We here it a lot... investing in real estate is not a business, it is an investment strategy.
We want to let you know that, just like with anything there is a right way to go about something and a wrong way.
Real estate is a very lucrative market. According to Forbes " The Real Estate industry has produced a total of 163 billionaires, the third most of any billionaire producing industries.
I find it hard to believe that these 163 billionaires just randomly started investing in real estate and all of a sudden became billionaires.
Do you think that there is any chance that they took a different approach? A business approach?
Just take a look at Donald Bren, now the richest real estate tycoon in America, establishing a net worth of $17 billion dollars and owning a real estate investment firm "Irvine Company"
I would say that this guy and hundreds of others treat real estate investing like a business, wouldn't you?
In order to treat your real estate investing like a business, you need to begin thinking and operating like an entrepreneur.
You have to take a step back and look at the grand scheme of where you want your business to be and how you will get there.
The majority of real estate investors, let's say 95% either, use real estate as another investment vehicle to hold their money (typically overpaying and not finding great deals) or they are sole proprietors, who are always on the go nonstop and can't seem to catch up or get ahead.
Does this sound at all like you?
If so, continue reading and hopefully we will give you a brief outline of what our business structure and business plan looks like and is intended to develop into.
Real Estate Departments & Systems
We have put together very detailed systems and processes to allow us to identify, purchase, hold and sell property. Each category that we will discuss has built in systems to allow us to hire future employees, scale our business and increase our revenue year over year. The categories to operate our business are:
Marketing/Lead Generation
Acquisitions
Financing
Construction/Rehabbing
Sales
Property Management
Business Management
Business Development
We discuss briefly each one of these categories and elaborate in detail in our Operations Manual the systems dedicated to growing our business.
1) Marketing
The key to our lead generation strategy is implementing a creative marketing plan designed to attract motivated sellers into our sales funnel. Our plan will be primarily based on a local inbound plan meant to dominate our market. Our main marketing focus will be to dominate the internet. This means building an online presence and generating leads through SEO, lead magnets, content creation and social media. Currently, we have developed an asset through our website and blog intended to dominate all highly searched keyword terms in our market. We are taking this approach because we feel that inbound marketing is the most cost efficient marketing tool to generate high-quality leads. We plan to educate all of our site visitors of not only the process of selling to a real estate investor but also all topics concerning real estate. This will increase our exposure online and create an atmosphere where search engines find us as the authoritative figure in our field. Although we will spend a lot of time implementing inbound marketing techniques, we have devised an outbound marketing strategy. This plan involves:
Direct Mail
Bandit Signs
Newspaper Ads
Guerilla Marketing Techniques
The more leads that we can bring into our sales funnel using effective, cost efficient marketing strategies, the more properties we will be able to act on to increase overall revenues for our company.
2) Acquisitions
Our acquisition team will be responsible for qualifying our leads, setting up walk through’ s, making offers, negotiating and implementing a due diligence process. An efficient acquisition process will allow us to evaluate and make offers on more properties while also turning over valuable information to construction department. After a lead has been generated, qualified and profit potential has been determined our next step will be to make an offer on the property. When we set up an appointment to view a hot lead where we think there are good margins, our acquisition manager will be required to bring with him:
A contract to purchase
Lead paint disclosure
Property disclosure
Any additional information we have to benefit the homeowner's situation (educational tools)
This will allow us to make an offer on the property on the spot and have the homeowner fill out all the information that will be needed to begin the closing process. We will carefully outline the benefits our service offers our clients and explain to them the details on the process of selling their property to our business.
When purchasing from the MLS or multiple listing services, we will have a different offer system. We will have acquisition technicians filter through the MLS twice a day searching for specific keywords such as fixer upper-must sell-contractor special-gut-TLC-needs work-motivated seller-quick close-cash only- handyman special. These keywords will lead us to properties that are either in poor condition or the homeowner is motivated to sell their home. Once we find properties we are interested in, we will contact the listing agent and see if the home is open for sale to investors. If the homeowner is willing to work with an investor we will send a purchase contract through the internet to the listing agent.
