Creating a business plan must be the first step in a business venture. This must be a plan that will ensure the properties you put into the business will have a high rate of return.
The author of the best-selling book, “The Seven Habits of Highly Effective People”, Stephen Covey, believes in the same principle: “Make time for planning: We win wars in the general’s tent.”
It is the same with any investment. Businesses prosper because they are well-planned and carefully crafted. Laying a well-thought-out plan is the start of a winning battle. This principle also holds for a rental properties business.
What is a rental property business?
A rental property business is one of the most profitable business ventures. It means a property owner lets other people use owned property for a specific rental fee. Expert investors also choose to purchase properties and earn rental income from these rental property investments.
A rental property business plan that has proven its capability to realise income goals can help a rental property business lay out the systems and benchmark success at a higher level.
What makes a favourable rental property business or investment?
There are many factors to consider in answering this question: What makes a favourable rental property business or investment?
A favourable rental property business or investment can make or break your chances of success in the industry. Having a property that your market needs is the most rewarding kind of investment.
Investors must have the skill to scan the target community for what rental properties are good for business or investment.
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How to choose the right rental property business or investment?
Choosing the right rental property is critical in a business. We must consider the different factors involved in selecting the right property.
Let us first understand what PROPERTY means.
PROPERTY denotes that a person or a group of people, such as a company, has legal title over something.
PROPERTIES are considered ASSETS and increase a person or businesses’ NET WORTH.
(Assets – Liabilities (Mortgages and expenses incurred in the business that are still unpaid) = NET WORTH).
Using ASSETS to generate income may increase CASH FLOW or cash coming into the business.
FEATURES OF A PROFITABLE RENTAL PROPERTY
It can be daunting to search for a profitable rental property, especially for a new investor.
Here are TOP 10 THINGS to consider in finding a profitable rental property:
1. Community/ Neighbourhood
The community where the property is located will most likely determine what kinds of tenants you will attract. If you buy near a school, students will most likely dominate your pool of potential tenants. This also means that during summers, you will struggle to fill them. If you buy near a business centre, workers will most likely be your clients.
2. Property Taxes
You must learn about the property taxes imposed in a specific community before targeting that community for your business. Property taxes have a significant role in your rental business. You must know how much of your cash flow will be going to property taxes.
High property taxes do not always mean harm to your business if it means the neighbourhood is good and can attract long-term tenants. However, there are unattractive locations but have high taxes, which could mean less income for you.
The only way to know more about property taxes is to visit a community’s assessment office, where all the tax information is lodged. You may also have a survey within the community homeowners, where actual experiences can answer most of your questions.
Find out if there is a probability of property taxes increasing in the future that may affect your projected cash flow.
3. Educational Institutions
When the community where you’re planning to establish your rental property has excellent educational institutions, it may mean that families living within the area are also economically stable.
Good schools mean good business opportunities, an attractive market for rental property business, and a high rate of return on your investment.
4. Criminal Activities
A community with rampant criminal activities is not a good place for businesses. No one wants to live in an area where there is robbery, tension, and crimes.
You must take the time to research accurate data from the local police and community library for crime statistics of the neighbourhood that will help you decide on your business plan.
5. Available Amenities
The presence of parks, gyms, movie theatres, public transportation channels, restaurants, and other engaging sites in the community may help promote businesses in a particular place. A real estate property near these amenities will significantly help in crafting an effective marketing strategy.
6. Busy Job Market and Future Development
A community with progressing employment opportunities has the advantage of attracting more tenants. You may check the employment and unemployment statistics on the Australian Bureau of Statistics or visit a public library.
You must also be aware of any infrastructure and investment developmental activities the government plans to implement in the community. Events such as these will have an economic impact on the real estate business.
7. The Rental Properties Listings
You also have to consider a high number of listed Rental Properties that may prompt you to invest or not in a particular community. If there are already lots of available properties, many landlords are competing for clients. To attract tenants, some landlords lower rents when there are high vacancy rates. On the other hand, real estate investors are forced to raise rents when vacancy rates are low.
8. Average Cost of Rent
For a business that relies on Rental Income, understanding the average cost of rent in a specific area is wise. Any property you consider buying in your rental property portfolio must earn enough rental income to cover your liabilities like mortgage payment, tax, and other operating expenses.
