If there's one thing I think many people can attest to, it's that plans often change. Throughout many of the online real estate forums, many people, including yours truly, have in one way or another, written down their plan of action! People do this to get other peoples reaction and approval. With any approval comes a sense of comfort and belonging. The problem is, most 'plans' that people write down or post in forums, are simply'well, not good. They lack depth, focus and reality. I can remember my first 'plan?. I posted it on a real estate forum. Then I proceeded to post about oh I?d say 10 others before I realized how silly it was for me to do this. It was silly because I completely did not understand what I was talking about.
I would write things like, ?I will: (1) File for LLC (2) open bank account (3) create business cards (4) blah (5) blah (6) blah.?
People have all sorts of plans and ideas. Some of them can actually be really good. For instance, I read a recent posting where someone talked about how they planned to purchase foreclosures. They mentioned many factors that were impacting their decisions, demonstrated understanding of the risks involved, and had an actual step-by-step breakdown of the process, numbers, requirements, laws and time frames. They had identified a specific market with a specific investment strategy with contingencies for possible problems.
The noob usually tries very hard to convince others he or she is getting better at the understanding of rei. It's that need for approval and also comfort. Having a plan written down, gives direction. It lays out a path to follow. But a plan without specificity is just pure fluff. It does not drive an overall strategem for success. A plan without specificity, which requires knowledge of the subject, is just a gathering of words on a computer screen or on a scribbled-on piece of paper. So, how do you write an effective and useful real estate plan?
First you have to build your understanding of numbers and finances. For me personally, I started by doing my own personal financials. I looked at several different Balance Sheets online and Income and Expense sheets. I then looked up what everything meant on the forms and made up my own simplified version [click here]. All I did then, was gathered all of my financial data. Most of my financial data revolves around debt and like most poor people, I have bad debt: car loan & student loan (no credit card debt for me though!). I took my bank statements, looked at all my bills and grabbed my last pay stub. I then called my lenders and got the exact amount owed on my loans (as well as daily interest accrual - for my debt elimination plan) and I proceeded to fill out my financials. I wrote down my earnings, matched them to my debts and realized I had a negative net worth of -$38,238.91 (on a good note, my net worth is now positive, thanks to rei, of $8,923.26).
You may be saying to yourself, 'okay, what's this got to do with a real estate plan?? The point is, you must have an understanding of finances and more importantly, you must understand where you stand, financially! If you don't, you'll be continuing down a road without direction. Doing my own personal financial statements, gives me a sense of discipline and information I need to combat my old self, the schlub, who accumulated debt and thought nothing of it. Of course, any financial statement I do will not be 100% correct, as my accountant knows more about it then I do, but at least, I have a working knowledge of my financial standing on a monthly basis. And when I can afford it, I will have both professionally-audited personal and business financials done on a quarterly basis by my CPA. For now though, I have ground to stand on. Seeing this mess called my personal financials, lets me know how far I have to go.
Now, my personal financials also let me know how well I?m doing in terms of paying off my liabilities (debts). Since I began this 5 months ago, I have decreased my fixed liabilities $1787.44. Now that may not seem like much, but compared to my previous way of life - they would have decreased $924 approximately, because I was not paying any attention to my finances. When I realized that the company that owns my student loan note, makes $6.73 a day in interest (as of June,2006), I felt sick. I felt stupid. I thought to myself, ?I am smarter than this. I can do so much better than this.? Now I am.
While learning about personal finances, the next thing to focus on is credit. The great thing about real estate investing or rei, is that there are so many different avenues you can pursue. Many people focus on their personal credit and then using it to borrow money. There's no question that the advantage to rei is leverage. However, if you want to invest in real estate, it is also wise to focus on building business credit as well. Why? Because I said so that's why! Wow, I?m having flashbacks.
Anyway, as I was saying, a combination of building personal credit as well as business credit are important because as a serious real estate investor, you want to maximize your Return On Investment or ROI, while at the same time minimizing your personal liabilities. If little Johnie falls on the front lawn at one of your properties, big Johnie Sr. will sue you. Now, if you own your properties in your own name, then whatever you own, personally, is at risk. However, if you are a member of an LLC or Corporation, well then the business is liable for damages, not you. Now this is not as cut and dry as it appears, and of course, seeking professional legal advise is paramount, but the bottom line is, if title to your investments are in the name of an LLC or Corp, you technically do not own them, the company does. Think of Bill Gates. He does not own Windows XP, Microsoft Corp. does. Just as the government tried to sue Microsoft Corp., not Bill Gates. Of course, there's a big difference between Microsoft Corp. and Joe's REI LLC; try a team of about 50 lawyers, but that extra layer of protection between you and your investments, should not be overlooked.
Now, getting back to personal and business credit - it is important to build both. Basically, you build credit by paying creditors on time. The same works for a business. You should have one personal credit card and one business credit card. Use them wisely and pay them off monthly. Contact any outstanding credit lines that have been destroying your credit and rectify matters with them, by setting up an action plan to begin paying them off. I am by no means an expert in this field, but it's really simple logic. If you owe money, pay it off. Now, I must say this. I am no proponent of debt accumulation. That's all credit is. It is evidence that a person or business has or has not been responsible in paying their debts. Our society has become debt-based. Debt is advertised as something that is 'good?. Well, I am here to say that it is not 'good?. Debt is complex and must be managed appropriately. Many large corporations take on debt to finance growth. However, a large corporation has complex business financials, that let a lender know, how well'or poor, a business is performing. The lender or vendor, can then make a judgement of whether or not to extend credit lines, mortgages, etc based on analysis of financial statements. There's that phrase again!
For the noob, it's important to understand the relationship between your monthly cash flow and your available credit. What will most likely happen is, you will start doing your financial statements. The first few are rough, because you're unsure if you're doing it right. Just barrel through it. I will be offering a very basic look at 'doing' financial statements in the near future. Next, you will review your personal credit. Work on getting it to a somewhat satisfactory position if it is not already. Get a copy of your credit report.
Now, given what I have covered thus far, it is vital to the noob, to understand the importance of having a sound knowledge base for real estate investment/business. It is my firm belief, that the above is the absolute basic beginnings for a real esate plan. So many people have different backgrounds and some would say 'just go out, learn a little about rei, and start buying.? That may work for them. It may have paid off big time for them. To me, that means very little. The purpose of this article is to give you the basic and most generic ideas for beginning a serious path towards rei/business success. There really is so much to cover and I could write 2 seperate articles Part I & II on business entities alone. Understanding credit and your personal finances are absolutely essential in order to actually develop any kind of investment strategy. There is a strong relationship between these two, in peoples personal lives as well as in business or rei. The one key element to recognize when considering real estate investing, that many people overlook is how different a successful business conducts its initial start up. A successful business does not become over-extended on debt financing, before it even has its first customer or contract. It grows by managing both cash flow and credit. In rei, usually, it is the other way around - many use debt financing, whether through a seller note, personal loans or conventional, to create a cash flowing situation [i.e. rental or rehab], which makes rei different from a traditional business. This is an important point that must be factored into developing your real estate plan. For now, start with your financial positioning and credit, no matter how bad or good.
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