Once the purchase contract is in place and the offer has been made, typically negotiations will begin. Our negotiation system is based on initially offering 10-15% below our Maximum Purchase Price. If the homeowner is not willing to accept this offer, we have some room to negotiate. Our next offer will be at 7.5-10% below our MPP and we will consistently work this system until we reach out maximum purchase price and we can offer no more. At that point, we will tell the seller that this is our final offer. If they do not accept we will not purchase the property and move onto another opportunity.
As stated, our marketing focus will be targeted towards specific buyer personas that fall under the category of motivated sellers. We will be actively seeking out motivated sellers with identifiable, distressing issues that force them to sell their property at discounted prices. With that being said, every lead that we generate will qualified and in order to qualify these leads we have specific software that we developed to ensure our required profit will be made on every purchase.
For example, if we receive a lead and determine from the numbers that this will be a good opportunity to use the rehab and sell vehicle, here is a brief guideline on how we will evaluate the property.
Determine the After Repair Value – The first step in any evaluation will be to determine the after repair value of the property. This will give us a better idea of exactly what we will be able to sell the property for after we make the necessary repairs during the construction phase. We will determine the ARV on a property by running a comparable market analysis on our subject property, basically comparing what similar properties have sold for, are selling for or have pending sales on.
Determine Repair Costs – When we first make contact with a homeowner who is interested in selling their property, we qualify the lead to find out as much information on their situation and property as possible. We follow a strict script to retain this information. Most of the time from this information, online photos and our team’s construction knowledge and experience we can come up with a good rough estimate. This will allow us to determine if this is a hot, warm or cold lead and if we should immediately set up a meeting to go out and get a more detailed estimate on the repairs. When we set up this meeting, we will our general contractor meet us at the site, to begin creating a brief scope of work. This document will be a more detailed examination of what how much the rehab will cost us for this specific job. If we do determine that we will move forward with a purchase on this property, we will put a 5-day inspection contingency in the contract. During this period we will go to the property and create a very detailed scope of work that will portray the exact repairs this project will entail.
Holding Costs – The average rate of turnover for a rehab and sell will be 4-5 months. We will continue to implement systems to make this process more efficient. However, with that being said, from when we purchase the property to when we close, there will be costs that we will incur. These costs include:
Taxes
Insurance
Utilities
Loan Payments
Closing Costs (Purchase & Sale)
Real Estate Commissions (Sale)
We will have a great understanding of these costs before we move forward with the project and typically will be able to estimate to the dollar.
Required Profit – For each project, we will have a required profit amount that will be made depending on the after repair value of the property. We will always have the intention to increase our profit margins on each project and try to negotiate the best price possible to increase revenues and profit. Since we will be working in the median home sale price range, our profit schedule will work like this:
ARV > $100,000 = $15,000 in profit
ARV $100,000 - $150,000 = $17,500 - $20,000 in profit
ARV $150,000 - $200,000 = $22,500 - $27,500 in profit
ARV $200,000 - $300,000 = $30,000 - $40,000 in profit.
So the profit will be determined by the after repair value we produced through our comparable market analysis.
Quick Formula – We want to quickly explain a simple formula that we will use to initially evaluate a property. Through this formula, we will be able to determine the maximum purchase price that we will offer on this specific property. The formula consists of:
ARV – Repair Costs – Holding Costs – Required Profit = Maximum Purchase Price
This maximum purchase will be the number that we have to stay under in order for us to secure our required profit.
Our profit margins we require range from 15-25% per deal. This profit margin will allow us to generate profit, pay operating expenses and manage the business.
3) Financing
An integral aspect of our business will be our capability to raise money from private money lenders, build relationships with hard money lenders and traditional banks, establishing joint ventures and leveraging our initial cash investments ensure that we have enough capital to act on projects that meet our revenue expectations.
