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Embarking on a rental investment project can be a profitable idea.
Indeed, suppose you manage to find quality real estate located in an area with active demographics and at an attractive selling price. In that case, your real estate investment can generate an attractive rental return.
Like any investment project, a business plan is necessary to start. This will allow you to make appropriate decisions and obtain financing more easily.
What should a rental investment business plan contain?
How to make a successful rental investment business plan?
What profitability can your real estate investment generate?
How to make the provisional budget for a rental investment?
How to prove to an investor that his rental project can become profitable?
What should the financial part of a rental investment business plan contain?
The answers to these questions are in the article below.
IS IT NECESSARY TO MAKE A BUSINESS PLAN BEFORE EMBARKING ON A RENTAL INVESTMENT?
Do you need to take out a loan to buy real estate? Interest rates have never been so low in France, so it is easy to borrow money to purchase real estate. So why not take advantage of it?
Does your banker ask you for a business plan to unlock the loan that will allow you to make this rental investment? Again, it's normal: the bank needs to understand your project's logic (especially to know if you will be able to repay the loan).
The business plan for your rental investment project will prove to your bank that you will make a good investment.
The business plan is the standardized presentation of your real estate project: it gives you a 360 vision of what you want to accomplish in financial, economic, and commercial terms.
Our business plan model for a rental investment meets all these criteria.
WHAT ARE THE PARTS OF A RENTAL INVESTMENT BUSINESS PLAN?
Here are the five parts that we find in our business plan for a rental investment :
– the "Market Opportunity" part will be used to present the market in a global way
– the "Presentation of the Project" part presents the outline of your rental investment
– the "Market Study" part, to target the perimeter around your real estate project
– the "Strategy" part is to unveil a plan that will allow your rental investment to be quickly profitable
– the "Finances" for the financial analysis of your real estate project
HOW TO TALK ABOUT YOUR PROJECT IN THE BUSINESS PLAN OF YOUR RENTAL INVESTMENT?
To enhance your rental investment project, you must specifically:
– reveal the ins and outs of your investment strategy
– present a precise and complete financial plan
– demonstrate how you will find your first tenants
– prove that your rental investment presents competitive advantages over other offers in the rental market
– show that the break-even point will be reached quickly and easily
In your business plan for a buy-to-let investment, show that the property you are about to acquire is a high-quality property ( or at least that you will receive it at an unbeatable price-quality ratio!).
You can mention the price per square meter, the property's neighborhood, the condition of the roof, or even its location. Then, explain why it will be easy for you to rent it out and prove to your bank that you will receive rent every month (which will allow you, in particular, to repay your mortgage).
Finally, at the end of your business plan, briefly mention five or six points that prove your project is well thought out.
You can talk about the property and its qualities, your investment strategy, your knowledge of real estate investment, the good figures of the local real estate market, or your tips for minimizing costs and increasing income from your rental investment.
Our business plan for a rental investment has been written to meet these objectives.
WHAT IS THE BUSINESS MODEL OF A RENTAL INVESTMENT?
The short version of the business or economic model of a rental investment is the collection of rents following the rental of a property. The business model of your buy-to-let investment should be explained through the Business Model Canvas, which is part of the business plan.
Our business plan for a rental investment contains a Business Model Canvas which presents the economic model of a rental investment.
HOW TO DO MARKET RESEARCH FOR A RENTAL INVESTMENT?
You have to present certain elements in a structured way.
In the "Market Research" part of our business plan for a rental investment, we find in particular:
- recent data on the real estate market
- the latest trends in the real estate sector
- the profile of the potential tenants of the property real estate that you are going to acquire
– the SWOT analysis specific to a rental investment
– the competitive study of other real estate projects
– the competitive advantages of one rental project over another
THE ESSENTIAL POINTS OF A RENTAL INVESTMENT BUSINESS PLAN
DISCUSS THE RISKS ASSOCIATED WITH YOUR RENTAL PROJECT
Every real estate project presents risks.
For example, there is the risk of non-payment by tenants. There is also the risk that the works and fittings will take a little longer than expected.
Mention these risks, but don't stop there: explain how you will solve them and minimize their impact on your rental property business plan.
For example, when starting a rental investment project, you must plan for a "pessimistic" financial scenario.
Indeed, we do not wish you this, but you will likely have difficulty finding a tenant for your property during the first months. You must also consider this scenario and see how it impacts your finances.
Will you still be profitable if your rent drops by 20%? The COVID crisis has shown us that we are not immune to anything. It would help if you also foresaw the scenario in which there will be a reduction in rents in the city or region where you will buy real estate.
Anticipate this scenario, analyze it easily and see how it impacts your finances in the long term. Then, your banker or investor will appreciate your caution and pragmatism.
You can easily do this with our financial model for a rental investment.
KNOW HOW LONG IT WILL TAKE TO PAY OFF YOUR MORTGAGE
Thanks to our financial forecast for a rental investment, you can test different credit terms.
