The Greek philosopher, Archimedes, said, “Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.”
There are many types of leverage to be used in commercial real estate, each type plays a critical role in the Commercial Real Estate industry. Successful sponsor and syndicators combine these forms of leverage to create attractive investment opportunities for their investors while effectively managing properties and mitigating risks.:
- Financial leverage enhances the potential for high returns by using other people's money as equity in the capital stack. One of the most common forms of leverage in real estate syndication. Investors use borrowed money (private investors, and loans) to acquire properties, increasing the potential return on investment. This allows them to control a larger asset with a smaller initial capital investment, which is GREAT!
- Knowledge leverage enables syndicators to make informed decisions and stay ahead of market trends. There are two basic types of ways to acquire knowledge, through your own experiences, and through studying other people's experiences. Do your market research! Syndicators leverage their market knowledge to identify undervalued or emerging areas, which can lead to better property selection and increased property value over time. A deep understanding of the real estate industry, including legal regulations, property management, and deal structuring, can help syndicators make informed decisions and mitigate risks effectively. This doesn't mean you have to be an expert in all areas, but you need to know it well, and you need people in your network and on your team who are more knowledgeable than you.
- Talent leverage ensures the property is well-managed, leading to increased property value and investor satisfaction. A good Property Manager can make or break a business plan, sponsors leveraging skilled property management teams to ensure efficient day-to-day operations are in line with the business plan will maintain and improve the property's value. On top of that, building a talented syndication team that includes legal experts, financial analysts, and acquisition specialists to facilitate the acquisition and management of properties mitigates risk against the unknowns. You don't know what you don't know.
- Resource leverage allows for the acquisition of larger, more valuable properties as well as the use of technology for efficiency, automations, integrations and overall customer satisfaction. Sponsors combine the financial resources of multiple investors in a syndication to access larger, higher-value properties that might be out of reach for individual investors. Utilizing property management software, data analytics, and CRM systems to streamline operations and enhance decision-making makes everyone more money by cutting costs and boosting Net Operating Income.
- Time leverage enables syndicators to focus on strategic tasks and growth rather than getting bogged down in day-to-day operations. Delegating tasks such as property maintenance, accounting, or legal work to third-party service providers, allowing sponsors to focus on strategic decisions and growth. Implementing efficient workflows and standardized processes can save time and increase operational efficiency. As Stephen Covey so eloquently said: "put first things first"
- Skillset leverage gives syndicators the tools to negotiate effectively and analyze markets for lucrative opportunities. Strong negotiation skills can help in acquiring properties at favorable terms and securing favorable financing. Proficiency in analyzing market trends, property value, and rental rates can lead to better investment decisions.
In the commercial real estate market, leveraging financial resources, knowledge, talent, and time is essential to achieving optimal returns in a timely manner and risk mitigation. However, the true strength of this industry lies in the collaborative efforts of a well-rounded syndication team. Whether it's the synergy between seasoned investors, property managers, legal experts, or financial analysts, it's the ability to unite diverse skillsets and perspectives that empowers multifamily syndicators to navigate challenges and unlock opportunities. In the world of real estate syndication, success is a collective endeavor, and the power of teamwork is what makes it possible. I guess you could say it is important to leverage one another.