Why You Don’t Have a Business Plan
Just lately, I’m starting to empathize with John the Baptist and the whole “voice in the wilderness” thing. I seem to be one of the few real estate educators who has realized—or is willing to say—we’ve all been doing this thing wrong for lo, these many years.
Specifically, I mean the way we, as real estate “investors”, think about and operate our “businesses”—which is to say, we don’t. We all plan, right from the start, to do things the way we’ve seen other “successful” (i.e. doing lots of deals) colleagues do them, which means basically doing everything ourselves.
As is explained in this lesson (excerpted from the manual for REMBA: The Ultimate Small Business Summit), this paradigm is unique to real estate investors, and is entirely cultural. There’s no other business in the world where the practitioners commonly operate without business plans, without systems, and without hope of ever turning their businesses into passive income streams that other people run!
Can you imagine someone opening a bakery, with the intention of buying all the ingredients, making all the pastries, and running the cash register all by themselves, year after year, never expanding or hiring a manager or taking a vacation without shutting the business down? Ridiculous! And yet that’s exactly how most real estate investors think—hoping to make enough money by working “in” their businesses to eventually CLOSE their businesses and retire on the cash or rents or whatever.
And when I try to explain this to people, I mostly get blank looks (except from those who’ve gotten to the point where their businesses are impossible to run under the “self-employed investor” concept. From them, I get tears and Amens). Why? Because no one else is talking about this problem. Why aren’t they talking about it? Because some of the gurus out there don’t get it, some don’t know how to fix it, and the rest want to sweep it under the rug because if they told people that there’s a whole new level of thing to learn, they wouldn’t be able to sell the dream of the perfect life that’s supposed to come with making deals.
So here’s my mission: get it through at least SOME PEOPLE’S heads that real estate investing can and should be more than just a really good job. And we’ll start with talking about the history of why we do things the way we do.
I think that there are 3 key reasons why real estate investors don’t think along the lines of business plans when starting out.
The first is that we are in a field where the practitioner—that’s you and I—have only recently begun to think of what they do as a “business” (and the vast majority of people outside the field still do not).
If the very fact that most real estate entrepreneurs don’t even think to create business plans isn’t evidence enough of this, the fact that we persist in calling ourselves “investors”—as if we put our money somewhere and then just sat back and watched it grow—should prove the point.
The old stereotype of the “mom-and-pop landlord” who scrapes together a down payment on a little apartment building, then lives in the basement and manages the building through nosiness, yelling, and general unpleasantness is, in many ways, an accurate picture of the property owner of years past. A really successful “mom” or “pop” might manage to pick up the building next door before they died, too, but would never have thought of themselves as being in the “business” of providing rental housing. Instead, they’d think of it as something that he did to make ends meet or even get a little ahead—sort of like taking a 2nd job.
Real estate “investing”, in fact, has a long history as a blue-collar pursuit. Getting a rental house or 2, buying an apartment building with no money down, even fixing up a property in one’s spare time and selling it for a profit were all activities that the practitioners did “on the side”, no different than someone who fixed up old cars on the weekend and sold them for a profit. And since these activities were largely carried out by people with no background in business, it would never have occurred to most of these folks to create a “plan” around their “business.”
Yes, there were full-time, hands-off real estate entrepreneurs in years past, but they were often more into building and development than purchase and management of existing properties. Lots of the richest people in America started in or made a lot of money in real estate—think Donald Trump, Leona Helmsley, etc—but those entrepreneurs who built skyscrapers and Mabel down the street who owned 12 units were worlds apart in their thinking, their scale, and their business acumen.
The second reason for the lack of business thinking—and business planning—in our industry is related to the first, and it has to do with the real estate education industry. Although real estate courses and books are now a dime a dozen, the history of the kind of education that’s available today stretches back only to 1959, when William “Bill” Nickerson, a former telephone company salesman, wrote his now-iconic book “How I Turned $1,000 into $1 Million in Real Estate in My Spare Time.” Prior to that time, you “learned” real estate by doing it, and from informal advice from other people who had done it, and from your banker, real estate agent, and attorney.
Yes, there were books written on real estate investing before then, but Nickerson’s was the first to become a national best-seller (and a catchphrase), largely because it was the first to say that, with a reasonable effort, real estate investors could get very wealthy in a matter of years, rather than a lifetime. This book spawned the first of the national, traveling courses, started by a Canadian salesman named Dr. Al Lowry. Lowry partnered with Nickerson to develop the book into a several hundred page course, complete with contracts, forms, and audio tapes. Though formally called “The Real Estate Investing Course” it was more commonly known as “The Lowry-Nickerson Course”.
It was this traveling show, which toured the country from the early 70’s to the late 80’s that set the standard for real estate education today. Back in the day, the Lowry-Nickerson course attracted 300-400 students at $499 a pop in even a medium-sized city. With all this money rolling in (and remember, $499 could buy a lot more gas in 1978 than it does today), it was only a matter of time before other gurus popped up and followed suit—many making bigger promises (and charging bigger bucks) than did the original. But the important thing about all of this educational brouhaha to us is when it took place, and who the key players were, and the backgrounds from which they came.
If the stories are to be believed—and I’m sure some are, though it makes me suspicious that every real estate guru has a story that basically starts, “I grew up on the wrong side of the tracks”—most of the instructors teaching the previous and current generation how to invest in real estate were, themselves, people with no real business background.