A long-term market analysis will significantly help you gauge where a community’s economy will be in the next five or ten years. There are instances when taxes tend to increase often. This constant increase in taxes could also mean your business may be at risk of paying high taxes in the future,
9. Calamities and Disasters
As a property investor, all your real estate properties need to be constantly insured. Thus insurance expenses will also be regularly subtracted from your income. In this regard, you need to know how much it’s going to cost you.
Flooding, earthquakes, and wildfires are natural disasters that may cost a lot for your business.
If insurance coverage costs eat away your rental income, you have to think twice about starting a real estate business in an area prone to these events.
Now, you have made up your mind that you want a rental property business. What should you do first?
Beginning your journey in the rental property business is not so much different from any start-up. You need to identify the key factors you must consider in crafting your rental property business plan to start with a solid foundation.
Your rental property business plan will vary depending on the strategy you opt for. So make sure you look into the possible negative and positive outcomes of these strategies and decide on the best fit for you.
Here are some of the most critical steps you need to take so you can draft a real property business plan and begin your journey as a real estate investor:
- Connect with the right people by joining a Real Estate Investors Club.
- Choose your target niche and rental property market. You may also start hiring a manager at this stage to help you start strong.
- Conduct the necessary research so you can come up with your budget projections.
- Secure the capital that you need by targeting good financing sources.
- Implement controls to improve productivity
- Run your rental property business at a sustainable pace.
1. CONNECT WITH THE RIGHT PEOPLE BY JOINING A REAL ESTATE INVESTORS CLUB
Networking is pretty much part of any business. Joining a Real Estate Investors Club or association gives you the necessary motivation to connect with people who have the same goals as you do. Frequently, clubs also help you find business partners or ideas that may guide you along the way.
Most organisations also include constant mentoring with club members to help reach goals. Some members may already be seasoned actual property investors that you would surely gain insights from.
2. CHOOSE YOUR TARGET NICHE AND RENTAL PROPERTY MARKET. BEST TO HIRE A MANAGER AT THIS POINT.
Your Rental Property Business Plan must be able to answer essential questions that would determine the probable success the business may achieve, such as:
- What is the scope of the rental properties I am willing to invest in?
- How much will my travelling and marketing research cost me?
- Should I hire a team to manage my business, or I’ll have to travel to and from my property regularly?
- What are the weaknesses of my rental property in the market if I consider other rental property businesses in the area?
- How strong is my rental property business in the market in terms of demand and price?
- What is the average price for property acquisition in the market?
- What is the average rental price in the market?
Many Real Property investors start experimenting with everything from market research to get the business rolling. This is one of the guiding principles in entrepreneurship that holds depending on the situation, “acquiring wisdom from own experiences,” which may sometimes be good but not all the time. Not everyone has the gift of having economic acuity and luck on the side.
Looking for a real property manager not only spares you from spending on things not beneficial for your properties but will also help you target your long-term objectives efficiently and more effectively.
You may think that spending on this expense is unnecessary, but you will be thinking otherwise when you have already spent too much time on your business and have thrown away more of your funds that you could avoid if you hire an expert. At Onelane, we make sure you reduce stress and get great returns on your rental properties.
3. CONDUCT THE NECESSARY RESEARCH TO COME UP WITH YOUR BUDGET PROJECTIONS
Before you even search for funding sources, make sure you already know what properties you will buy. Determining the cost of how much you can invest and how much you need to outsource is crucial.
You must also determine the expenses you will be incurring as you need to also prepare for them.
4. SECURE THE CAPITAL YOU NEED BY TARGETING FINANCING SOURCES
Funding the endeavour is one of the biggest challenges rental property investors face. However, financing a real property deal is not as hard as many investors make of it. They forget that more lenders are willing to give investors a chance to earn just as they want from the deal.
Banks are into lending activities for property investors because they know that these properties may generate appealing income.
Private money lenders, or considered “alternative” sources of funds, have been present more than ever as many entrepreneurs sprout. However, they have higher interest rates. In exchange for higher rates, investors receive the money they need faster than applying from a bank.
5. IMPLEMENT CONTROLS TO IMPROVE PRODUCTIVITY
A Rental Property Investor has many options in what control systems to include in a Rental Property Business Plan. Of course, all of which must focus on improving the productivity of the rental properties.
To ensure productivity, you could design strategies to process rental applications, analyse the client’s credit, and formulate standardised background checks.
