The Investors’ Game Plan, Part 1: Develop a Rental Business Strategy.
Looking to escape the 9-5 and attain financial freedom?
Most people who dream of launching their own business want to gain full autonomy and the ability to live their lives more flexibly, rather than simply being stuck behind a computer desk. Yet nearly half of all new businesses fail within their first 5 years of operations, mostly because they failed to plan adequately for the realities of running a company in the modern world.
In this 3-part series, we’re giving you comprehensive tips on how to get your rental business off the ground, by approaching it in the same way that a traditional entrepreneur would. Whether you’re looking into setting up your own rental business, putting up a coffee shop, or launching your own tech start-up, the core principles remain the same. Following these tried-and-tested methods is a good way to think about structuring your approach to property investing.
In this installment, we’re looking at how to develop your rental business strategy to set yourself up for success, starting from day one.
Often in business, entrepreneurs are advised not to get involved in an industry which they know little about, and the same holds true for rental investors.
While you don’t need to have a professional background in real estate to be a successful buy-and-hold investor, you do have to know as much as possible about the market you’re getting into and the ins and outs of the industry if you want to succeed in building a profitable portfolio.
The biggest reason that new rental businesses “fail” (or the investor simply gives up) is that they didn’t know what they were getting themselves into in the first place. But you can avoid this by educating yourself: take a course, get a mentor, or read all the material you can find about rental investments and different markets to get a sense for the daily realities of the job. Industry forums (like BiggerPockets!) are a great place to get support and information from experienced investors, which is an invaluable resource when you’re coming to the rental industry with zero prior knowledge.
Doing this will help you discover which parts of the business resonate with you or excite you most, which will help you identify the niche you want to be in, too (e.g. MFR, SFR, student rentals, etc.).
2. Know what market you want to focus on
There’s no one-size-fits-all approach to setting up a rental business – your strategy will be dependent on the market you want to operate in.
Some say starting in your own local market is ideal, since you have at least some familiarity with how the rental market works locally and knowledge of different residential areas, meaning you’ll have a better grasp of property hot spots and which ones to steer clear of.
However, it may not be possible for you to get started by investing in your own backyard, especially if you live in an affluent area, or one where properties don’t pass the 1% rule (monthly rent divided by purchase price). In this case, it’s vital that you do some due diligence on the area before buying a property there.
3. Consider external and internal factors
Once you’ve identified an area you want to invest in, the next step is to carry out market research. This is different from the area market research you’ve done already, and involves looking at the competition and target audience for your business, to see where the greatest opportunities lie.
A useful tool for doing this is conducting a SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis for your rental business. For example, you could think about:
Strengths: What’s the value that you as an investor will bring to the business? What are the most positive aspects of the area you’re targeting, from a rental investment standpoint?
Weaknesses: What are your limitations, in terms of finances, skills, or time commitments? Which weak points can you identify in your strategy, or in the rental industry itself?
Opportunities: What are other landlords doing, and how can you improve on this? Are there any gaps in the market that are underserved currently, which you could exploit?
Threats: Are there new property developments or economic trends that could negatively impact your rental business? How do you intend to safeguard against these?
4. Set financial targets
The aim of starting a rental business is to earn more money, but this kind of vague goal isn’t the same as setting concrete financial targets. By knowing what your financial goals are and your timeframe for achieving them with your investments, you’ll have a clear roadmap to reaching financial freedom.
Setting goals with target dates will help you structure your approach to building your portfolio – letting you know how many properties you need to acquire to hit that target, and giving you an incentive to work to meet those goals. Include your current salary from your job and all your living expenses in your calculations to get a realistic picture.
5. Roles & Responsibilities
What are your personal skills? Are you organized? Detail-oriented? A people person? All of these attributes are essential in running a rental business, so if you feel like you might fall short in one or more of these categories, there are two ways to go about things.
One is self-managing your properties and learning as you go, and the other is working with industry experts, like property management companies, who can help run the day-to-day of your rental business for you.
Either option can work, but it depends on how much of your own time and energy you’re willing or able to realistically invest into making your investments work.
Whether it’s to escape the 9-5 to attain financial freedom or simply just to give yourself a new stream of income to save up for the rainy days, setting up a rental business can create a lot of these opportunities for you. But it’s important to be organized and clear about your approach from the outset to avoid getting overwhelmed or surprised by the realities of landlording down the road.
Stick around for Part 2 of The Investors’ Game Plan series, where we’ll look at 5 steps to create your business plan!
Did you find these tips helpful for getting started with a rental investment strategy? Let us know in the comments below!
Image Courtesy of Andrea Piacquadio