Apartment Investing Business Plans: What You Should Know
While to some, apartment investing may sound like a passive hobby, for most successful real estate investors, it’s a highly involved business endeavor. So, if you want to give yourself the greatest chance of succeeding in the multifamily investing game, writing an effective business plan is key. No matter the size of your potential investment, a business plan can help clarify your goals, as well as bringing potential obstacles to your attention.
However, if you plan to purchase multiple properties, or if you’re considering bringing in business partners or outside investors, creating a business plan is even more important, as you’ll likely need to share it with them in order to get their approval. Plus, the simple act of creating a business plan may help you gain ideas and insights that can make your investments even more lucrative. And, if you already own a multifamily property and are looking to upgrade it, refinance it, or simply make it more profitable, having a solid business plan is equally essential. While some of the below, such as choosing the market you want to invest in, may be redundant, most of the information is still highly relevant.
Elements of a Successful Apartment Investing Business Plan
Depending on the nature of your investment goals, you may want to have a specific business plan for each property you acquire, as well as an overarching business plan for acquiring a larger number of properties. While multifamily business plans can vary significantly in nature, they generally have a few shared components. These include:
Target Market (Geographic and Demographic)
Legal, Accounting, and Asset Management
Mission Statement: A mission statement is generally a one to two sentence explanation of why you are doing business. Ideally, this statement should include both what you plan to get out of the business arrangement, as well as what you hope to provide others. For an individual apartment building, a mission statement could be “Our building will generate wealth for my investors and I while creating a safe, comfortable, and enjoyable place to live for our residents.” For a larger-scale investment plan, a mission statement could be “I will utilize multifamily investing to generate wealth for my investors and I by acquiring 200 units over the next 5 years, while providing residents great places to live and excellent customer service.”
Investment Strategy: In essence, the investment strategy summarizes what type of property you will invest in and how you will make it profitable. This is a bird’s eye view, and can also include mentions of your plans for financing, property management, renovations, exit strategies, and other important elements, which you can elaborate on in future sections.
For instance, a specific plan could say “We plan to acquire a class C 15-25 unit property in the Atlanta, Charlotte, or Charleston markets, upgrade it to a class B property, and raise rents by 10-15%. We will hire an outside property management company to take care of management responsibilities, and plan to finance the property with a 70% LTV loan.”
Target Market (Geographic and Demographic): Choosing a target market, or markets is essential, both from a geographic and demographic standpoint. Geographically, you’ll want to answer questions such as: What markets do I want to invest in? What submarkets? Which are the best neighborhoods to invest in those locations? Demographically, you’ll want to answer questions such as: Who is our ideal customer? How old are they? How much money do they make? What do they look for in a place to rent? How do we best market to them?
For instance, a plan could say “We will be investing in a property in the Dallas, Texas market, in the Arts District submarket. Our target demographic will be singles and young couples making between $65,000 and $85,000 per year. We plan to reach them with targeted online video ads, local morning radio ads, and posters throughout the local community.”
Property Financing: This section should describe how you will finance your property using debt and equity. Equity includes all sources of cash that will be used to finance the property, and should include details any GP/LP investments and/or joint ventures that are planned. In terms of debt, details could include the amount and type(s) of debt that an investor plans to use on the property, the anticipated LTV, and the expected interest rate of the debt. For instance, a plan to purchase a $4 million apartment building might say “I, as GP, will contribute $100,000 of equity. LP investors are expected to contribute an additional $900,000 of equity, for a total of $1 million. We plan to take out CMBS or small agency loan of $3 million at 75% LTV, with an expected interest rate of around 5%.”
Marketing Strategy: Marketing is very important to the apartment investment process, especially if the property you want to acquire currently has occupancy issues, or you want to rehabilitate and rebrand it in order to raise rents. Potential marketing efforts could include online paid advertising and social media, local radio and television ads, fliers, and sponsorships of local organizations and events. For apartments geared toward college students, campus-wide promotions may also be ideal.
A good business plan should include which marketing efforts you plan to use, how much you plan to spend, and what your expected/desired result is. A plan might say “We will use paid online advertising and local fliers, posters, and banners, some which may be the result of sponsorships. We plan to spend $10,000 on paid online ads and $5,000 for fliers, banners, posters and associated ad costs over a 3-month period until we reach 98% occupancy.”
Financial Projections: Without making financial projections, you won’t be able to measure your profitability goals against your actual progress. Even more importantly, lenders generally require detailed financial plans before approving a borrower for a loan, so if you want financing, you’ll need to create a reasonable estimate of what the future may hold. This typically takes the form of a pro-forma profit and loss (P&L) statement that you will present to your lender. However, for your own purposes, you may wish to create both best and worst case scenarios of your statement, in order to create backup plans and determine how to best respond to various opportunities or setbacks. In addition, you will want to list the basic assumptions you have made in your projections (i.e. rents will increase by 1% over the next 5 years, occupancy will stay at approximately 95%, etc.).
Exit Strategy: How long do you intend to hold your property or portfolio of properties? If you’re the GP, and you have LP investors, how and when will you return their funds? Will you engage in tax deferral strategies, such as utilizing a 1031 exchange to exchange your property for another piece of multifamily or commercial real estate? The exit strategy part of your business plan should answer all these questions and more.
Property Management: Property management is another essential part of the apartment investing process. For very small properties (i.e. 5-10 units), some investors will take care of this themselves. However, most investors hire an external property management company to take care of this. In other cases, the owner or GP (or one of them) already owns a property management company and that company will take care of the management. Your business plan should state which of these options will be used and how much property management is expected to cost.
If you’re involved in a deal where one of the other partners will be using their company for property management, beware of overcharging and make sure that all fees and financial arrangements are specifically detailed in writing.
Legal, Accounting, and Asset Management: Every apartment investor needs both a good real estate attorney and an experienced accountant. In addition, larger investors with multiple properties may also want to retain the services of an asset manager, who can take a high-level view of an investment portfolio, monitor its health, and suggest ways to cut costs and increase profitability. So, who will you use? If you don’t know, how will you locate them and decide? How much will they cost, and are these costs reflected in your financial projections? Answering these questions will help put you on solid footing when it comes to assembling a professional team to assist you with your investment.
The Best Multifamily Business Plans Are Flexible
In the same way that 19th century Prussian military commander Helmuth von Moltke said “No plan survives first contact with the enemy,” no multifamily business plan will ‘survive’ contact with the real world. Markets change, lenders change requirements, and service providers adjust their costs all the time-- and your apartment investing business plan should reflect that. If you’ve realized that a new type of marketing could benefit your property, or that you want to look for properties in an entirely different market-- simply change your plan. Having a business plan is great, but it’s a template, not a stone carving, so allow it to guide you on your journey while not letting it restrict your choices.