The main source of funding that we will focus on is raising money through private money lenders. Private money lenders issue loans with best the terms and charge the most reasonable interest rates. Our goal will be to build quality relationships with 8-10 private money lenders. These private money lenders will be used on projects where margins are not significant but still meet our minimum profit requirement.
We will then leverage hard money lenders on projects where we have a large spread for profit margins. This is because hard money lenders tend to charge higher interest rates and fees, so the money can become much more expensive. We will also build relationships with local banks and lenders to leverage our buy and hold portfolio and ensure we will be able to get traditional mortgages on multifamily projects we intend to hold. These relationships will also be used for projects that we purchase in cash, make necessary repairs, rent out and cash out after 6 months into a traditional mortgage loan.
Joint ventures will also be an integral piece for project funding, although we will try and keep JV’s to a minimum due to shared profits. These joint ventures will also be built on relationships with other trustworthy investors who would like to partner on a specific deal where margins are significant. Our goal will still be to reach our minimum profit expectations through these JV’s but are willing to take a slight decrease in profit depending on the deal.
4) Construction Process
The construction and rehab division is a major factor in determining the success of our overall company and business model. Our company’s approach to rehabbing properties starts immediately when we come in contact with a lead. From the initial contact, we will qualify the homeowner’s property through conversation to get a better understanding of the overall condition of the property. Once we run the numbers and determine this is a property that we may be able to move forward with, we will set up a meeting to put together a more detailed analysis of the property. This analysis will be documented in a software we created to better organize our scopes of work for each specific project.
Once we put the homeowner under contract, we will have 5 days to complete our due diligence and ensure that we have accounted for all variables. This scope of work will determine exactly what will be done on this specific project. In order to become more efficient with our projects we have put together a binder system for our material lists that we will use on all of our projects. This material list consists of 3 – 4 options of each piece of material and is broken down by quality.
For instance, if we are rehabbing a property with an ARV under $100,000 we will use our lower priced material. If we are rehabbing our property with an ARV of over $200,000, we will be using our higher priced material since we will have higher margins on these projects and since higher priced homes call for better quality.
From the scope of work and material lists that we have produced we will be able to put together a budget for our job. This budget will allow us to track all of our expenses pertaining to the job in question. This will ensure that we are meeting our minimum required profit. Also from these two documents, we will be able to produce a schedule for the job. This schedule will keep the rehab moving efficiently in order to limit our holding costs per job.
All of these documents will give our general contractor and project manager a detailed analysis of what sub-contractors we will need to hire for the property, what material needs to be purchased. By implementing sub-contractors, we will speed up the rehab process and be able to turn over our properties in a more effective manner.
We will continue to evaluate all of the systems that we have in place in order to limit our time on each job and do more projects per year.
5) Selling Process
Statistics prove that more home buyers are looking for turnkey properties and are unwilling to purchase properties that require additional work. The team that we have assembled has mastered the craft of construction and pride themselves on putting together a quality product for resale. This is where we feel we have a competitive advantage over all other houses that will be listed for sale.
HS Property Funds will be selling properties for the same prices that other houses will be selling for. The only difference is that we will have a completely remodeled, turnkey property while our competition is typically selling outdated properties. Completely remodeled, fully updated properties are very uncommon in our current market.
Another competitive advantage that we have over our competition is that we will be selling our properties in house with no real estate agents. This gives us the opportunity to eliminate all 7% or reduce commissions to 3% if we sell to a buyer who is using a real estate agent.
We have extensive knowledge in inbound marketing and use this knowledge to create enough exposure through landing pages, paid Facebook advertising, social media and other lead magnets. This allows us to increase our profit margins per deal and add to our total revenues.
During the negotiation process, the homeowner will get a detailed breakdown of how we arrived at our current offer price. We do this so we can educate our clients on the exact process and make them feel comfortable with the transaction. This presentation will consist of:
Comparable Market Analysis – Showing the client an estimated price that we will be able to sell the property for.
