6 Reasons Why Business Plans Are Important in Real Estate Investing
Let’s repeat some well-known business facts: a) 98% of all businesses in the USA are small businesses. b) 98% of all businesses fail in the first year, c) 100% of all failed businesses have well-understood reasons why they failed. With these three facts, we should be able to craft a business that has a more than average chance of success.
Why businesses fail.
All failed businesses share the same characteristic: they fail for one or more of the following reasons:
1) Undercapitalized. They don’t have the financial strength to survive the startup period.
2) Weak Management. The current owner/manager simply doesn’t have the skills to make the business flourish.
3) Wrong product. You can’t sell what the public doesn’t want to buy.
4) Wrong market. What you have may be attractive but the local market can’t afford to buy it.
5) No ‘exit’ strategy. With no thought of the future, the business will founder.
6) No “vision” as to what the business intends to accomplish.
Notice that nowhere once did I say the words “Real Estate”, even though that is the emphasis of this article. A “Real Estate” investment business is just the same as any other business, and can fail for all the same reasons that other businesses fail. The main difference is that when you invest in Real Estate, you tend to risk larger amounts of capital. Also, the Real Estate market contains many factors that you can never control, unlike most ‘normal’ businesses.
What’s the answer?
The most important answer is: a well-crafted business plan. Developing a meaningful business plan is more than just sitting down and describing your product in glowing marketing terms. The act of creating a business plan forces you to think about the various aspects of the business. It also places you in the position of your customer, your banker, your lawyer, your assistants, and yourself as owner/operator.