Ron LeGrand was an auto mechanic. Or, depending on which story you listen to, a carnie. Wade Cook was a taxi driver. Carleton Sheets was a real estate salesman. Russ Whitney worked in a slaughterhouse. They had no business training themselves, and they learned real estate from generations of others who had no business training. One assumes that they ran their real estate portfolios exactly as they taught others to do so—by brute force. Thus, their reliance on business plans and the other trappings of small business would be expected to be minimal.
But more importantly, all of these folks—and as a result, the folks after them and the ones after them all the way down to today—had something else in common. Their sales pitches, presentation techniques, and even the platitudes they all quote are rooted in the motivational, self-improvement movement that began in the late 1960s and continues through today.
Seriously, listen to the motivational audios of Zig Ziglar or Brian Tracey. Read Maxwell Maltz’s, “Psycho-Cybernetics.” Heck, read “The Secret.” What do they have in common with what you hear from every national real estate speaker? The message that if you want something (real estate success) badly enough, if you visualize (all the properties you’ll buy and money you’ll make) strongly enough, if you believe in yourself and your dreams (and, of course, buy my course) with enough fervor, you will succeed.
Why do you imagine that real estate investment education is sold and taught with such a huge dose of motivation?
It’s partly because making us feel as if we can do anything (as long as we buy the course in front of us RIGHT NOW) sells lots of courses. But it’s mostly because the gurus who sell it have been so affected by the motivational/self improvement industry, and that’s because the original national bazillionaire gurus (and their heirs) hung out with the original national bazillionaire motivational speakers (and their heirs). Check out any of the programs for those giant stadium-filling “success seminars” and you’ll see the real estate guys paired right up with the pure motivational speakers. Yep, you could see Zig Ziglar on the same stage as Al Lowry; Raymond Aaron following Tony Robbins. With the motivational and real estate education industries so tightly bound together, how could they not echo the same themes?
So, what’s the other theme that runs through both motivational literature AND real estate literature?
It’s goal setting. Almost every real estate course, like almost every self-improvement course, emphasizes setting, and writing down, short, medium, and long-term goals. We’re encouraged to think about how much cash, income, and equity we’d like to build; to write down how many deals we’ll need to do this; even to break our goals down to such details as how many properties we’ll make offers on this week in order to reach the larger goal of number of deals and the even larger one of wealth.
What’s this got to do with the lack of business plans among real estate entrepreneurs? In short:
- We don’t make business plans because our mentors haven’t taught us it’s important.
- The reason they haven’t taught us that it’s important is that, mostly, they don’t know. They don’t have business education, in the traditional sense, and their own training taught them that personal goal setting, rather than business planning, is the way to get from here to there.
Thus, personal goal setting has largely filled the role in our lives that business planning does in the lives of other entrepreneurs.
The third reason that most real estate entrepreneurs don’t have business plans is simple: in our industry, they aren’t crucial for getting funding. If you hoped to open a different sort of business—say, a coffee shop—you’d need money to rent a space, buy brewing equipment, furnish the store, get the initial inventory of java, and so on. You might apply for a small business loan at your bank, or you might go to the Small Business Administration for help. But in either case, you wouldn’t get very far if you couldn’t produce a reasoned, written plan to convince the guys with the cash that some of it was safe with you.
In real estate, of course, financing isn’t provided on the basis of the soundness of your overall business plan. It’s provided on each individual property, based in part on the value of that property and in part on your own ability to repay. In many ways, it’s easier for a raw beginner with no real idea how to fix or manage a house to get financing to get the money to buy it than it is for an experienced entrepreneur in another field to borrow money to start or expand a business he already understands.
If it was truly necessary to have a business plan in order to get money to buy properties, we’d all have one. But since it isn’t, and since no one has ever explained to us the importance of having a business plan, and since we’ve seen lots of people around us succeed despite the lack of one, you may be wondering why you should bother to have one.
Why You Need a Business Plan Anyway
As busy business owners ourselves, we are very much AGAINST doing things for the sake of form, or because other people do it, or as an intellectual exercise. So if creating a business plan was just something one did in order to be “like other business people”, we’d say, forget about it. Who needs the trouble?
But the fact is, creating a business plan has a number of benefits, both financial and psychological, for you as a real estate investor. To-wit:
- Because a good business plan requires thought about (and often research into) such areas as customer base, marketing plan, and because it is written for an audience that has no idea what your business is “supposed” to do, the process of composing it helps you organize your thoughts about your own business and reveals the gaps in your own knowledge about it.
- Because a good business plan can expose major flaws in your plan before you’ve invested a lot of time and energy pursuing it.
- Because a good business plan begins with a vision statement and mission statement regarding your business, it helps you think about the ethical standards you’d like to uphold before situations arise that might tempt you. More on that later.
- Because a good business plan is a gauge against which you will later measure the progress of your endeavors and the effectiveness of your systems. Without a written plan that tells you where you’re headed, how do you know whether you’re getting there?
- Because a business plan does, in fact, help you to get financing. Not conventional FNMA financing–which is completely dependent on your credit score, debt-to-income ratio, and the value of the property–but certainly other forms of financing that become even more crucial to you when you are no longer qualified for FNMA financing because you became too successful. Private lenders are impressed with business plans, as are portfolio lenders (especially those where a single person, such as the bank’s president, makes the decision whether to lend to you or not) and lenders who are contemplating providing you with a “business line of credit” for your operations, as opposed to mortgages.
- Because a business plan reminds you that you are not your business. You most definitely should have personal goals, but your business should have a life of its own—so you can have a life, too.
Want to get started on a business plan without having to figure out how to start on a business plan? Members of the Inner Circle Program get a free business plan template for real estate just for signing up—and you can quit anytime. Click here to find out more.