Business Planning for Real Estate Investors

By Clifford Hockley, CPM, CCIM

SVN Bluestone, Principal Broker

Henry Ford, the father of Ford Motors, had a relentless focus on planning. He looked ahead and planned his innovations, to be most efficient at utilizing the limited resources he had available. This is the main concept I want to deliver in this article. Successfully operating your buildings is the goal for all investors. Achieving that takes a thoughtful planning process. We will review some planning tools that can improve your operating results and increase your long-term returns.

Creating Intentful Investing

Annual planning with a view three to five years into the future can help you maximize your investments return. As a property manager with over 35 years of experience, it seems that a minority of investors plan the success of their investments. I suspect that a map may be needed to help investors reach their goals.

First off, the most important thing that investors can focus on is the maintenance of the condition of the properties they own. It does not make a difference if you own a retail center, a medical building, an industrial park, an apartment, or an office building. The same rules apply, even if it is a NNN building, and the tenants are responsible for keeping the building up. Even in a poor location, the quality of an investment will stand out and will act as a beacon for tenants. Happy and successful tenants pay the rents that allow us to offset the mortgages and expenses.

Let me give you a recent example. I was driving in a low-income neighborhood when I came upon an oasis. Literally, it was the most amazing thing. In this case, the older buildings were newly renovated, the landscaping was in excellent condition, and everything was fully rented. That owner had two properties next to each other and compared to the other properties in the area they attracted the best tenants. It was clear that they had planned to be the best property in the area, and that by setting a high benchmark they were successfully attracting tenants, higher rents, and my eye. The extra effort was worth it.

Dollars and Cents

Another critical part of the planning process includes the regular review and forecasting of income and expenses. As part of this review, it is logical to look back at historical operating statements and rental comparables to establish a current and potential three-year budgeting process. Much of that key into existing and anticipated vacancy rates of the property as well as business and employment growth in the region where the property is located. In some areas, job growth is slow, in other areas grows 4 – 5% a year. This will directly impact the business formation and the increase in demand for real estate as well as rental income and the success of your property. See the Multnomah Economic Indicator Report for December 2022 for current information on metropolitan areas across the country.

As part of the budget planning/budgeting process, you also need to consider expected capital expenses over the next three to 10 years with a particular focus on high ticket expenses, such as roof, HVAC, and asphalt replacements, as well as interior and exterior upgrades.

One Page Business Plan

Driving the success of your real estate investments is your view of the future of your portfolio. It is helpful to create a road map to guide you to your destination. Much like you might plan out the future of a business, planning out the future of your real estate investments pays dividends. Creating a one-page business plan to direct your efforts will help you refine your budget. See the sample plan HERE. It does not take much time to think through your annual budget if you take time to build your plan ahead of time. Involve your property manager and your leasing agents in the process and visit your property in person or by a drone overview, for more successful results. Additionally getting feedback from and communicating the goals to the property and asset managers will enable you to better reach your long-term goals.

Annual Mortgage Review

Included in your planning should be an annual mortgage review to assess the status of your leverage and depreciation. Understanding where you stand leverage-wise can help you focus on your future investment goals. This can also help you hedge against the vagaries of the economy as you plan ahead. Consider sharing this information with others (e.g. spouse, children) so they can track your progress with your real estate investments. Included with this analysis should be a review of tax implications (federal, state, and local) as well. The Client Mortgage Spreadsheet can assist you in this analysis.

Finally, as part of the planning you should annually update your personal financial statements to gauge increases and losses in personal net worth. The object of investing is to set goals to increase your net worth over time. These reviews will help you understand your investments and help guide you to buy, sell or refinance your investments. What many investors forget is that all investments do not operate the same way. If investments are not making you money, they need to be sold and traded into properties that make money for you.

Building Wealth

In summary, as you invest with the intent to increase your net worth, consider the following:

Have a system in place to track the job and economic growth of the areas your properties are located in.
Prepare an annual business plan for your properties and this should include leasing activity.
Prepare an annual budget for your properties with your property manager.
Review your mortgages and annual tax bills and depreciation.
Use this information to buy, sell and refinance your properties.
Update and review your personal net worth / financial statement annually.

Your long- and short-term goal is to increase the value of your properties, you can do that with some active investment of your time, and a plan for the future.