Real estate development can have big profit potential, and renovating multifamily investment properties is one way to take advantage of the opportunity. A renovation business plan can help developers stay on budget. Most lenders also require a business plan as part of the approval process. To qualify for lending and maximize profit, take steps to draft a solid business plan for each renovation project—and keep it up to date.
What is a multifamily renovation business plan?
A multifamily renovation business plan is a document that outlines the goals, strategies, and methods of a company or individual as they relate to the renovation of a multifamily property. The plan should address the real estate investor’s target market, competitive landscape, and marketing and sales strategy. It should also include operational details and financial projections for the property’s value once renovations are complete.
Why Is a Multifamily Renovation Business Plan Important?
There are many reasons a multifamily real estate investor might need a business plan. For example, a detailed business plan is essential when a real estate owner is courting additional investments or funding like commercial construction loans.
Business plans are also necessary because they lay out many milestones a developer intends to reach throughout the renovation process. Creating a detailed business plan is essential to managing the various elements of the project itself and helps to guide more effective decision-making.
When You Should Write a Business Plan
Every business should have a business plan. However, it is essential for real estate investors who need to manage complex renovation projects requiring large sums of cash.
A well-crafted business plan lays out a business’ financial needs. It also helps business owners document overall revenue and determine the viability of a venture at any particular time. For this reason, the most successful real estate investors often prepare formal renovation plans before construction begins.
Any real estate investor considering taking out a loan or working with outside investors should also dedicate time and energy to preparing a high-quality business plan. In the case of a commercial construction loan, potential lenders will scrutinize the document to determine if the project fits within the bank’s risk tolerance.
Ultimately, a business plan should reflect the needs and goals of the individual project size and scope. If the project timeline or other renovation activities change, make every effort to keep the business plan current and aligned with the current state and direction of the project.
How To Write a Multifamily Renovation Business Plan
There is no one-size-fits-all approach to writing a business plan for the renovation of a multifamily investment property. However, you should include several critical components when crafting an effective business plan. Follow the outline below to prepare a business plan to guide your next multifamily renovation project:
The executive summary is the first element of a business plan and serves as a high-level overview of the document. It functions like an abstract for a research paper and tells readers about the project. The executive summary of a business plan should help potential investors, lenders, or other readers better understand the general goals of the renovation project.
Consider the following tips to draft a compelling executive summary:
- Include a short, single-sentence, value proposition, or innovation highlight. Use this section to introduce the niche your business—and project—fills. Also, discuss how the planned renovations will solve that problem for the customer.
- Clearly describe the target market. Identify the target market and briefly describe how the proposed multifamily renovations will address their needs.
- Briefly describe the financial and operational realities. Use the executive summary to identify current capital for the renovations, discuss funding needs, and outline your team and various responsibilities.
The company overview is the portion of a business plan that provides background information and specifics about the company or, in the case of a multifamily renovation business plan, the specific project.
Start with the basics: include your business name, and describe who you are and what the company does. Identify the business structure the company operates under, such as sole proprietorship or LLC, as well as the location of the business’ headquarters and any other relevant real estate it owns.
Then, share information about who each owner is and how much of the business they own. If there are notable members of management, lenders will want to see their relevant experience and the roles they will play in renovation activities. Likewise, share details about similar renovations you have already completed.
Use the industry analysis to research and analyze the applicable multifamily market, including its size, growth potential, and local trends. Additionally, assess the competition and identify any opportunities or threats that could impact the success of the project post-renovations.
The elements of an industry analysis usually vary by project, but follow these tips to get started:
- Describe the current property and planned renovations and provide a broad overview of the area’s current multifamily real estate market.
- Review recent industry trends and patterns in the context of your redevelopment project.
- Examine various factors that influence the industry, including legislation or materials challenges, or even the price of competing items or services.
- Incorporate the data into a forecast for growth. These predictions should cover both the long-term as well as the short-term.