Net Profit Derived From Listing With Agent – This will compare the purchase price we are offering, along with our terms of the deal to the net profit they would receive from selling to an agent. A simple illustration of the process looks like this:
The net difference to the owner is $25,575. This information will be provided to the client. This number may seem like a large amount, but remember this seller has a motivation or need to sell their property and the advantageous terms we offer interest sellers in this situation.
Educational Information On Their Specific Situation – This is a tool that we use to build trust with our clients to ensure them that we are looking out for their best interest. If the homeowner is behind on mortgage payments, we will supply them with information guides on the foreclosure process. If the homeowner has inherited a property and is unaware of the process, we will provide them with information for this specific situation.
Purchase Contract/ Lead Paint Disclosure/ Property Disclosure – These are the tools that we need to close a deal and take the property off of the market. We bring these tools with us in our folder to hot leads so that we have the ability to close on the property at our visit.
6) Property Management
We understand that an integral aspect of success is the ability to properly, effectively and efficiently manage our rental properties. This means creating specific systems to maximize rent, evaluate and retain tenants, make repairs add value, reduce operating expense and increase our total net operating income.
Our main goal in our business is to get to a point where we only focus on income producing activities. This means initially we will be hiring a property management company to help manage and organize our properties. We will be going through an extensive interview process to find a property management company that shares our values, work ethic and offers invaluable experience to help build our portfolio.
7) Business Management
The ability to hire great talent, direct this talent and other resources within our organization to advance our strategic goals will enable us to scale and create a business that operates without the direction of the owners. Our business management department will be in charge of strategic planning and organization to better develop our companies business goals and business strategies. We will be consistently creating better systems throughout each department in our business to better accelerate controlled growth. Our business management department will oversee both internal data and external data about our industry, markets, and competition to put our business and employees in the best position to gain a competitive advantage.
This department will also be responsible for decision making within the organization, such as the choices both internally and externally that effect business operations. This entails making the final decisions on which properties we will purchase and reconfigure our buying criteria based on market conditions.
Throughout the life of our business, we will continue our search for technology that will allow us to automate certain aspects of our business. We will also continue to track and monitor our information within our CRM to easily track contacts, leads, and other marketing data.
We also thoroughly believe in the business management department’s interpersonal role. This will involve communicating with customers, employees, and suppliers. Leadership starts from the top down and our business management department will set the tone and atmosphere of the organization. This also means putting employees in specific positions to manage programs and projects that further business growth.
8) Business Development / Expansion
As we are developing this business and we get all of our systems in place, expansion and growth will become a focus. Our business development department will be in charge of growth, building valuable relationships with key players, creating investment opportunities in order to diversify our portfolio and expand into other profitable niches. Once we are at a point where our residential investment business is running by itself, we plan on getting involved in development projects and commercial projects while exploring additional investment strategies.
A key role for our business development department will be to build ongoing relationships with private money lenders. Initially, this will be the sole focus of this department to ensure we have funding for the leads that we are generating. This means identifying possible private money lenders and pitching our business model in order to build and maintain relationships.
This department will also be in charge of researching competition to identify new opportunities, systems, and leads.
Wrapping Up Our Real Estate Investing Business Departments
How will you grow your business? Do you think you will be able to grow your business by yourself and take on all the tasks for each one of these divisions throughout the life of your business? When first starting out this will typically be the case, but you need to devise a plan to allow your company to grow and scale to allow your business to operate without you.
These are the departments we chose to implement in our business, however you can choose to implement different division as you deem necessary. Remember that your systems in your divisions will constantly be tailored to enable your business to operate more efficiently.
Let us know in the comment section below how you tailored your business. Also, if you are in real estate investing and have not yet taken a holistic view of your vision and strategy it may be time to take a step back and begin this process.
We hope that this post gave you a better look at how a real estate investment business can be set up and offer you guys some ideas on how to set up your business.