Renting out your home or buying an investment property can be an excellent way to earn passive income and expand your portfolio. With about 36% of U.S. households currently renting, there is clear demand for rentals on a national level, and that can be seen in many locations across the U.S.
For your rental business to succeed, you need to have a clear plan for success. This is known as an investment strategy, but you could also call it a business plan. Your plan will help you to ensure that you establish and reach your investment goals as well as generate enough income to not only cover the expenses associated with maintaining a property, but also generate a profit at the end of the day.
Why bother creating a business plan for your rentals? Because it helps to keep you on track and the money rolling in. Statistics show that having a business plan improves your chance of success in business by about 30%. While renting out properties isn’t exactly a business, the truth is that you should treat it like one. If you think of your rentals as the serious money-making venture that they are, then you’ll be able to ensure that you’re not only generating income from them, but turning a profit as well.
What Is a Rental Property Business Plan?
A rental property business plan provides a snapshot of the current status of your rental property and outlines the goals you want to achieve and the growth plan for the next few years.
Some of the things you’ll want to consider covering in this plan include:
- Company description (optional)
- Investment strategy
- Local market analysis (an overview of the local housing market and rental market)
- Marketing strategy
- Financial plan
- Real estate acquisition plan
Like any other business, having a clear outline of what you want to achieve with your investment property can help you plan the next steps and prepare for any setbacks. A business plan is a core part of your rental property investment analysis and will show you what steps you need to take to reach your goals. It’ll also help you to determine whether you’ll generate a good return on investment (ROI) on a potential property.
If you plan to acquire and operate rental property, you are more likely to succeed in the highly competitive real estate industry if you have a well-thought-out business plan.
Learn more about rental property investment analysis here. Make sure you set yourself up for success.
Why Do You Need a Rental Business Plan?
A business plan is vital for more businesses today and you stand to gain if you have one for your rental properties as well. Let’s look at some of the main reasons why you’ll want to consider creating a rental property business plan.
- To Determine the Feasibility of Your Rental Unit
A plan will help you to choose the right market to invest in. This involves researching different housing markets to find one that is expected to bring in the returns that you’re looking for. Markets vary considerably, with some offering better opportunities for cash flow, and others a stronger rate of appreciation. Some markets offer both. Make sure you look at what’s out there to find a healthy market where you’ll be able to invest for a profit.
- For Financial Budgeting and Forecasting
Financial planning is one of the core reasons you need a business plan. As a landlord, you’ll have a handful of fixed and maintenance costs on the property. You need to consider your purchase inventory, sales plan, and expense budget.
You need to incorporate forecasts in your business plan based on the current rent prices and market statistics. For instance, the average rent price for single-family homes went up during the first half of 2022, hitting a national average of $2,495 a month. With your plan, you’ll need to get more granular with your research and dial down to a local level. Look to see what housing prices have done historically in your prospective market. Check to see what other, similar properties are renting for. While this is just a projection, you can use this data to get an estimate how much you’ll make monthly and plan your expenses.
Want to learn more about how to generate better returns on your rental property? Read this article.
- It Helps Track Your Business Goals
If you are dealing with multiple properties, one of the goals could be to maximize the returns on your portfolio. A business plan acts as a guide on how to run, structure, and operate the rental properties. You can detail all your plans and follow through if you have written objectives.
For instance, if you are planning to secure a business loan or make other key decisions, a business plan helps you keep track of this. It can also help you achieve key milestones like getting tenants in all your units. It’s a roadmap of how you want to achieve each of your goals.
- To Better Understand the Market
If you are a first-time landlord, you’ll want to make sure you don’t forget any important steps when researching potential markets and rental properties. A business plan should help you uncover important research about your local market and investment opportunities, including:
- Important local trends (new businesses, employment rates, population growth)
- The size of your target market (how many locals are renters?)
- The direct and indirect competitors (other local rental properties, new apartment buildings, etc.
A rental property business plan will help gain a deeper understanding of the marketplace. In return, you can strategize much better and use this knowledge to make smarter investment decisions.
- To Attract Investors
If you plan to grow your investments and bring investors on board, then a business plan can help. The information in your plan can help potential investors or lenders understand your plans.
Potential investors will usually want to see your goals, strategy, and financial projections.
When you have a business plan, or investment strategy in place, it becomes easier to explain your activities .
- To Reduce Your Risk
Starting any type of business venture can be risky. In fact, data shows that about 20% of new businesses fail during the first two years after opening, 45% during the first five years, and only 25% of new businesses make it to 15 years or more. Still, the good news is that there’s a lot that you can do upfront to increase your chance of success. Creating a detailed business plan to take a great deal of risk out of your venture.
- To Make Your Rental More Attractive to Potential Tenants
As you conduct research for your rental property business plan, you’ll get to understand what local renters are looking for. With this information, you’ll know what type of property to look for in the market that you’re thinking of investing in. For instance, maybe you’ll discover that one-bedroom apartments in a college town tend to rent quickly and for a competitive price. You’ll also know what kind of upgrades to make. Maybe most people have pets in your location. In this case, making your rental pet-friendly and choosing, say, hard floors instead of carpets when it’s time to upgrade can make a big difference to pet owners.
