Real Estate Investing Blog

Recognizing that many investors become intimidated or afraid of items in the investment process, this article describes the major areas of the investment process. The under each area, the steps required or activities needed are laid out. Conceptually, if the would be investor will move ahead accomplishing each, a successful investment will inevitably be the result.

The steps for the investment are:

1. General partner and investor preparation
2. Project identification and analysis
3. Business Plan Development
4. Purchase contract
5. Closing and Initial Operations
6. Investor Communications and Securities Compliance
7. Oprations
8. Marketing and Sales (leasing, developing buyers, developing investors)
9. Debt and equity financing
10. Exit

While there are other topics you will have an interest in understanding or learning more about relative to real estate investing, completing the areas above will lead to a successful investment.

Clearly, these steps are more complex than simple one liners. In the lists below, you will find some of the key activities that you need to be mindful of or complete when executing and investment or series of investments. This list can be made more granular and depending on the investment items could be added or deleted to the process. So, as you approach investments exercise flexibility to meet the needs of your project modifying or adjusting this as needed. The general steps under each area are:

General partner and investor preparation

1. Prepare escrow accounts and agreements
2. Complete personal financial statements for major (>10% owners)
3. Prepare biographies for principals

Project identification and analysis

This step is perhaps the most complex and can be viewed as three major components: 1) market selection, 2) submarket analysis, and 3) property analysis. All of these constitute the due diligence phase of an investment.

During market selection, determine:

1. Population growth characteristics,
2. Economic factors,
3. Transportation factors,
4. Regulation factors (review tenant rights laws, housing authority activity, etc.)

In submarket analysis review:

1. Competition,
2. Immediate transportation,
3. Immediate access to education, government support, recreation facilities, shopping and entertainment,
4. Housing costs,
5. Crime factors,
6. Local area demographic considerations,
7. Local employment

For the property itself, consider:

1. Unit by unit inspection details,
2. Detailed review of the grounds including parking, lighting, landscaping, drainage, fences, signage,
3. Amenity inspections,
4. Building exterior inspection,
5. Review of the properties abutting to the target property,
6. Drive by and walk by traffic,
7. Walking access to shopping, entertain, and public transportation,
8. Walking / bus access to schools,
9. Availability of good contractors and other services or employees

Business Plan Development

The business plan has to answer several question including:

1. The amount of capital needed including reserves, improvements, and purchase needs
2. The returns the investor can expect
3. How risk will be managed
4. How the accounting and finances will be managed
5. How the project will be managed and your qualifications to accomplish this
6. How the investor will eventual exit
7. How the investment will be organized

Purchase contract

1. Describes the terms of closing,
2. The warranties and representations the seller must stand behind
3. The sellers preclosing operations requirements and consequences if they are not met
4. Protection against fraud or mismanagement in the in the information provided by the seller to you, the purchaser

Closing and Initial Operations

This phase includes a number of steps that will have a great deal of influence over the eventual success or failure of the project. Essentially, during this period, the purchaser and seller are checking off items that lead to the successful close and taking steps to kick off operations. Consider the following a s a basic set of steps:

1. Collect in escrow equity for closing,
2. Complete operating agreements,
3. Complete investor subscription agreements,
4. Finalize the business plan,
5. Complete loan commitments,
6. Provide all information the bank will need for set up,
7. Put the rent roll in your management system or spread sheets,
8. Collect investor communication information in email and call set up systems,
9. Set up banking accounts,
10. Set up entities with the local government,
11. Establish contracts, hire employees, determine sources of operating supplies,
12. Complete improvement plans and contracts,
13. Set up initial operating improvement schedules,
14. Create initial operating books,
15. Ensure accounting information for all transactions prior to closing are recorded with date, purpose, who to, whether capital, expense, income, or investment,
16. Enter accounting information from per closing transactions and the closing sheet / HUD1 and ensure books are balanced and prepared for initial operations

Investor Communications and Securities Compliance

1. Pre closing provide risk statements,
2. foreward looking statements disclosures,
3. Reporting plans and intent,
4. Subscription agreements and investor information complete,
5. Operating agreements executed

Operations

This includes all the day to day requirements such as:

1. customer service,
2. Maintenance,
3. Service and supply contracts,
4. Lease management,
5. Collections and evictions,
6. Day to day banking,
7. Human resources and day to day compliance,
8. Capital improvement management,
9. Taxes,
10. Operating statements, year end statements, taxes, and licenses

Marketing and Sales (leasing, developing buyers, developing investors)

1. Online, print, and signage,
2. Promotions and concessions,
3. Sales training and preparation,
4. Associations, social media, etc.

Debt and equity financing

1. This is the culmination of the financing picture.
2. Preparing bank packages,
3. Negotiating loan agreements,
4. Provide financials and business plans,
5. Managing loans and refinancing post purchase,
6. Closing with your equity investors, releasing the funds for purchase, and raising additional capital in the future if needed to protect the investment

Financing is a major opportunity and can turn out to be a major risk for your investment.

Exit

This is preparing and evolving a plan to exit the investors’ cash investment and to eventually sell and completely cash out their investment. The options for this are limited by imagination alone, but most view this as the eventual sale to another investor. The requirements can be daunting, but if the investor will breakdown the process into successively smaller steps as outlined here even a relatively small investor can manage relatively significant opportunities.