Adding proven systems to a rental property business plan is the most viable way to succeed in your investment. Moreover, having a strategy for every process associated with your rental property business will make it easier for you to be more efficient and productive.
6. RUN YOUR RENTAL PROPERTY BUSINESS AT A SUSTAINABLE PACE
Make sure you can handle all your properties, but if you’re having a hard time doing so, you may always find a property manager that you know you can trust to do an excellent job.
You may start small and grow into an empire than starting an empire, then end up small. Although there’s nothing wrong with starting big, it’s best to think about how well you can manage such.
Understanding a Rental Property Business Plan
Understanding your property business plan is the perfect step in making your investment clear as a real estate investor. It also focuses on the things you need to do and the overall purpose of your rental property.
WHAT IS A RENTAL PROPERTY BUSINESS PLAN?
A Rental Property Business Plan is a written piece of well-crafted ideas focusing on the purpose, mission, and result that a rental property business owner aims to achieve.
A Rental Property Business plan is a strategy for starting and managing a rental property business. When a rental property business plan is well designed, a company is most likely to succeed.
HOW TO WRITE A RENTAL PROPERTY BUSINESS PLAN
STEP 1. Create a Vision and compose your Mission Statement
Your Vision and Mission statement is the anchour of all of your undertakings. It will serve as your guiding principle and will motivate you to go further.
A vision and mission statement helps push you to reach your goals and will serve as a gauge if you’re doing the things that will take you nearer or farther from your aims. With perseverance, success is not impossible.
STEP 2. Identify your goals
Your Rental Property Business Plan must identify measurable goals; by doing so, it’s easier for you to see if you have achieved them or not.
You should not set a goal that is too generic.
It should be measurable, quantifiable, and, most of all, reasonable.
When you have measurable goals, you will have a basis for declaring your status in the real estate market. You will also know how to adjust your property management. All these will help you achieve your goals next time or be more productive with your next financial plan.
Your goals must be SMART. (SPECIFIC, MEASURABLE, ATTAINABLE, RELEVANT, and TIME-BOUNDED.)
For example:
Must achieve AUD10,000 per month in August of 2021 in the aggregate earnings of all the rental property investments I own. By August 2021, I will also lease the other eight of my properties.
SPECIFIC
You mentioned the aggregate earnings of all the rental property investments you own. That is being specific. And also your goal of leasing out your other eight properties.
MEASURABLE
AUD10,000 is the unit of measurement. Or the monetary value you declared. If you fall short from this, you’ll know you didn’t reach your goal and that your rental real estate investments are not doing well. This will give you the signal to do a thorough market analysis and property management check.
ATTAINABLE
You’ve got 20 Rental Properties, with 12 of them all earning AUD1,000 per month. So your aggregate income just from the 12 properties will be AUD12,000.
You have eight properties that need the proper market strategy and property management to not go unnoticed in the market. So, you will be working on these eight properties not to be vacant to add up to your rental income generation.
RELEVANT
Is earning AUD 10,000 relevant to your business? Is your goal of leasing out the other eight vacancies you have impactful to your company? YES, to both of these. If you are a multi-million real estate business, an AUD 10,000 will be irrelevant to your business.
Being Relevant then would mean creating an impact. For a multi-million real estate business, AUD 10,000 would be like a passive income. It won’t make much relevance to the business.
TIME- BOUNDED
So, you’ve set a date for you to check if you have already achieved your goals. That’s being time-bounded.
Example:
By August 2021.
Being time-bounded will make your goal seem more achievable because you will have a factual basis for the plan of action you’re going to take.
AFTER YOU’VE SET YOUR GOALS…
STEP 3. CHOOSE THE RENTAL STRATEGY FOR YOUR BUSINESS
HOW ARE YOU GOING TO ACHIEVE YOUR GOALS?
Now that you know your goals, it’s time to write your objectives and the strategies to fulfil those goals.
So, what are you going to do to achieve your goals of earning AUD10,000 per month and leasing out the vacant eight properties you have?
If you see that it is reasonable for you to adjust the price, then go with it.
If changing the price would mean your present tenants would try looking at the other rental properties in the market, then think twice. Unless you offer them additional perks like free wifi or a monthly freebie in a local spa or salon, raising your rental price must be a careful decision.
