“It’s not luck”
Dr. Eli Goldratt
Focus is an essential element to success in sports, business, and everything. The more success biographies you read it may become crystal clear: mega success is a function of obsessive focus. The odd thing about the human condition is that we are inundated with more and more distraction. Even large companies struggle with strategic implementation for this very reason. You, as CEO of your real estate business, have a grand strategic goal. Have you gotten mired in tenant calls? Have you been inundated with more work at your job? Large companies join your experience that whirlwind can stymie your objectives. (See The Four Disciplines of Execution).
Understand your far from alone if you don’t think your getting the results your capable of. Luckily, a brilliant physicist started to attack this problem. Dr. Eli Goldratt wrote a book called The Goal originally published in 1984. We recently lost this great man who’s legacy is underappreciated by the general public but he was excellent at sharing his vision. This was first readily apparent in The Goal. Dr. Goldratt laid out his Theory of Constraints (TOC) as a management philosophy.
The core tenet of TOC is that not only focus is critical but it guides us to FOCUS on the RIGHT THING. The essential truth is a system cannot be improved by improving a non-constraint.
For example: If you’re a fix a flipper and you want to improve your business is your ability to paint faster going to truly make you more money?
Most manufacturing companies have heard of it and many use TOC to great benefit. My hypothesis is that real estate investors can really become truly exceptional with TOC. All things are systems.
Lets assume you want to be a multifamily syndicator. Lets walk through the steps and see if it can serve us.
1. Identifying the System’s Constraints
Identify the system’s constraint(s) (that which prevents the organization from obtaining more of the goal in a unit of time)
The system constraint is definitely a function of where your are starting. Like Einstein said …everything is relative. Can we agree that if you have notched you third acquisition and manage 10 units your situation is different than a newbie?
Let’s evaluate the experienced investors system constraint to get a great feel for how this process can really change the game. Let’s call the experienced investor Jane. Jane has developed some nice relationships with some local brokers. She has recently acquired her first small multifamily property with her self directed IRA. She studied the BiggerPockets forms and read great books like Buying and Selling Apartments by Steve Burgess. She knows what a great apartment deal looks like.
How does she improve her business?
The bad news all of her personal equity was deployed with he first apartments project. If her goal is to purchase more multifamily she is in the position that most committed real estate investors find themselves. More opportunities than their personal resources will permit them to capture. Her constraint is CASH. The other serious potential candidate to be address first is her mindset. Does she have the believe that she is offering an opportunity or is she feel like she is begging?
2. Decide how to Exploit the System’s Constraints
Decide how to exploit the system’s constraint(s) (how to get the most out of the constraint)
Since Jane has decided to keep her momentum going she needs to figure out how to go to the next level. She ran into some folks on BiggerPockets that have faced the same situation.
Enter the real estate syndication model. This tried and true method focuses on using an well established set of rules and process to bring in third party investors.
Here Jane faces an interesting choice. She can go bigger buy jointly managing the investment the group makes in a 50 unit complex. Or, if Jane really wants to go bigger she can avail herself of the private placement regime available under the securities laws.
3. Subordinate everything else
Subordinate everything else to the above decision (align the whole system or organization to support the decision made above)
Jane has decided she wants to syndicate into infinity so she has elected to master the syndication model. At this point, she reads everything she can find on Regulation D 506 and intrastate offering exemptions.
Finally, she has decided its time to contact a great securities lawyer.
4. Elevate the System’s Constraints
Elevate the system’s constraint(s) (make other major changes needed to increase the constraint’s capacity)
With some great advice, Jane starts her private money campaign. She has decided that she wants to meet accredited investors to establish a relationship. She worries less about deal flow for awhile and much more about conducting these meetings.
Warning! If in the previous steps a constraint has been broken, go back to step 1, but do not allow inertia to cause a system’s constraint.
This step requires Jane to be patient. With persistence she over time planted the seeds that will power her business over the next few decades.