Planning For Success
As Benjamin Franklin said ‘if you fail to plan you plan to fail’, but does the old adage apply to property investment? Joanna Jefferies investigates whether investors need business plans to succeed.
1 October 2018
If you ran a retail business, for example, without a business plan, you would be regarded as either a lunatic or hopeless and likely to fail – so why is it that property investors sometimes eschew the usual business planning compulsory in any other business class?
Property investment is often seen as a passive long-term investment, and therefore not too difficult to succeed at without a plan. But Property Ventures’ Mark Honeybone says having a business plan means you’ll succeed much quicker and have clarity around what success means.
“In property it’s how long you’ve got to get there. If you’ve got 10 years left, you could plan to buy 10 properties, sell five off and have five freehold. Everyone has a different goal, whether it’s passive income of $100,000, $200,000 or $60,000.”
Outlining in a plan what your “end game” is, means you can work backward from that point to figure out how and when you’re going to get there.
Honeybone says the following are key questions to ask yourself to help pinpoint your goal:
- How much time do you have to reach your goal?
- What cashflow position do you want to be in at that point?
- What equity position do you want to be in when you reach that point?
For Positive Real Estate property coach Lisa de Vries, it’s important that your goals match your future expectations for lifestyle.
“We look at what the investors’ goals are, their financial ability and timeframes to create a plan that takes them all the way through to retirement.”
Working backward from these goals means you can then decide how you might achieve them. This will involve figuring out how many properties or which type of properties will lead you to that goal, and projecting estimates for how those investments will fare over time.
It will also involve investigating the huge range of strategies available, says de Vries.
“If a person is 65 or 35, then what we’re trying to achieve is the greatest financial outcome. But the strategy for each person will be completely different depending on when they are starting, their financial ability, income, and what they are personally trying to achieve.”
How Is A Property Business Plan Different?
Property investment differs to any other investment class simply because it’s “time in the game” that dictates the financial outcome. Understanding how the property cycle impacts your portfolio is key, says Honeybone:
“If you understand the property cycle, you’ll buy up large when no one else is buying, and you’ll get all that capital growth from that. Then at the height of the market it might be a good time to look at what properties in your portfolio aren’t performing and why they aren’t performing and sell them.”
Because property has unique drivers, de Vries says all her new clients have an independent financial adviser (AFA) write up a report detailing their finances, to establish accurately what their financial position is and what their options are going forward.
She says it’s crucial that any advice taken is specific to property:
“A general financial adviser will look at all sorts of vehicles for wealth creation; our advisers are focused on property as the vehicle for generating wealth.”
What's In A Property Investment Plan?
Successful Palmerston North investor Heather Black embraces a business plan as a key part of growing her portfolio and likens property investment success to completing a marathon.
“To me investment planning is the same. My husband and I decided on a passive income position that we wanted to be in (so that was in our business plan), what age we wanted to have achieved that by, the expected return of our investments over that time (that involved researching how things had gone to try and predict the future) and that enabled us to work out how much cashflow we needed to have the passive income we desired and [that dictated] the pace at which it needed to be attained.”
‘If you have a really big, hairy, audacious goal and you land slightly short of it, then it’s okay because you were sticking your neck out trying for something massive, I just wouldn’t accept a plodding “see how it goes” mentality’ HEATHER BLACK
Once these key goals were addressed, the business plan “got down to the nitty gritty” which included detail on “what kinds of [investment properties] were we comfortable with – were they shared driveways? Were they multi-income?”.
Monitoring the plan is the final step and since 2009, the Blacks have had what they call a “financial freedom review” every three months.
“That’s a formal presentation where I present on flip charts – it’s as corny as that – our financial performance to my husband and we jointly make decisions on things like property improvements, interest rate management, changes to accounts, the impacts of changing legislation and local infrastructure changes.
“It helps to have this regular check-in against the business plan – it helps to keep the eye on the prize.”
