Real Estate Investors: How to Develop a Business Plan and the Top Four Mistakes to Avoid

Some of the other things to avoid in terms of your business plan are what to do during a business downturn. If our environment today doesn't teach us this, you have got to plan and understand what happens in a worst-case scenario.

Making the Numbers Work during a Business Downturn

With private lending, the scenario that you have got to explain to people is what the house is going to rent for, and if a private lender is involved in it what his interest payments are going to be each month. Let's say to make the math real simple a private investor lends you $100,000 and let's just say at 10% to make the math easy, so, $10,000 a year, $850 per month.

That investor is going to say, "The interest on my loan is going to be $850 per month." You need to be able to demonstrate that once you've got that property up and renting that you're not only going to be able to afford his $850, but obviously you're going to be able to afford to pay the taxes and the insurance and all of that.

You would be able to demonstrate that the rent maybe is $1,100 or $1,200, but even if you had to accept a much lower rent, let's say $1,000 on that particular property just by way of an example, but that $1,000 worst-case scenario still covers that private lender's interest payments. You've got to bring that home to that person.

You've got to be able to demonstrate, "Hey, I think with the market right now it could rent for $1,200, but I understand it's a weak market. Maybe I can only rent it for $1,100. Maybe I can only rent it for $1,050. Maybe I can only rent it for $1,000. But even at that number, $1,000, I can still make your payment, and I can still pay the property taxes and the insurance."

You've got to be able to demonstrate that, and that's a possibility and there's nothing wrong with bringing it up and telling them, "Weird things happen, the markets go crazy, but even in the worst-case scenario I can still cover your payments." Be able to demonstrate that as part of your business plan.

Using Fancy Language

The other thing we see a lot is using fancy language. Again, your private lenders may not necessarily be real estate investors. Don't necessarily assume that. The private investor could just be a businessperson. It could be a retired person.

I have retired nurses as private lenders. They don't know the first thing about real estate. That's not what they're into. They're looking for a higher return on their money than they're currently getting at the bank or the CD or the money market, but they do not want to become real estate experts.

They're assuming that I'm the real estate expert. They don't want to have a business plan that has a lot of lingo in it and a lot of language about lease options and all that stuff. Just be careful on how much lingo you use. Keep the language fairly simple so a non-real estate investor could at least understand it and appreciate it.

Lack of Attention to Detail

Probably the last thing, which is true of a lot of things in life, believe me, is attention to details. You'd be amazed at how many resumes I get. I get a lot of resumes in my business, and how many misspellings are on resumes and formatting mistakes are on resumes.

Business plans are no different. We get business plans with misspellings. We get business plans where the column numbers don't add up.

Proof the Business Plan

You have to believe in yourself and your business enough to spend the extra time and proof your thing. If you need to, have two or three other people proof it. Make sure that enough attention to detail is spent to make sure spelling and footing mistakes are all removed from your plan.

Obviously, as an investor, if I'm sitting there and your columns don't add up, it's going to concern me that your attention to detail isn't going to be particularly high. Again, don't let simple mistakes like that catch you. Spend some extra time.

You can have me proof it. You can have somebody else proof it, whoever. Just make sure that the whole thing is thought through and somebody else reads it to make sure it makes some sense. Those are some big mistakes, or big errors, that we see quite a bit.

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