Posting beautiful quality photos as a marketing strategy
This is always very effective, especially since we spend most of the time on the internet – Instagram, Facebook, Twitter, Pinterest, etc. You must use social media for marketing your properties better.
Photo by Andrea Piacquadio from Pexels
The Power of Word of mouth
Word of mouth has never failed to increase sales of specific products. It could help you gain leverage on the market, especially if you are careful with the quality of the services you offer. When you have aced maintaining properties and good service, your properties would be on top of the market listings just by what other people say about them.
Ask for Reviews
You may encourage your past and present tenants to leave you reviews that you could show off to attract people to trust your service. The internet is such an excellent venue to influence your target market.
Adjust Your Rental Property Business Plan
Don’t get tired of adjusting your rental property business plan. It must adapt to changes in the market and your situation.
AFTER IDENTIFYING YOUR OBJECTIVES AND STRATEGIES…
STEP 4. FINALISE YOUR FINANCIAL PLAN
Financial Planning is the main ingredient in any entrepreneurial endeavour. It must be because it’s the reason why you started a business in the first place – to grow financially.
When investing in any long-term investment property, you must always consider the projected revenue and expenses. This is what we call a PROJECTED INCOME STATEMENT that real estate investors find helpful in making decisions about their properties.
A Projected Income Statement shows the profit and losses for a specific future period. It looks the same as a regular income statement except that it uses estimated data that you expect in the future rather than absolute numbers from the past. It’s also commonly referred to as the BUDGETED INCOME STATEMENT.
NOW, YOU’VE PLANNED FINANCIALLY. WHAT’S NEXT?
STEP 5. LAUNCHING YOUR RENTAL PROPERTY BUSINESS
Now, you’re ready to get your business rolling.
MARKETING STRATEGIES TO HELP YOU RENT OUT YOUR PROPERTY
Photo by Dominika Roseclay from Pexels
FOCUS
You must focus on your market. If you want university people as your tenants, you must know where to find them, online or offline.
BE SOCIALLY PRESENT
Use social media to make your properties visible. Make sure you use quality photos that will highlight the good points of your properties. Social Media is where most of the market stays longer; stay with them too.
ASK FOR REVIEWS
Ask your tenants from the past to give reviews about your properties. Your present tenants, too, could be a good source of relevant and timely reviews.
HELP IGNITE CURIOSITY
Whilst you know some people do not belong to your target market, make them part of your initiatives, like making the community know about your properties. Marketing your community may pave the way for future tenants to notice the great neighbourhood they want to belong to.
Blogs about your properties and the community are great pieces of content that must be constantly available for everyone to read about. By doing so, you are creating a future market that you could target.
BE PART OF THE COMMUNITY
Sponsoring a community activity like a competition for students or a booth at a local event will make you more a part of the community. When people in the community engage with you more, your name becomes familiar to them, and they start referring you to friends who plan to move into the neighbourhood.
MARKET THE ENTIRE COMMUNITY
It is vital that people, especially those that don’t live in the neighbourhood, know good things about the place where your rental property is. What tenants are also looking for are excellent properties and a great community where all their immediate needs and even some perks are present.
STEP 6. OUTLINE AN ORGANISED TEAM
Your business plan must come with the financial resources and the organised team you plan to have in your endeavour. Your real estate team must have a definite structure, including the roles and tasks each member plays. By doing so, you will be sure they don’t have overlapping functions.
If you are just starting, you may not have a team. But soon, as your investment grows and you feel like you’re having a hard time managing it, you may then opt to create your team.
PARTS OF A RENTAL PROPERTY BUSINESS PLAN
Depending on the reach of your company, these are the most commonly identified parts. However, you may design a plan to best suit your needs.
Moreover, you may refer to this and adjust it according to your needs.
EXECUTIVE SUMMARY
Mission Statement
Objectives or Goals
Guiding Principles
PRODUCTS
Properties Descriptions
Services Descriptions
COMPANY DESCRIPTION
Ownership
Legal Form
Location and Facilities
MARKET ANALYSIS
Location and scope
Market Needs
Market Growth
MARKETING STRATEGY
*SWOT Analysis – *Strength, Weaknesses, Opportunities, and Threats
Promotion and Advertising
Sales Strategy
ORGANISATION AND MANAGEMENT
Organisation structure
Management Team
FINANCIAL PLAN
Start-up Costs
Source and Use of Funds
Projected Income Statement
Balance Sheet
Projected Statement of Cash Flow
You may refer to the Sample Business Plan for more details.