- Describe how your organization will be poised to offer a product or service that nobody else offers.
The market analysis section of a business plan should clearly describe the real estate market as it relates to the renovation project. Analyze how the newly renovated multifamily property will fit in with the marketplace once complete. Pay particular attention to the units’ appropriate finishes, pricing, and marketing.
Some of the points that you should be sure to hit in your market analysis include:
- Include industry and market growth projections with information about potential shifts in the market demand.
- Understand and be able to describe your customers and why they need the development, supporting the report with demographic data.
- Determine the size of the rental market and whether it is growing or shrinking. If the market is shrinking, justify the multifamily renovation project.
- Outline unit pricing for competing developments and describe how your pricing and marketing choices will give your organization the edge it needs.
- Show that your company is meeting the needs of target residents.
Describe your target market and how your proposed renovations will best serve those customers. Because the marketing strategy for the redevelopment depends heavily on the target market, use this section to provide detailed demographic information. Likewise, explain how the newly renovated property will best serve those residents.
One of your business plan’s most important functions is showing how your proposed renovations compare to other multifamily developments in the area. It may be challenging to make these predictions with any reliability, so drawing on previous projects in similar markets may be helpful.
Start by identifying your competitors and provide information on their sales, volume, pricing, market share, and marketing strategies. Then, evaluate their strengths and weaknesses and compare them to the strengths and weaknesses of your project. Finally, identify any gaps in the market that the proposed multifamily renovation can exploit.
Strategy and Implementation
Your business plan’s strategy and implementation section lays out your strategy for getting into the market and reaching your organization’s goals as they pertain to the renovation project.
Outline the company’s strategy and plans for execution, including the processes and metrics needed to reach project milestones. This section should include a detailed project timeline, a list of subcontractors, and a renovation budget.
Use the marketing strategy section to outline the company’s plans for promoting and selling or renting units once renovations are complete. It should include a detailed marketing budget and schedule and a sales or leasing forecast for the completed units.
The financial projections section should include a detailed budget for the multifamily renovation project, a sales forecast, and a profit and loss statement. Also, provide:
- A detailed renovation budget
- Project milestones that align with construction loan draws
- Sales or leasing timeline
- Break-even analysis
- Balance sheet
Operational details ensure the whole renovation project runs smoothly. Use this business plan section to describe day-to-day operations and how the teams and management will interface to execute the renovations according to the project timeline and budget. Ensure the operational details are consistent with the renovation budget and timeline.
The management team section should introduce the company’s executive team and describe their experience in the multifamily renovation industry. Additionally, it should list any advisors or consultants hired to help with the business plan and the project as a whole.
The exit strategy is the section describing how ownership of the company or individual renovation project will be transferred or otherwise handled in the event you leave. No serious investor will put money into a project that doesn’t have a clear and defined exit plan to help make it through an uncertain time.
Finally, the appendix supports the overall renovation plan and should include all critical documentation or data. Your financials should be part of the appendix, as should be the resumes of top team members and any documentation regarding designs, budgets, and renovation timelines.
Frequently Asked Questions
What can I do to minimize legal risks during my redevelopment project?
To minimize legal risks during redevelopment projects, exclusively hire insured contractors or get site insurance before beginning renovations. Always consult a real estate attorney who can guide you on your risks and how best to mitigate them.
How do I determine the right amount of capital required to finance my redevelopment project?
The amount of capital required for a redevelopment project varies depending on the size and scope of renovation and redevelopment activities. Consider the costs of acquisition, due diligence, permitting, construction, and carrying costs. A realistic estimate of these costs is essential before seeking financing or investments and beginning your project.
What are some ways to generate revenue during my redevelopment project?
There are many ways to generate revenue during a redevelopment project, including leasing vacant units, offering amenity packages, and submetering utilities. One of the most popular ways to generate additional revenue during a redevelopment is to increase the fees or rents at other properties. This increased income means additional revenue to offset a property that is currently vacant and getting redeveloped.