Leverage
Leverage can be a tricky subject. Some people have a fierce spirit of independence and self-sufficiency. These individuals typically insist on paying for everything with cash and doing everything themselves.
They don’t want to have to rely on anyone else for their success. I admire people like this. They’re self-starters, and they get things done. I was very much like this – from a very young age – then I discovered the power of leverage, and my career and financial paths have taken off in ways I never imagined.
What is leverage?
In business – for example – leverage is using something to maximum advantage – either through internal or external resources. For the independent-minded and self-sufficient, using leverage doesn’t mean a sign of weakness. Instead, it can indicate acknowledgment of one’s strengths and maximizing your potential by using the resources around you.
For example, the Roman Empire maximized its army’s prowess and military success by leveraging the ingenuity of its engineers, who devised innovative weapons such as catapults and trebuchets. Don’t shy from using leverage if it improves your results.
Why not maximize your success by leveraging the resources around you?
How?
Through my own experiences, I’ve discovered three of the most useful ways for using leverage in the world of business and investing to maximize success: 1) Money, 2) Expertise, and 3) Time.
Money…
Most people can’t buy a home with cash, so they use what money they do have for a down payment and leverage the banks to obtain a mortgage for the balance. Since high school, I’ve been involved with real estate in one form or another – first in construction, then with development and investing. I learned early on that without leveraging the financial resources of others like commercial banks, I couldn’t acquire or develop the type of commercial properties essential for my portfolio.
Even with bank financing, most investors can’t acquire commercial cash-flowing property independently. What options do they have? Financial leverage is not limited to bank financing if you think about leverage. Leverage uses what you have and maximizes it by using other resources to accomplish your goals.
How can an investor use leverage benefit from a commercial property? By leveraging the capital of other investors in a pooled investment like a syndication or private investment fund. Pooled investor funds and bank financing obtained by the fund can be used to acquire a commercial property none of the individual investors could have acquired on their own.
Through the power of financial leverage, your $50k or $100k of investment capital pooled with other investor capital is suddenly able to benefit from the cash flow and appreciation of a $10 million asset – an asset no individual investor would be able to acquire with just their resources.
Expertise…
Many of us are experts in law, medicine, or business. Some are even experienced real estate investors, but most do not have expertise in multiple real estate segments or geographic markets. You can stick to what you know in the markets you’re familiar with but are you preventing yourself from taking advantage of the best assets in the best markets? It would take a tremendous amount of time, brainpower, and even capital to be an expert in multiple asset segments across multiple geographic areas. Fortunately, there’s the power of leverage.
You can leverage the expertise of others to participate in asset segments and geographic locations you wouldn’t be able to do on your own. The wealthy have been leveraging the expertise of others for decades by partnering with them in a co-investment through syndications or private equity funds. By doing this, they can create a recession-proof income and appreciation from a diversified portfolio.
When leveraging the expertise of others, you don’t have to, and you shouldn’t surrender entirely to the will of others. You should leverage your abilities and deal analysis skills to assess the feasibility of each project and evaluate the competence of management to realize your investment objectives.
Don’t hand over your money blindly.
Remember, leverage means using what you have and combining it with other resources to maximize your results. You can use your analytical abilities to combine with the expertise of others to invest in assets and markets you wouldn’t be able to do on your own – allowing you to create multiple streams of diversified income and growth.
Time…
Notwithstanding the money and knowledge hurdles, not many individual investors can dedicate time to a commercial property across the entire investment lifecycle, including due diligence, finance, acquisition, renovations, management, and disposition.
For investors wishing to benefit from commercial real estate but don’t have the time, what is the solution to the time constraint? Leverage.
Syndications and private funds already have all the processes, infrastructure, and personnel in place to see an investment through from start to finish – freeing up your time for you to spend as you please.
Leverage doesn’t have to be an acknowledgment of weakness or limitation. On the contrary, think of leverage as using tools to maximize results. Everybody uses tools in their work or industry to enhance their work product.
Leverage – whether of money, expertise, or time – is just a tool for investors to maximize their financial results and accelerate their goals.
MIKE AYALA
Mike Ayala has owned and operated mobile home parks since 2007, and has been active in construction and management since he was 15 years old. He graduated from the Associated Builders and Contractors 4-year project management program at age 22 and then became a licensed instructor. He is also the host of the Investing for Freedom podcast.