Housing is a fundamental human need and many entrepreneurs are building multi-million real estate portfolios by starting real estate investment funds. Anyone wishing to start this type of investment vehicle should speak with a competent attorney who understands Securities and Exchange (SEC) law who can walk you through the maze of dealing with accredited and potentially unaccredited investors.
My job is to discuss how you write a business plan to attract these investors to YOUR fund. There are 6 parts to an investable business plan for real estate funds.
Market Opportunity: The best real estate funds have a specific focus or niche. This section is an overview of your investment profile. Are you investing in commercial property, multi-family residences, single family residential property, raw land or some other type of asset? Will you fix and flip, wholesale, or hold long term rentals? Are you buying raw land to farm or build a residential development? It’s important to be clear about the types of properties you’re buying, their average price ranges, and the geographic area you will cover. Investors become nervous if you’re buying every type of property from every location across the country.
Business Model: Tell the reader how the fund will make money and what the expected property cash flow is. How will your fund make money? Don’t overcomplicate this section. The easier to understand, the better. Here’s a simplified example of the business model:
We buy duplexes in New Orleans.
Buy and hold strategy
Average Price: $150K to $200K
Rent: $700 to $900
Cash Flow: 10% – 12%
Marketing Plan: In this section, discuss how you will find these properties. Some business models thrive with realtor involvement. Others don’t. Wholesalers who want to find deals not on the market or in MLS depend on social media marketing, radio and TV advertising, bandit signs and more.
You will also need to discuss your marketing plan for raising investor funds. Most investors want to know that you have ability to raise the funds needed to purchase and rehab properties.
Team: Strong businesses have great teams and the real estate game is no different. Real estate teams include contractors, lenders, title companies, realtors, and administrative personnel. Of course, the hardest people to find are reliable contractors. Discussing your plan to find and retain great handyman and construction talent can make the difference between you receiving funds and not receiving them.
Financial Projections: Investors want to see your five year financial forecast including a schedule of when you expect to buy properties, Cash Flow Statements, Balance Sheets, and Profit & Loss Statements. The average investor wants to be certain you’ll be able to pay their preferred return EVERY SINGLE MONTH WITHOUT FAIL.
Exit Plan: When and how can investors cash out? When will their principal investments be returned? In this section of the plan, you discuss how initial investments are returned.
Being able to pitch investors is vital. Here are a few tips with regards to pitching your investment fund:
Tell your story. Have you ever heard the saying “Facts tell. Stories sell.” It’s true. Don’t be afraid to tell the investor how you fell in love with real estate and why the business is your passion. Keep it short and sweet but people want to connect with YOU. A great story is the way to do that.
Clearly state the goal of the fund. I recently spoke with a prospect who’s buying houses in Texas. When we began speaking, he wanted his fund to buy apartment buildings and commercial properties in a growing Texas town. I suggested to him that he only discuss the fourplexes he wants to buy and say this…”We’re buying 10 fourplexes in this small town in Texas. Here’s why the town is a great investment. Once we own the 10 units, we’ll have $3 million real estate portfolio. Are you interested in learning more.” That’s it. Most people in the demographic that he was pitching would love to own part of a $3M portfolio. Don’t overcomplicate it.
Know your numbers. Understanding terms like NOI, Cap Rate, and cash flow are essential to raising funds. You must know the terms and your numbers for the deal.
Practice your pitch. Who’s your favorite actor? Mine is Angela Bassett. Angela never goes into an audition and wings her performance and neither do I. When you’re pitching investors, it’s an audition. The best pitches are practiced numerous times. The more money you’re requesting, the more you should practice. Ask one of your entrepreneur or investor friends to listen to your pitch and pepper you with questions. Practice makes perfect.
Follow up. After pitching an investor, follow up. Keep a list of investors that you have pitched. Use an Excel spreadsheet or a Salesforce database but don’t forget to follow up.
If you need help writing a business plan for a real estate investment fund, I would love an opportunity to assist you. Please contact me at wewritebusinessplans.com.