Create the Plan

Moving on…..

Now that you have established the market and what will bring people in. It’s time to build a strategy. First and foremost address the profitability. Though I am a firm believer that even a property that operates at a net zero profit, but pays for itself and grows with the market, is still a viable portfolio building tool depending on the future casting involved, I still think it is always best to create a revenue stream that adds to the monthly income.

Taking a moment to assess your strengths is important. Obviously a fully finished and turn-key space is desirable, but I subscribe to the notion that adding value to the property will only help encourage growth and profits. If you are a contractor by trade, being the point person and arranging all the subcontractors and projects that need to be done, essentially being your own construction manager, is perfect. Use this strength and tackle what needs to get done. If you are approaching the project from the perspective of someone who doesn’t know which end of a hammer to use, but you can research and analyze all market trends, growth opportunities, and rentability in your specific market, then lean into that. Each strength has its place and there isn’t one strategy that is flawless.

If you are the knowledgeable builder with experience in what draws people in and how much it costs to do, then find the property that needs the work and is undervalued. To the counter point, if you have the knowledge and are able to read the market, find the property that doesn’t need much and may be in a prime spot for growth and marketing.

Now that you have your strengths in line it’s time to forecast the profit margins. Simply put, a very easy strategy is to go on the internet and determine what the annual average growth of the real estate market is for the area. Though I don’t use this in consideration towards rent prices since I don’t see a need to try and project what the market will always do in the future and add that into potential profits. What this does, is tell you if you are getting into a market that has potential or if it is in need of revitalization, or even if that revitalization has started. I use this metric to give me the confidence that my investment isn’t being wasted, and that there is stable growth and one day, if I have to sell for any reason, I won’t be underwater. I don’t really rely on an emerging market that is going crazy, but more of a market with maybe a steady 5% to 10% appreciation per year. This helps combat inflation on the investment.

So the market is solid and good for growth. Excellent. Now take that metric and throw it away. That was simply meant to confirm that the market you are entering is solid, but realistically won’t be realized until you sell or refinance. Simply put, if you are only making profit from the appreciation of the property, there are probably better choices to be made. Now do the research to see what all levels of rent go for. If you are looking commercial then you need to look at exactly what all levels of rentable square footage are going for. Everything from the warehouse, to the chic boutique clothing store with perfect placement. Gather all those numbers and figure out where your property will fit. If you are looking at short or long term rentals, then you should get both the averages. You want the per night minimums of the short term and the lowest potential for the long term. What these numbers will help you realize is what the market can currently sustain. Don’t get lost in the thought that you are going to break the mold and create the perfect one-of-a-kind space that can’t help but rent for 50% above the average. Come to terms with what the market has to offer and what the market sustains. If you outperform than that is all the better for you, but getting into it with realistic expectations is necessary.

Once you have the highs and lows calculated take the time to really analyze your budget and what end of the market you can be in. If the houses in the market are selling for $400,000 and you find one for $200,000 but needs $85,000 in renovations and you only have $100,000 to invest in this project its likely that’s not the best option for you. Now if you are the type of individual that isn’t bothered by debt then this is the place to apply that mentality. Honestly for everything the world of investing has to say, there is something to be said for using debt to achieve a goal you have researched and know will produce revenue. If you are confident, believe in the idea, and have the ability and drive to see it through, then there is no reason taking loans or working with credit cards to get there isn’t a viable strategy. More over you just need to understand what level of stress you want to incur. If you debt yourself to the max, then be prepared to sweat it out until the project is completed. You could also cash role the whole thing and know you can weather the storm. I’ve been in both positions and handled them both. Honestly, it just comes down to your mental capacity. If you are ambitious and young with nothing to loose, a great business plan, and a life ahead of you to rebuild if things go sideways, then I say use the debt. But it’s completely up to you.

To illustrate both options and put some numbers to the ideas, I would say if you have amassed about $30,000 to $60,000 and have a 680 credit score, or above, then you could debt your way into the rental game. This would give you enough working capital and with all the creative financing options on the market you could sustainably move into the market without risking so much, that the simplest hiccup would derail you. If you have over $100,000 saved and you find the right market, this amount will still require you to use debt, but you will have far more working capital to dig yourself out of holes or pay your way through problems that arise. I will be completely honest since I have been through so many different property deals. I know there are plenty of gurus that claim to have the magic sauce that can carry you from having no money, to owning a real estate empire in no time flat. But in the real world, where I’m not looking to sell a course on how to achieve this, I think it’s more practical to be realistic with your investments. Let’s be honest these are investments that many people go a lifetime without being able to afford, so if you want to be successful, then you need to be practical. There are other options for investing that I think should be realized before you step into the real estate game.

With all this established and some basic numbers compiled, take the search to the streets. I don’t have a crystal ball and no one does. Finding the deal takes time and negotiation. You may bid on a few properties and fail at attaining them, but if your research is solid and the market is what you want, then wait it out. I’ve sat on a market for years and never quite found the deal I wanted, but with enough time and patience you’ll find the deal and be confident you made the right choice.