Leverage Is Your Secret Super Power!

You think superheroes are the only ones with super powers?

Not by a long shot…

When it comes to real estate investing your secret super power is leverage!

Just as you would leverage a big boulder into a new position using strong branches and boards, you strengthen your position in a real estate deal by leveraging (using to your advantage) other people’s money (OPM), other people’s time (OPT) and other people’s expertise (OPE).

If you leverage these properly, harnessing OPM, OPT & OPE can make you wealthy, especially in real estate. But be warned… rarely can you reach the wealth you desire without using at least two of the three types of leverage.

Here’s a quick breakdown you can use as a guidepost:

OPM = Debt or equity partners – there are several strategies you can apply to leverage a deal.
OPT = Team – these are your contractors, employees, sweat equity partners and outsourced helpers (such as you would find on Craigslist, Fiverr or Upwork).
OPE = Experience and expertise that comes in many forms (not just people) – this includes books, documentaries, workshops and events, experienced partners, agencies, mentors, coaches and wise associates.

We use leverage in our deals…

At Investors In Action, we use leverage in every deal…

• We use OPM to fund properties – whether it’s seller financing, private investors or bank money.
• We use OPT, because there are a lot of jobs that need to be done and we don’t really want to swing hammers anymore. (Though we actually have     done a fair amount of rehabbing ourselves “back in the day.”)
• We use OPE every day of the week. We are always reading and learning and growing! (We suggest you do the same and never stop… a millionaire mind = growth mindset)

Why is leveraging other people’s everything so critical?

Unless you have a lot of money sitting in the bank to use in your own deals, you are going to have to rely on investors’ funds… OPM. Even if you do have a lot of money of your own, this just allows you to BIGGER deals or diversify your funds.

If you want to be successful and grow your real estate investing business, you’re likely going to ask for private capital. This comes from other people who are interested in participating in your deal(s) but don’t have the time or interest to do deals themselves. They can fund your deals and earn interest on an agreed-upon dispersement schedule.

People can use their self-directed IRAs or other retirement accounts. The caveat is that the retirement account gets the returns… not the person who owns the account. (They get to pull the monies out later just as they would with any retirement account. The difference is that there should be a lot more moola in there!!)

It is the retirement account making the private loan or participating in the deal. We wrote a very short article about that. Here’s the link: http://investorsinaction.com/be-the-bank-2/

A more recent article we published on a similar topic can be found here: http://investorsinaction.com/baby-boomers-what-has-your-money-done-for-you-lately/

Private lenders vs. private equity partners…

There are two ways to use private funding. One is when the person with the funds acts as a lender and the other is when he acts as an equity partner.

First, let’s talk about private lenders. You can have lenders who loan you a specific amount and receive in return interest for a specified period of time. You get to use their money in your deals while you are paying them. At the end of the term, they get their original investment back in full. For example, we’ll do an easy calculation: let’s say we borrow private money from someone who loves what we’re doing in self-storage properties. Now let’s say that amount is $100,000 at 5% interest. That’s our agreement. And the private lender wants a check every month. Great. We make sure she receives an interest payment of $416.66 a month every year for a set period of time, which may be three years or five years. That’s $5,000 a year in returns. Not bad, right?

At the end of that few years, the private lender has earned a good chunk of change in interest and then she gets her original investment amount back. It’s definitely not like going to the bank for a loan where the interest and principle is calculated into the payments. This is PRIVATE money.

Now let’s talk about private equity partners. These people are not your active business partners; they agree to put a certain amount of money into your deal because they like the returns as you’ve presented them with your plan.

These individuals typically may receive a monthly check from you for a specified period of time or share in the profit when you exercise your exit strategy with the property. Let’s say your plan is to rehab your property and hold onto it for a period of five years.

The equity partner may not get his initial investment capital back right away. Instead, he may take a position in the appreciation of the property, the monthly cashflow and/or maybe even part of the depreciation (because a lot of things on a property will depreciation over a scheduled time and therefore are tax deductible, which could be of interest to your equity partner). He could take one or all three of these positions in your deal. You both will determine the terms, sign an agreement and move forward.

Leverage goes both ways!

You might wonder why people would want to invest with us or any other real estate entrepreneur. It’s simple. They are leveraging our talents and decades of combined experience. In our case, we know how to find, secure and operate self-storage properties. It’s a win-win.

While we have leveraged OPM to get a deal done, the participants (those who let us use their money in our deals) are leveraging our team of experts and strengths. They’ll get good returns without having to lift a finger in rehabbing a property or having to learn all the nuances of commercial real estate.

When using your leveraging skills… your real estate investing super power… use it wisely. Make sure that things are fair to both sides. (That doesn’t mean equal financially, because you will be doing the work it takes to get the property going profitably; the investor is just letting you use her money to get the deal done.) It’s not about what you can get out of people; it’s more about how you can effectively partner with other people to attain a shared goal.

There is absolutely no room for self-centered behavior in this or any business. You are here to serve others. Remember that when you are at the negotiating table, the raising private capital table or the dealing with other human beings in any regard table!

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