A Beginner’s Business Plan for Real Estate Investing

If you’ve been in business long, you know that business plans are a must for raising capital, gaining new partners, or for other ventures of major corporations.

However, have you ever considered the real benefit of having a personal business plan for buying and selling real estate, while leveraging your current equity?

The planning process, as well as a written plan of action, is essential to executing tangible initiatives and achieving real wealth.

New clients often ask what steps are required to develop this sacred document: the Business Plan.

Every planner works differently, but I like to start with my client’s Big Why.

Every overachiever has one.

Why do you get up in the morning? Why do you want to pursue this venture?

The answer to this question generally points directly at my client’s real goals more than anything else.

This question naturally leads to a discussion of my client’s ambitions, and I like to use a worksheet of questions to narrow these ambitions to a plan of action.

Sometimes a detailed plan has gelled in my client’s mind, and he just needs to get these details on paper, but most often we need the planning process to help distill strategy into actual initiatives.

Here are a few starter questions:

• What future milestones do you need for success?  Number these in order of importance or in chronological order. What actions will generate revenues for you within the next 60 days?
• What tangible initiatives will generate a large sales volume for you over the next year?
• What are your associated costs for each?
• In what ways can you consolidate these initiatives along with your other business activities to make the most of your schedule and energy?
• How much money do you want to make over the next year to five years, and what concrete steps will you take to achieve this goal?

Partnering with a professional planner or simply a co-worker can make your planning process much more effective. Sit down with someone and brainstorm about the future. Ask your partner to help you organize your plan and develop a written plan of action.

Once you have your ideas in writing, review your goals, mapping your overall goals to daily action items, and focus your weekly schedule and time blocking needs.

Then you should know with assurance how to achieve your goals on a daily basis, what income to expect, and what your expenses will be.

If you have any start-up capital needs, address those and determine where to get the funds needed to implement your plans.

If you need a particular type of business plan for that capital raise, be sure to ask a professional planner to help you pull that together – often banks and venture capitalists are looking for a formulaic business plan.

If you want a more detailed written plan, make certain you cover these areas:

• What you hope to achieve ultimately in one straightforward sentence
• Why you will be successful
• Your business structure (sole proprietorship, S corporation, partners, etc.)
• How your business will unfold over the next three years with concrete milestones to achieve each quarter (number of houses sold or bought, income, etc.)
• Specific initiatives detailed with goals, a step-by-step plan, marketing and sales strategy, and a budget
• A section dedicated to time blocking and how you plan to leverage yourself through an assistant, subcontractor, or other help
• Overall financials and assumptions
• An addendum projecting balanced portfolio growth and development using specific properties

At the end of your planning session, make sure you ask your partner to hold you accountable and to meet with you at least once a quarter about your plan.

By setting up future meetings together, you’re guaranteeing yourself a means for measuring your success against your plan.

I like to create written financial projections and an executive summary for the plan so my clients will have two easy reference sheets while they work.

Do whatever works best with your business style, but put something in writing, even if it is very brief.

Whenever you start a new venture, your business plan should be tweaked once a month because you will be learning lessons about your business on a daily basis and the plan is still fluid.

In most cases, after you have been in business two years, you need only update your plan once every quarter.

These updates may only take 1 hour of time, but they are crucial to staying on track.  This is where good accountability from your partner may be essential.

If you decide to use a professional business planner, make certain you pick one with direct, hands-on CEO experience actually conceptualizing, initiating, staffing, funding and operating multiple, multi-industry companies and plans.

Make certain they own real estate and have written plans surrounding their investments.

Their past experiences will directly benefit the quality and reality of your own business plan.

Finally, ask for a sample plan they’ve written for someone else, and make certain that you find their writing style readable and useful given your needs.

This will guarantee that you use the product you’re paying for.

How a Balanced Real Estate Portfolio Can Save You Millions!

Financial planners generally advise that we maintain a balanced portfolio of assets, spreading our risk over different types of investments.

For example:

• Maintain 3 to 6 months worth of liquid funds in a money market account in case of emergency.
• If you’re 40 or older, take a conservative approach and maintain a portfolio that is 25% real estate, 33% bonds, and 42% stock mutual funds.
• If you’re younger than 40, take a more aggressive approach because you have longer to live. Develop a portfolio that is 35% real estate, 17% bonds and other fixed-income vehicles, and 48% stock mutual funds.
• Maximize your 401(k), IRA, and SEP plans.
• Develop a focus with your financial planner and stick with the plan.

