Financial Plan
In the Financial Plan section you will focus on painting a good, but realistic, picture of the financial health of your real estate investing company. If you have already began your investing activities you will want to include your current numbers, then forecast your sales, financing, etc. for the future. You want to be as realistic as possible with your projections, but keep in mind that it is these numbers that lenders will be looking at when considering you for a line of credit.
This section should be between two and four pages.
Sales Forecast
You will want to begin this section by stating whether or not you have prior profits from your real estate investing activities and how many years you have been in business.
After your explanation paragraph, you will want to get into the nitty gritty. This is where you need to sit down and really begin to think about the numbers you expect with your real estate investing. First look at your goals and decide where you believe your net (after expenses) revenue will be in 6, 12, 24, 60 months.
Is this number a realistic dollar amount that you truly believe you can achieve? Make sure that it is or you will be more apt to give up on an unattainable goal. Also, if a lender or prospective business partner believes your numbers are inflated beyond the true potential of the business model they may not view your financial plan as credible. It is important to aim high, but realistic.
Your gross revenue will include every dollar you will receive from all aspects of your business. This includes income from all deals, your rentals, and all other sources. Put it into a table like this:
|
Net #’s |
1st 6 Months
|
Year 1
|
Year 2
|
Year 5
|
| Net Profits From Sales/Deals | $ 40,000 | $ 100,000 | $ 180,000 | $ 320,000 |
| Net Profits From Rentals | $ 3,000 | $ 9,000 | $ 30,000 | $ 90,000 |
| Other (if applicable) | $ N/A | $ N/A | $ N/A | $ N/A |
|
Totals
|
$ 43,000 | $ 109,000 | $ 210,000 | $ 410,000 |
| * Assumptions used: 1. Average deal profit is $20,000 2. Average rental profit is $500 per month. | ||||
Be sure that when you are calculating your profits that you write down the assumptions you are using. For instance, I was using the assumption that average profit on a deal is $20,000 and positive cash flow per rental property averages $500 per month because I will specialize in duplexes. By knowing my assumptions you can tell that I plan on performing two deals my 1st six months in business and increasing it to 16 deals by year 5. You will need to spell out your assumptions clearly so a lender can see exactly how you will reach your numbers.
This is also where you will want to put any charts, graphs, or other figures to further illustrate your past and future sales. For instance; a pie chart that shows the breakdown percentages of your different sources of revenue or a line graph that shows the profit trend for the next five years would be great visual tools. If you know how to make these visuals I highly recommend placing one or two in this section.
Your sales forecast section should answer the following questions:
- What are your figures for gross revenues and net income in past years?
- What do you plan to generate for gross revenue and net income in future years?
- What assumptions are you making with regard to the number of deals per year, expenses, and profits per deal?
- Do you have charts and graphs to illustrate your financial history and future projections?
Break Even Analysis
Now that you have put your projected revenues onto paper you will want to work up a break even analysis. A break even analysis is just as it sounds. It shows what it will take to break even. You can look at this one of two ways (or both if you choose). For a “normal” business such as a restaurant or something of that sort you will often have large up front start up costs. A traditional break even analysis will chart out how long it will take to recoup your start up costs and begin to make a profit.
For most small time real estate investors the traditional break even analysis is not the best tool because the start up costs can be so low that it really doesn’t make sense to chart out an overall break even. However, a monthly break even analysis is an excellent tool for you and I suggest you place it in your business plan.
To calculate your monthly break even you will basically determine how many deals or how much money you will need to make each month to break even. If you are going to do real estate investing full time you will need to figure all business and personal expenses in this analysis. For example:
“Lets say that all of your personal expenses (i.e. home mortgage, groceries, car payment, etc.) add up to $3,000 a month. Your business expenses (i.e. marketing, gas, insurance, cell phone, lead generation, etc.) add up to another $3,000 a month. Your total monthly expenses are $6,000 a month. You must at least make $6,000 a month (actually more because of taxes and other reasons) just to break even.
Now, you have your revenue numbers from the previous section. How many deals will it take to cover your monthly expenses? Well, according to my example above, I plan on making an average of $20,000 per deal. But notice that in my first six months in business I was only able to make 2 deals. That means that I wasn’t able to meet my minimum expenses for a few months. Lets say I didn’t make my two deals until the 5th and 6th month. Months 1,2,3,and 4 all went without me even meeting my expenses. If my monthly expenses are $6,000 a month, I went $24,000 in the hole my first four months in business!!! Wow ..I wasn’t managing my business very well.
This is where my break even analysis comes in. I need to concentrate on covering my monthly expenses first, then go for the big money later. If I can do 1 $20,000 deal at the beginning of the month I am set for the rest of the month. However, those big deals are harder to come by. So …I will work in some smaller wholesale deals to cover the cash flow. My average wholesale deal is $3,000 so I only have to do two wholesale deals per month to break even or one retail deal. I will concentrate on the wholesale deals (while still looking for retail deals) until I meet my expenses, then I will shift a little more focus to the retail deals.”
A good break even really only needs to be one or two well written paragraphs. So, basically break down your monthly expenses for the reader and show them what you will do each month to break even. After you break even it is all gravy.
Financing Plan
For most people the financial plan is the worst part about writing their business plan. However, it is actually very easy once you know what to include. The basic questions you will want to answer are:
- What are your current sources of funds?
- What sources will you pursue going forward?
- In what amounts?
- Why do you need access to these sources?
- What assumptions are you making when projecting future funding needs?
- What will serve as collateral for these sources of funds?
Really, this section is all about how you plan on funding your real estate investing business. Do you plan on using your own cash, borrowing it from your uncle, getting a business line of credit, or going with conventional loans? Probably all of the above plus some others. Just write down where you get, and will get, your money from.
If you answer all of the questions above you will be in good shape. Be sure to be truthful and realistic.
One of the most important questions in the list is about your collateral. Anyone lending you money will want some type of assurance that they will get it back. With real estate investing the collateral is usually the property being lent on…but not always. Sometimes lenders will want to see that you have a significant amount of money, other pieces of property, or so on that you can put up for collateral in risky deals. So in this section write what your collateral will most often be. It will most likely be real estate if you are buying your properties right. If so, simply write:
“As a safeguard for our valued lenders we will only invest in low LTV (loan to value) properties at 65% to 75%. A trust deed secured by the investment property will entitle the lender to that property as collateral should I default on the loan. While we are confident in our ability to invest only in low LTV properties, we do have other forms of collateral upon request.”
Now that wasn’t so bad was it? Now that you have finished your Financial Plan section continue on.
Click continue to learn how to write the Important Assumptions Section in step 7 of 8.