It takes Black half a day to prepare all the information and she recommends pitching an investment strategy to a friend or partner as a way of taking the scary feelings out of property investment.
“If someone gave you $500,000 to invest in property for them, they’d want to know, for argument’s sake, how’s the money invested? How’s it performing? What are the ‘gotcha’s’ coming down the pipeline?”
Black is currently around 18 months behind on the equity position she and her husband set out to achieve, due to bank loan-to-value ratios throwing a spanner in the works.
“But if you have a really big, hairy, audacious goal and you land slightly short of it, then it’s okay because you were sticking your neck out trying for something massive. I just wouldn’t accept a plodding ‘see how it goes’ mentality.”
While the Blacks revisit their business plan every three months, de Vries says it’s important to monitor investment plans constantly, and at the very least review them annually.
“There’s a lot of outside forces at work that you can’t control: capital growth, lending criteria and government regulation all play a massive part in what we could or should be doing. You have to be smart and strategic to keep yourself safe and to succeed. All Investors need to adapt and adopt to the changes as they arise.”
Despite having a plan, never close your mind off to new opportunities says Honeybone.
“About three and a half years ago I saw a lot of investors go through a mentoring programme, they just missed out on such outstanding buys because they had this plan they were taught. They missed out on hundreds of thousands of dollars because they wouldn’t take a really good opportunity sitting in front of them because their criteria was too narrow.”
To the same end, when you are following a business plan or strategy you may not be actively looking to buy property at a given time, but Honeybone recommends keeping an eye on the market at all times, because “the deal from heaven” might pop up.
Recently, despite not being on the lookout for a property, he purchased a cross-lease home in Te Atatu, Auckland, cheaper than any other house he has seen sold there.
“I was the only bidder, I picked it up so cheap – already in a few months’ time it’s made a heck of a lot of money.”
In Honeybone’s case, having an overall plan or goal was key, yet having the flexibility to step away from the plan and invest when an opportunity arose was crucial to his success.
No Plan? No Problem
Ask Hawke’s Bay investor Lex Severinsen if investors need business plans and the answer is an emphatic “No”. Severinsen and his wife have achieved great success through property investment and are currently earning between $230,000 and $240,000 in passive income from their 14 investment properties, despite not having a business plan.
But their investment endeavours weren’t always so successful. When the pair started investing in the 1980s they put together a business plan which took into account the 15% inflation that was occurring at the time. They managed to clock up 12 rental properties, but when government regulations changed to regulate inflation, the value of their properties stagnated and then fell.
Ten years after they bought the properties, they were worth less and rents had dropped.
The bank asked the Severinsens to sell the properties, but when put on the market not one sold.
Luckily the couple had some livestock to sell, which managed to appease the bank, but it was a classic example “of a business plan that didn’t work.”
Since then, Severinsen uses a combination of logic and spontaneity to make investment decisions. This has resulted in a raft of spontaneous investment decisions, including a “somewhat vague idea” to buy property overseas, which has netted a fantastic result from three properties bought in the USA.
At the time prices in Australia and New Zealand were high, but in America the prices had crashed to a third or a quarter.
“I googled ‘foreclosure USA’ and got 2.5 million hits. I stared at it for days and played until I found out where the cheapest houses were and what their rents were,” says Severinsen. “Then I jumped on a plane and went over.”
After pinpointing San Francisco Bay as a great location to invest in due to its unique topography which means property can’t spread any further out (Severinsen had a hunch this would push prices up), he purchased a NZ$160,000 home returning 13% net, then two more, before jumping on a plane home.
Eight years later that property is now worth $630,000 and he’s had over $1 million capital gains from all three.
Severinsen says property investment is easy: “It’s just so obvious to buy whenever everyone else isn’t and not to when everyone else is buying – it doesn’t require any plan at all, really.”
Severinsen is so confident in his spontaneous strategy that instead of the usual “ready, aim, fire” he embraces a philosophy of “ready … fire, fire, fire!” – before he starts aiming.