, and investing strategy. For example, do you intend to invest in short-term rentals in high traffic areas, or single-family homes that will have lower tenant turnover and higher rents.
Related Reading: How to Find Rental Comps for Your Real Estate Investing Strategy
A good market analysis would include:
- Data and demographics about your niche market.
- The current supply and demand in your market and how it might change.
- The income potential and obstacle potential.
- The primary and secondary competitors.
Seeing how you compare to competitors can be done by using one of our favorite marketing buzzwords, a SWOT Analysis. A SWOT, standing for "strengths, weaknesses, opportunities, and threats," forces you to discuss the individual business attributes that can help or hurt your investment. It also can lead to some creative thinking and future strategic idea implementation.
At the end of the day, you want to prove that you have a vast knowledge of the real estate industry and therefore, understand what makes a good investment.
Financing Strategy
Think of financing strategy as the section that outlines the different financing methods you intend to use AND contains a financial projection for your company / investment. While this is initially based on educated guesses and the assumption that you will get the requested financial backing, you are allowed to revisit, reflect, and update the numbers as you go.
You'll want this section to include the following documents:
- Profit and Loss Statement (income vs. expenses)
- Cash Flow Statement
- Balance Sheet (net worth vs. debts and liabilities)
Lead and Acquisition Strategy
The lead and acquisition strategy covers how you will find new acquisition opportunities. Whether that be hiring a real estate broker or wholesaling, your investment plan and potential financial backer needs to know.
Exit Strategy
In order to plan for the beginning, you must prepare for the end. Exit strategies influence every investment decision made from original purchase to final sale. In this section you'll want to detail what the end of your investment period will look like — buy and hold, cash-out refinance, 1031 tax deferred exchange, etc. — and how you will know when it is time to enact the chosen exit strategy.
In most cases, this section will also include the marketing plan for finding new tenants and new properties, and what the ongoing property management will look like.
Goals and Objectives
What are your investment goals for the next one to five years?
Every successful business venture needs to have obtainable and specific goals in place to have an idea on how it intends to grow. You will use what you know from the market analysis to list long-term and short-term metrics, how they will be measured and accomplished, and what overall investment success would look like.
Creating a commercial real estate investment business plan is just one facet of the real estate investing journey. To learn more on how to get started, download our Investment Real Estate Guide today.