This is terrific advice. So why don’t most real estate investors apply the same philosophy of balance and diversification to the real estate portion of their holdings? If you own solely condos or all warehouse space, over the long-term you can get burnt.

I have clients who purchased real estate nationwide, particularly in Texas and New York, during the early 1980s. The market appreciated quickly, and their net worth was phenomenal.

Many of their purchases were leveraged, and when the real estate crash occurred in the late 80s, they lost millions of dollars.

However, the folks who had balanced portfolios, with rental agreements in place that guaranteed their overall debt repayment, rode out the crash and regained their high net worth during the following years.

What does balance and diversification mean to real estate investors?

Real estate is different than cash, bonds, or stocks in that it is real property – you can physically see the home or business or lot that you purchased. Intense emotions are often involved with real estate purchases for this reason, and investors struggle to diversify.

Individual investors lean towards buying property to flip, to renovate, to build new construction on, to rent out, to run a business with, or to take residency at.

Many investors specialize because of the different temperaments, pocketbooks, and skills that we have.

Specialization can be very useful, but consistent success depends on balance.

Here are a handful of principles that I encourage my clients to use:

• Escrow for roof and other unforeseen maintenance on all your properties along with at least 3 months worth of rent for every leveraged property you hold. Keep these funds in a liquid bank account, like a money market fund, set up for this purpose alone. Go ahead and factor these funds into every purchase, and your holdings will remain safe during catastrophes like hurricanes or soft rental markets.
• If you’re a real estate professional and have special knowledge of your market, take a more aggressive approach and maintain a portfolio that is 45% flipping and/or light renovation projects, 15% long-term residential or commercial rental properties and vacant land, and 40% condo conversions and/ or new construction.
• If you’re not a real estate professional, take a more conservative, long-term approach. Develop a portfolio that is 25% flipping and/or light renovation projects, 45% long-term residential or commercial rental properties and vacant land, and 30% condo conversions and/ or new construction.
• If you own five or more properties, purchase in different geographic regions, both urban and rural. This will make it easier to ride out economic trends over the long haul. However, be very savvy about rural purchases – these are best made in areas where the principles of supply and demand work in your favor. For example, mountain resort property that is surrounded by national forestry land has built-in appreciation.
• Discuss 1031 tax exchange advantages with an expert intermediary and maximize the tax savings available through your properties.
• Develop a focus with your business planner and stick with the plan.

The above percentages are of course general suggestions.

Your investment strategy could be wildly different if you are a carpenter or lay tile for a living.

If you have physical limitations, you won’t want any renovation work in your plan.

So utilize the principles of diversification, but customize these basics to best fit your particular situation.

A Beginner’s Guide to Real Estate Investing

Think real estate investing is just for old married couples featured in TV infomercials? Wrong! I was about 30 when I bought my first piece of property. It was a two-bedroom house in a quickly appreciating neighborhood in Orlando. It was the cheapest good quality house in the area, and I netted $30,000 by flipping (reselling) it eight months later.

I wish I had started investing sooner.

The only reason I didn’t invest was because I didn’t understand the process. Now, I buy two more homes every time I sell one.

Here are the basic steps for investing in real estate:

1) Determine your strategy early: flip, renovation, or long-term rental. Do you want to hunt for something undervalued, hold it, and then flip it in the coming months? Are you a skilled carpenter, or do you know what’s involved in a renovation? Are you willing to deal with a renter? If so, the renter will pay your mortgage and give you some immediate profit.

2) Interview realtors. Don’t waste everyone’s time looking at property with a realtor until you know you’re with someone who is investment-focused. Most realtors will not be able to tell you the basic numbers you’ll need on a property. A good place to research these is TheSRE.com, the real estate investor networking community.

3) Interview mortgage brokers. Once you find a realtor, ask for three broker recommendations and check out what your local bank or credit union offers. You’ll want to know what each offers in terms of interest rates and closing costs. Bring a copy of your three credit reports to your meetings, along with a sample property (in the same price range), so they can run hard numbers.

4) Put contracts on the cheapest house in the best neighborhood. These contracts will put you in control of that market. For example, let’s say the cheapest two-bedroom house in the best neighborhood in Nashville costs $100,000 and the next cheapest, comparable home goes for $140,000. You can buy the home at $100,000 and raise your price to $130,000 the next day and still make a profit.

