To succeed as an apartment investor, you must have a well-structured business plan. You also need to be focused on personal commitment and perform detailed due diligence. You must be willing to research the local areas where you plan to invest thoroughly as well as each investment property. If you are investing as a passive investor (limited partner) through a real estate investing (REI) syndicate, you must also do research on the syndicate.
You need to know the success rate of both the syndicate and the sponsor (general partner) of your investment project. If you are truly serious about experiencing success with apartment investing, creating a well-structured business plan is crucial. Even when investing in a relatively small apartment property deal, a detailed business plan can enable you to establish firm goals.
Having a top-quality business plan can also help you predict and navigate potential investing obstacles when necessary. In addition, a business plan may be required if you intend to invest in several properties. It may also be a requirement if you need to include business partners or associates as well as more investors.
If you are already well-established as a multifamily property investor, a business plan may also be essential if you want to refinance, upgrade or increase your profitability. Having a clear, concise and comprehensive business plan will also help you stay organized throughout your investment projects.
Components of a Business Plan for Successful Apartment Investing
The main components of an ideal business plan for successful apartment investing include the following:
- Mission Statement. The major element of a successful business plan for apartment investing is typically a short statement of your reason for operating this business. It should contain an explanation of what your expected rate of return is and what you have hopes of it enabling you to provide to others. A sample statement may explain that you plan to create wealth for your investors while providing safe and enjoyable living spaces for apartment residents.
- Investment Strategy. This is a summary of your plan for making a successful multifamily property investment. It describes the type of investment real estate and explains your blueprint for making it a lucrative investing project. This strategy statement can also reveal your financing plans, renovations, rental rates, property management, exit strategies and other aspects of your overall investment plan.
- Target Market Data. Select a specific target market for apartment investing. It is essential to research both geographic and demographic data on your market (or markets). Your geographic research should enable you to determine the locales in which you want to invest, including the major market, submarkets and individual neighborhoods.
In terms of demographics, you want to decide on the ideal property owner, the market value of the property and the potential renters in the area as well as their income level and lifestyle. You may also want to explore successful methods for advertising empty apartment units for rent, such as online video ads, media advertising and posters placed in the locale.
- Investment Financing. This section explains how you intend to finance your apartment property investment using a combination of debt and equity. Your investment equity is comprised of the cash sources to be used for financing your investment. Any general partner or limited partner investments or plans for joint ventures should be noted.
The explanation of debt should give details concerning the type(s) and amount of debt that you plan to use for the property investment. It should also include the expected loan-to-value (LTV) ratio and debt interest rate. For instance, let’s say that you are the general partner (sponsor) in a multifamily syndication investment property deal with a property price of $5 million.
Your investment financing plan may state that, as the general partner (GP), you will invest $200,000 of equity. The passive investors or limited partners (LP) plan to contribute $800,000 of capital as equity. These combined amounts equal $1 million. You intend to acquire a small agency loan or commercial mortgage-backed securities (CMBS) equaling $3 million at 75 percent LTV and an anticipated interest rate of about 5 percent.
Especially if you are a beginner, acquiring financing for an apartment investment is a major goal and concern. Before you can produce an effective financing plan, you need a full understanding of your own financial profile today. Determine how much cash you have for investing. Decide whether you have equity that you can use for your property investment.
You may have enough cash to fund your apartment investment on your own. However, there are good, reliable alternative options for financing your property purchase. Whether you are investing with cash, equity or a combination of both, your business plan should include a financing section that details how you intend to finance your apartment investment.
- Rental Marketing Strategy. Good marketing practices are especially important to the success of your apartment investment plan. An excellent marketing strategy is essential if your investment property has ongoing issues with maintaining full or nearly full occupancy rates. If you plan to renovate the property for the purpose of increasing rents, high-caliber marketing techniques are also a necessity.
Local television and radio ads, flier handouts and local business and organizational sponsors are also excellent options for your property rental marking strategy. Your marketing plan should also include paid online advertising along with social media ads. Your plan may also state the amount of capital that you intend to allocate to each type of advertising and marketing.
- Financial Projections. Most lending agents require that you submit comprehensive financial plans before approving your loan application. If you generate financial projections, they will enable you to compare your profit level goals to your real progress. The financial projections are often presented as a pro-forma statement of profit and loss (P&L).
For your own benefit, you may decide to produce the best and worst possible projections of your statement. This can prompt you to devise backup options for various possible advancements or setbacks in your investing. This exercise will also help you identify the primary assumptions that you have used in making your projections. Examples of these assumptions are the annual rental rate increase or the occupancy rate.
- Versatile Exit Strategy. Your business plan should include a versatile exit strategy that answers multiple questions. It should explain how long you plan to hold your investment property or real estate portfolio. Perhaps you are the GP of a large apartment complex investment that also has LP investors. When will you return their capital, and how? Will you utilize strategies to defer taxes like a 1031 exchange for exchanging your property for another multi-unit or commercial property?
- Property Management. This aspect of apartment investing is also quite important. Some investors who purchase small multifamily buildings of 10 units or less choose to manage these properties themselves. Yet the majority of real estate investors engage the services of an outside property management team. Your business plan should clarify which of these management options you will use.
It should also state the expected cost of your property management services. If another partner of your investment deal will use their company for your investment property management, monitor the managing procedures for any signs of overcharging. In addition, ensure that financial arrangements and fees are well-explained in writing.
- Accounting, Legal and Asset Management Services. All apartment investors need to have an experienced accountant and real estate attorney. Investors in multiple apartment buildings or upscale properties often benefit from working with a well-qualified asset manager.
This professional can oversee the well-being of an apartment property portfolio while reducing costs and boosting profitability levels. Your business plan should include your planned method of finding these essential professionals to work with as well as the cost of their services.
Change Your Business Plan as Needed
Always remember that your business plan is not set in stone. It is merely a guide or template that can help you stay focused on your investing goals. The real estate market can change, and lenders may revise their requirements. Service providers constantly alter their costs. In order to stay current, you must stay flexible and be ready to change your business plan as needed.
To achieve success as an apartment investor, you need a well-designed and developed business plan. You must be totally committed to performing due diligence and learning about all aspects of multifamily property investing. It is essential to research the locales where you intend to invest thoroughly and to carefully assess each investment property.
If you are pooling your capital with other passive investors in a syndication multifamily investment project, you must also perform comprehensive research on the syndicate. Determine the success rate of the syndicate and the sponsor of your property investment deal. Whether you are investing in a small to mid-size apartment building or a large multi-unit complex, you need a reliable, detailed business plan to help you set and adhere to top-caliber investing goals.
When you have a top-caliber business plan, you will be prepared to predict the occurrence of serious potential investing obstacles. Also, if you plan to invest in multiple properties, a quality business plan may be required. If you are currently an established, experienced multifamily property investor and need to refinance, upgrade or enhance your profit levels, an excellent business plan may also be a necessity. Success may be closer than you think possible when you operate with an optimal-quality business plan.