Things to Consider Before Writing Your Rental Business Plan
Before creating a business plan for your rental business, here are some of the factors you need to consider.
- Your Goals
What’s your big-picture goal for the rental units? You need to answer this question before creating this plan. You might need the rental unit to earn a passive income, as a retirement plan, or as an additional income. Your goal can be expressed as a financial figure. Maybe you’d like to earn 10k per month as passive income, or reach 30% asset appreciation after ten years. The goal will determine the direction you’ll take as a landlord or rental property owner.
Knowing the “why” will help you overcome any small issues, keeping you on track. For instance, if you want to retire comfortably using the income from the rental properties, your business plan will be mapped out for a long-term investment.
- Specific Objectives
You also need specific objectives that are measurable and clear. These should be the steps that you’ll need to make to reach your big-picture goals. Some examples of objectives can be:
- Invest in two properties by the end of the year, each one generating $400 per month in profit
- Earn a net profit of $50k per year by year three
You can have one key objective or multiple, depending on your investment plan. Once you have a clear set of goals, you can tailor your business plan accordingly.
- Your Strategies
Your strategies as a rental property owner are tied to your vision and objectives. For instance, if you want to increase the number of tenants in your properties, your tactics can include how you will market your properties or leveraging social media to reach out to more renters.
Looking for more real estate investment strategies? Get started here.
- Working Methods
If you’ll be working alone, you need to determine how many hours you’ll have to dedicate to the business. On the other hand, if you’re planning to invest outside your own local market or looking to expand your portfolio, you’ll want to consider outsourcing a property manager. Before drafting the details on a rental property business plan, it’s important to factor in what approach you plan to take with your property management. It’s a good idea to factor in the cost of property management when running your numbers, even if you’re planning to oversee them yourself at first. That way, if you do decide to outsource down the road, the numbers will already be included in your budget and plan.
How to Create a Rental Property Business Plan
Once you’ve decided what needs to be included in your business plan, it’s time to write it down. Keep in mind that your plan doesn’t have to include each and every one of the following sections. The goal of your plan is to create a guiding document that summarizes your goals and plans so it can be as short or as detailed and elaborate as you’d like. If you’re trying to get funding, you might need a more detailed plan, if you’re thinking of starting out with one rental then your plan can be a short one-page document. It’s up to you and depends on your goals.
Now, let’s take a look at some things that you can include in your business plan.
- Executive Summary
The first page of your plan is the executive summary. This section is a brief summary of each section of your plan. Although it introduces your business, it’s usually the last section to write because it summarizes everything.
This section should summarize the main points in your rental property business plan
Some of the things to include in the executive summary include
- Company description (optional)
- Investment strategy
- Local market analysis (an overview of the local housing market and rental market)
- Marketing strategy
- Financial plan
- Real estate acquisition plan
- Company Description
This section details your rental business, business partners, property locations, and company structure. If relevant, include all of your team members, their experience level, job descriptions, and other information.
Additionally, you should state when the company was started, a background of how you met your business partners, and mention any licenses you hold. Include milestones achieved, such as the number of property acquisitions and occupancy goals. You should also explain your legal structure, whether you are a sole proprietor or an LLC.
- Investment Strategy
Your investment strategy should include your plan to achieve milestones that will help you to reach your projected big-picture goals. This can include the type of property that you plan to invest in, the projected returns that you’ll need each property to generate (cash flow, appreciation, or both).
- Local Market Analysis
In this analysis, you need to provide an overview of the local rental property market. For this section, you need to have a summary of the local housing market and rental market.
Here are some of the key things to cover:
- Whether the local economy is growing, stagnant, or increasing
- What local housing prices have done in the last ten years
- Average price-to-rent ratio
- Affordability
- Absorption rates
- Taxes
- Local schools
- Crime
This section can also be a good opportunity for you to ensure that the market you’re planning to invest in checks out from an investment standpoint.
Learn how to find a good market to invest in, and find investment-grade market data on the Renters Warehouse Market Research Center.
- Marketing Strategy
This should include how you plan to market your property to ensure that it gets in front of a wide audience. This is crucial for helping to keep your vacancy rates low.
- Financial Plan
A business plan should include financial projections and plans. Some of the financial statements to include are your balance sheet, income statement, and cash flow documents. These financial documents are critical, especially if you need to outsource financing. You can show the expected revenue and the capital that you need to continue investing.
- Real Estate Acquisition Plan
If you’re planning to scale your investments, then you’ll want to include a plan for real estate acquisition. How do you plan to scale your portfolio? This should include a growth plan with milestones and your plan for securing funding. See the best way to scale your portfolio.
If you’re investing to turn a profit, then it makes sense to treat your rentals like a business. A rental property business plan can help to keep you on track and working toward your investment and portfolio goals. It’s also crucial in helping you to ensure that you don’t tie up your capital in an underperforming asset. Finally, it will come in handy if you need to get funding from investors.
Once you develop your business plan, it becomes easier to hit milestones, especially if you want to grow your portfolio. Not sure where to start? Then keep it simple. Keep in mind that the length and details of your business plan are entirely up to you. In fact you can even create a one-page document if you’re just starting out, outlining your goals, strategy, and localized market research. Then get to work putting your plan into action.
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