5) Contract to Close. You’ll sign a contract, show the seller a pre-qualification letter from your lender, and get your home and termite inspections. Next, your lender will do an appraisal of the home. If you want to renovate the house, a Purchase and Renovate loan may appeal to you – this wraps the cost of construction up in the loan so you have few out-of-pocket costs – and this may require an estimate from a general contractor and plans from an architect. Once your lender approves the loan, you will close on the house. In general, this process takes about 30 days.

6) Execute your investment strategy.

Flip: Just sit and wait until the market allows you to sell at your target price. You don’t even need to turn on the utilities until you go to resell it.

Renovate: In general, your lender doesn’t care if you use the general contractor who provided them with an estimate, so make sure you’re working with a solid crew who will get the project completed on time. You can burn up a lot of money if they’re inattentive to your house. Once the project is done, determine how much property in the neighborhood is selling per square foot, and you’ll know your new sales price. Also be aware of 1031 strategies if you have more than one property.

Rental: Go to your local hardware store and buy a sign that reads, “For Rent.” Include your cell phone number on the sign. Drive around the neighborhood and determine what the average rent is for the number of bedrooms you have (renters care more about bedrooms than square footage). Then ask your lawyer for a lease agreement, or just find one through a link at TheSRE.com. Finally, draw up a basic application for potential renters and have them fill it out.

These are just the basics, but they demonstrate that the buying and selling process isn’t too tough. Keep in mind that if you have good credit, you may be able to get loans of up to 100% of the home cost. Also, typical closing costs are about 3% of the sales price, and this can either be paid for by the seller or wrapped into the loan.

Don’t wait as long as I did to try real estate investing. If you’ve got the right motivation and resources, then it may just be the best investment you ever make.

What Is a 1031 Exchange and How Can it Save Me Money?

What if the government was willing to give you an interest free loan to invest in real estate?

No-brainer, right?

You’d be calling for the application and hurrying to sign up while the going was good.

Well, the government has actually been making that opportunity available for many years in the form of the IRC Section 1031 tax-deferred exchange, one of the most misunderstood and underutilized sections in all of the tax code.

Myths of Tax Deferred Exchanges

Pursuant to IRC Section 1031, a seller of property that is held for productive use in a trade or business, or for investment (homesteads are excluded), can permanently defer the recognition of capital gains upon the sale of their property.

They can then leverage the present value of the resulting tax savings for future investment. In order to do this, the exchanger must direct the proceeds from the sale of their existing property (the “relinquished” property) to a reputable qualified intermediary.

Then, the qualified intermediary uses those proceeds to purchase a “like-kind” property for the exchanger (the “replacement property”) that is of equal or greater value to the one that the exchanger just sold.

As a general rule, you can safely assume that any real property will qualify as like-kind to any other type of real property for 1031 purposes.

Real estate is real estate, whether it is improved or unimproved, residential rental or commercial, and so on.

It is important, however, to keep in mind that both the relinquished and the replacement properties must be held for investment or for productive use in a trade or business on their respective sides of the exchange.

The 1031 exchange is not a dubious tax shelter scheme nor will participation in a properly structured 1031 Exchange trigger an audit.

To the contrary, IRC Section 1031 is an affirmative section of the tax code that is fully sanctioned by the government, provided that the various IRS guidelines are followed.

Initial skepticism is common but there is actually a rational incentive for the government to provide this tax-break. While it may initially seem that the government is foregoing substantial tax-revenue, more revenue is actually derived from other sources when the disincentive from selling low basis property (the capital gain tax), is removed.

For example, allowing the owner of a growing business to move into a newer and larger manufacturing facility, without a debilitating capital gains tax, facilitates the creation of new jobs which, in turn, generates more income and sales taxes. This growth, in turn, creates more opportunities for that company’s suppliers and its providers of employee benefits and services.

It also generates more title premiums; creates more opportunities for realtor’s commissions; increases transfer tax revenue; and so on and so forth.

This phenomenon is commonly called the “velocity of money.”

Motives for Doing an Exchange

Keep in mind that a tax-deferred exchange is not a reason to sell property. Rather, it is a means by which another goal or purpose can be achieved for a particular investor or business property owner.

Some common motives for doing a 1031 exchange include upgrading into a larger facility for an expanding business; consolidating many smaller properties into one larger facility with less management burdens; diversifying one’s holdings from a single, large facility to a group of smaller ones in different regions; moving investments to a location closer to where the investor lives (or is relocating to); or simply reinvesting into a hotter market.

Every property owner has their own unique perspective and, therefore, the motive for exchanging can be as varied as the property owners themselves.

