On today’s show we are talking about leverage. But folks I’m here to tell you that most people think of the word leverage in a very narrow way.
Most of the time when we say the word leverage it’s assumed that we are talking about borrowing money, financial leverage.
Let’s go back to the root of the word. A lever is used to describe what happens when you take a large stick or a pole and use it to multiply the forces. For example, I have a shovel with a really long handle. If I’m trying to remove a rock in my garden, I will use that long shovel as a lever. The force applied at the end of the handle is not very large and I’m able to multiply the force considerably at the end of the spade and pull that rock out of the ground easily. A lever can multiply forces, or it can multiply distance traveled.
There are many places in real estate investing that we can seek to get a multiplier. Financial leverage is what most people think of first.
But we can get a multiplier many different ways. For example it doesn’t take very much energy to release a huge amount of energy when you apply a needle to a balloon. Popping a balloon is a form of leverage where you get a huge multiplier.
The second form of leverage is when you can multiply your time. The easiest way to do that is to hire someone to do the work for you. That multiplier comes simply from saving you time. But if you hire the right people, they will also have skills that you lack in some areas. They will perform that same task many times faster than you could.
Another form of leverage is education. When you know of a better way, you can take a huge shortcut and reduce something complex into something that is extremely easy.
But there is one other form of leverage that is extremely powerful for real estate investors. That is scale.
You might work for days on a renovation of small single family home in an older neighborhood. When it’s complete, you might make $20,000 or $30,000 profit on that deal.
But even if you apply the other forms of leverage, you can leverage money by using other people’s money. You can hire people to leverage your time. You can use systems, processes and automation to make the use of time even more efficient. But at the end of the day, your profit potential is still that $20,000 or $30,000 profit.
But if you are working on a project with 100 apartments or 1,000 apartments you are leveraging scale. Instead of improving one single family home, you’re improving 100 or 1,000.
There are so many places in the system when you can get a multiplier in your business. Each one of these is an opportunity to exercise leverage. For example, an insurance policy is a form of leverage. You pay a relatively small insurance premium and in exchange, the insurance company promises to cover the risks named in the policy.
So many of you are stuck because you’re thinking linearly. You are thinking using simple the math of addition and subtraction. If you want an extra dollar, then you need to add a dollar to your bank account. There’s no question that addition and subtraction are essential to what we do. But given the choice between using addition or multiplication to bring cash into your bank account, a multiplier seems very attractive.