Vary the rates, amounts, and repayment terms to see how this impacts your income statement, break-even point, and projected balance sheet.
Our template has explanations so you can easily understand the big financial results (we know our clients aren't necessarily financial experts!).
THE FINANCIAL PART OF THE BUSINESS PLAN FOR A RENTAL INVESTMENT
How to estimate the financial profitability of your rental investment?
Several financial indicators and ratios must be calculated to estimate a rental project's financial profitability.
Don't like complicated calculations and formulas? For an accurate estimate of the financial profitability of a rental investment, you can use our economic model for a rental investment.
You enter assumptions, turnover, gross profitability, net profitability, and other financial indicators specific to your rental investment are calculated automatically.
WHAT IS THE ESTIMATED BUDGET FOR A RENTAL INVESTMENT?
The provisional budget for a rental investment is extremely variable.
This can range from a parking space in the provinces (for only 20,000 euros) to the purchase of a real mansion on the shores of Lake Annecy (several million euros).
Thus, we cannot give you an average provisional budget.
The most important elements that will influence the start-up budget of a real estate investment are:
– the region of establishment
– the type of property offered for sale
– the amount of renovation and compliance work
– the costs of the notary are attached to the file
To get an idea of the estimated budget of your rental investment, you can use our financial model for a rental investment.
You can use the provisional budget already drawn up for a rental investment. However, you have the possibility of modifying the characteristics to obtain your personalized start-up budget.
HOW TO CALCULATE THE GROSS PROFITABILITY IN THE FINANCIAL FORECAST OF MY RENTAL INVESTMENT?
Gross profitability is an indicator that must be found in the financial forecast of your real estate project.
Gross profitability is the amounts collected concerning the money you invest in acquiring a property.
Thus, to know the gross profitability of your real estate investment, you must divide the rent over the year by the property's sale price, then multiply the result by 100.
Imagine, for example, that you buy an apartment for 250,000 euros. The rental of the latter allows you to receive 1,800 euros each month.
The calculation of gross profitability is therefore (1,800 x 12) / 250,000 x 100 = 8.7%
We use this indicator to compare real estate projects with each other and determine the most interesting.
Use our financial model adapted to a rental investment to obtain your project's gross and net profitability and other real estate indicators without having to do any calculations.
WHAT RATE OF RETURN SHOULD APPEAR IN THE FINANCIAL FORECAST OF MY RENTAL INVESTMENT?
Generally, the net profitability of a rental project will be between 3 to 8%.
Thus, we can consider that a net return above 8% is representative of a good rental investment project.
WHAT ARE THE PARAMETERS THAT CAN AFFECT THE PROFITABILITY OF A RENTAL INVESTMENT?
The type of housing, the implantation region, the living area, and the work necessary to rent the property.
GETTING INTO A RENTAL INVESTMENT: IS IT PROFITABLE?
Your rental investment is profitable when your turnover (i.e., the rents collected) is sufficient to cover all current expenses (including the repayment of the loan, which will have been used to finance the rental project.
We then say that you have reached the break-even point or that the cash flow of your rental project is positive: every month, you earn money, even during the repayment period of the mortgage. To
Find out your projected income, expenses, and threshold profitability. Then, you can use our financial model for a rental investment.
HOW TO PROVE THE PROFITABILITY OF YOUR PROJECT IN THE BUSINESS PLAN OF YOUR RENTAL INVESTMENT?
To prove the profitability of your rental investment, you must identify the break-even point and show that you will [quickly] reach it.
To exceed the break-even point, the income from your rental investment must be higher than the total expenses. Your income assumptions must result in a turnover that will cover all the costs of your rental investment.
In our financial model for a rental investment, we guide you to build realistic income forecasts, making it possible to obtain the desired level of profitability for a rental investment.
WHAT TABLES SHOULD BE INCLUDED IN THE FINANCIAL PART OF THE BUSINESS PLAN FOR A RENTAL INVESTMENT?
If you wish to present a serious financial analysis to a potential financial partner, here is what should be found in the business plan for your rental investment:
– the list of initial investments
– income hypotheses
– performance indicators [balances management intermediaries]
– an analysis of the WCR [Working Capital Requirement]
– a financing plan
– graphs and financial ratios
– a forecast income statement
– a forecast balance sheet
– a forecast cash budget
You will find all these elements in our financial model for a rental investment.
A FINANCIAL FORECAST FOR A RENTAL INVESTMENT
Our financial model for a rental investment will help you succeed in your business plan.
Indeed:
– the model contains all the financial elements mentioned above
– the model is easily modified
– the model guides you and helps you correct your assumptions
– the model is adapted to the reality of a rental investment
A dedicated tab indicates in a very clear and detailed way if your forecasts of income, costs, and profitability [among others] are correct.
If, for example, your cash balance is negative or your forecast turnover is too low, this part of the financial forecast tells you how to correct the situation.
To fully understand what our financial forecasting models contain, you can consult a free financial forecasting example.
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