Whatever the motive, though, a 1031 exchange is considered an essential tax tool to accomplish the desired goal.

The Timing Requirements

The most widely known requirements of the 1031 exchange, even among those with just a cursory knowledge of the code section, are the 45 and 180 day rules.

What these rules refer to are the strict timeframes under which the taxpayer, also known as the “exchanger”, must “identify” potential replacement properties and acquire at least one of the identified properties.

These seemingly simple rules, however, are fraught with pitfalls that can easily jeopardize an exchange.

In a typical delayed exchange, where the exchanger begins by relinquishing property that they already own, the 45 day period to identify replacement property begins running from the date of the closing of title on the exchanger’s relinquished property.

That day is day zero and the next day is day one for both the 45 and 180 day time periods (which run concurrently).

During this 45 day period, the exchanger must specifically identify, in writing, the property or properties that they intend to purchase with the proceeds of their relinquished property.

Furthermore, the identification must be in writing, signed by the exchanger, and delivered to an undisqualified party (usually the qualified intermediary).

If the exchanger fails to identify any properties as “replacement” properties during the 45 day period, the exchange is over and the proceeds of the relinquished property are taxable to the extent that they represent capital gain (Such gains are taxable at the Federal Capital Gains rate plus any applicable State capital gains tax, depending on the location of the “relinquished” property).

Assuming, however, that the exchanger does successfully locate a replacement property or properties, and properly identifies them, the exchanger then has 180 days from the date of the relinquished property closing to close title on the replacement property or properties.

Remember, however, that the 45 and 180 day rules refer to “calendar” days, not “business” days. Therefore, even if the 180th day falls on a national holiday, or if the exchanger is incapacitated or unavailable for some reason, there will be no extensions granted by the IRS.

None. Don’t even ask.

If the closing of title on the replacement property does not occur within 180 days, the exchange is over and, again, the relinquished property proceeds are taxable to the extent that they represent capital gain.

Furthermore, a common pitfall of the 180 day rule is the mistaken assumption by many taxpayers that the 180 day rule is absolute. It is not. In reality, the rule requires that the closing of title on the replacement property must be completed within 180 days OR before the exchanger’s tax return is due or filed (including any extensions.)

This means, for example, that an individual exchanger who commences an exchange on December 1st, in a non-leap-year, would have only 135 days to complete their exchange, instead of the full 180 days.

Worse yet, if the taxpayer were to file their tax return before they closed on their replacement property, the exchange would terminate immediately upon the filing of that return.

The aforementioned tax-deadline predicament is easily resolved by the filing of a request for an automatic extension of time to file a tax return but it’s crucial that the exchanger be aware of the problem and actually does so.

The exchanger should also be aware that there are different tax deadlines for different types of taxpayers.

For example, C and S corporations are generally required to file their tax returns on or before March 15 and will have to consider the implications for the 45 and 180 day rules with respect to that earlier filing date.

Fatal Errors

A common error in attempting a 1031 exchange is for an exchanger’s attorney to close on their client’s relinquished property, place the proceeds of that sale in their attorney’s escrow account and then contact a qualified intermediary to facilitate the exchange.

Unfortunately, though, under this scenario, the exchange is blown before it’s even begun.

The exchange agreement between the taxpayer and the qualified intermediary must be in place prior to the closing of title on the relinquished property and, if it is not, then no tax deferral is realized.

An even worse scenario would be where the client’s attorney actually facilitates the exchange from start to finish, essentially acting as their client’s intermediary.

It’s easy to see that this is an unacceptable scenario for a tax-deferred exchange since Section 1031 expressly disqualifies the exchanger’s own attorney or CPA, among others, from acting as their intermediary and performing this type of service.

Qualified Intermediaries

For now, the Qualified Intermediary industry is unregulated. It is, therefore, imperative that the prudent exchanger chooses a reputable, experienced intermediary whose documents and services have routinely withstood IRS scrutiny.

Perhaps even more importantly, though, is that you choose an intermediary that you can be sure is going to be there with your funds when you need them.

Many of the so-called independent intermediaries will provide a guaranty that your funds will be returned but just remember that a guaranty is only as good as the assets that are backing it.

What if that company goes bankrupt while your exchange is in progress or, worse yet, what if the intermediary simply disappears with your seven or eight figure proceeds?

Be aware that this is not an uncommon occurrence so make sure to use an intermediary that is affiliated with a major financial institution

. If a qualified intermediary’s name isn’t one that you readily associate with a reputable and financially stable company then you shouldn’t be using them.