Real Estate Investors: The Business Plan and Your Financial Forecast – Part II

When presenting a financial forecast, you really need to lay out exactly what your revenues are going to be. If you’ve not bought any properties at all, obviously you’re going to have zero revenue until you purchase your first property, and then maybe rehab it for a month or two, maybe a month to find a tenant, but then you should start to see some revenue, and the investor should see that.

So a three-month purchase period, two months rehab, one month finding a tenant, and then boom, they can see the revenues starting to come in. Then maybe you start a second property and then you see that also. You see that takes some time, and then eventually you see some revenue.

Include Historical Numbers When Possible

If you’ve already got properties, you may want to show some actual historical numbers, what you did last year with that property or the year prior, or even both years. If you can show the property made $10,000 last year, $11,000 the year before, I expect it this year to make $12,000, so you can kind of see the normal progression, maybe as the rents have increased.

Include Expense Report

Lay out your financial forecast, and obviously you’ve got to include expenses, and make sure that as part of this process you lay out all of the expenses. Don’t shortcut it and certainly don’t be too tight with your assumptions here. I mean maintenance happens. Do not ignore it. Make sure you’ve got plenty of money in there for maintenance.

Make sure you’ve got money in there for vacancies. Make sure you’ve got some things in there for insurance and your property taxes, and then just administrative costs. All of your costs – if you’re going to be running to the property, your mileage and all those things – need to be incorporated into your financial forecast, but you need to think these things through.

How Are You Going to Finance the Deal?

Part of that is where you need to demonstrate to your private lender how you’re going to finance your deals. Are you going to use private lenders as the primary source of funding? Or are you going to use banks as the primary source of funding and a private lender as the secondary? You need to lay that out as part of your financial forecast.

Ultimately that leads to the discussion with the private lender, and at that point you’ll say, “I need some secondary money. I’m going to borrow the money from my local community bank, 80{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} of the purchase price, and I need a private lender to help me out with another 10{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4}, 15{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4}, 20{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4},” and obviously your financial forecast would reflect that. You need to think these things through in terms of developing your business plan.

Mistakes to Avoid with the Financial Forecast

One of the things that I see a lot of times on business plans is 1) they’re not really specific enough, they’re too general, but 2) their assumptions are too tight. They’re not including enough costs. They’re assuming too many properties. They’re going to do five properties this year and they’ve never done a property before, so their assumptions I think are too aggressive and too strong.

I would try to be conservative, don’t be over-optimistic. I beat that home with some of my coaching students. I tried to parry that down and make them very realistic, so when they talk to a private lender their historical background and expertise makes sense given their business plan.

You don’t have a background where you’ve bought one property and a business plan where you’re projected to buy 12. That doesn’t make sense and people see right through that.