RENTAL PROPERTY CALCULATOR
You may use the Rental Property Calculator for a more straightforward computation of a rental property’s profitability. Together with the account descriptions, they will guide you in filling out the required fields.
These are the account titles you will find in the Rental Property Calculator. To help you understand what to fill in the required fields.
(space for the online Rental Property Calculator)
| RENTAL PROPERTY CALCULATOR | |||
| ACCOUNT TITLE | DESCRIPTION | ||
| INVESTMENT IN A PROPERTY | |||
| PURCHASE | Your INITIAL INVESTMENT. The money that needs to be prepared to buy and prepare the property for rental. | ||
| Purchase Price | The total cost of the property you bought, including commissions, etc. | ||
| Down Payment | The money you give to the property seller is part of your initial investment and a deduction to what you owe the seller. | ||
| Loan Amount | After deducting the downpayment from the purchase price, you must entirely outsource the amount left to acquire the property. This is the amount you apply for a loan from a bank or a private lending institution. | ||
| LoanTerm | The period it will take you to pay for the loan. Some loans also offer amortisation payments which could be monthly or annually. The usual loan term is 20 years. | ||
| Interest | The interest determined by the bank or lending institution must be per the laws set forth by the government. | ||
| Total Paid | The TOTAL AMOUNT you will return to the bank, that’s principal plus interest. | ||
| UPKEEP AND MONTHLY EXPENSES | Expenses that you have to pay each month. There is an option to change the units of time in the drop-down list. | ||
| Property Tax | The tax of your property; based on the value of your property, not on the mortgage. This value is also referred to as the ASSESSED VALUE. The percentage of the Property Tax multiplied by the Assessed Value. | ||
| Insurance | You pay for insurance protection from unforeseen events, artificial or not—fire, theft, natural calamities, etc. | ||
| Maintenance | The cost of keeping the property in good shape and all necessary repairs. | ||
| HOA Fee | The Homeowners Association (HOA) fee covers costs of repair and maintenance and sometimes other perks within the neighbourhood. | ||
| Other Costs | all other expenses you need to cover each month of each year to keep your property working well | ||
| RENTAL PROPERTY INCOME | It will generally come from rent. | ||
| Rent | The gross rental income you will receive from all your tenants each month. | ||
| Vacancy Rate | a measure of how often a property stays unoccupied, and this means no rent is collected | ||
| Management Fee | when you hire someone to look after your properties | ||
| SELLING THE PROPERTY | To determine your income if you plan to sell it back to the market. | ||
| Value Appreciation | property gains value over time, input annual percentage increase of this value | ||
| Holding Length | the time after you will sell this property, measured in years | ||
| Selling Price | This is calculated automatically once you fill in all the previous accounts. This is the book price for which you should be able to sell your property. If you know the Selling Price, input the value directly into this field. | ||
| REAL ESTATE INVESTMENT EVALUATION- HOW TO CALCULATE ROI ON RENTAL PROPERTY | The calculator will automatically generate a summary of all essential data of your investment. Hence you have to know what these values mean: | ||
| Loan Payment | The monthly or annual payment you need to make to pay off your mortgage or loan. | ||
| Other Costs | These are all the other costs, excluding the mortgage. | ||
| Gross Income | all the money you receive from your tenants, taking into consideration only the vacancy rate and the management fee | ||
| Cash Flow | the gross income after subtracting the mortgage payment and the maintenance costs. This is the actual amount of money that ends up in your business at the end of each period. | ||
| NOI | Net Operating Income. It is equal to the gross income diminished by all the operational costs. The mortgage costs are not taken into account here. | ||
| Cash-on-Cash-Return | also called the Annual Yield. It is the ratio of the amount invested (downpayment) and the cash flow. The higher it is, the better; and | ||
| Cap Rate | This value describes what part of the property purchase value you will receive in net income every year. It’s calculated by dividing the Net Operating Income (NOI) by the property value. | ||
| REMINDER! | Pay special attention to the LAST TWO NUMBERS: cash-on-cash return and cap rate. Based on these results in the rental property calculator, you can decide whether your investment is sufficiently profitable. |
FOR AN EASIER RENTAL PROPERTY BUSINESS PLAN JOURNEY
Now that you’re into rental properties, property management is easier with Onelane!