A few years ago, I wrote an article in one of our Income for Life Newsletters titled, "The Velocity of Money." The idea for this article came from a lesson I picked up in one of Robert Kiyosaki's books - "Who Took My Money." He writes that the Velocity of Money is the one reason why rich get richer and the average investor risks losing it all. I agree. From Robert's book: "As a professional investor, I want to … 1. Invest my money into an asset. When I teach my real estate investing concept of having homes buy more homes, I'm teaching Robert's velocity of money concept. I read Robert's book in the summer of 2005. Little known to me, I was already teaching the velocity of money and didn't really realize it. Thankfully, I was already utilizing it with my investing. To give you an example: Let's assume you purchase a nice single-family home for $200,000. To purchase this home, you use a 10-percent down payment loan program and invest approximately $20,000. Let's say your total monthly house pagement is $1,300. (You can use a fixed, interest-only loan program to lock in a lower monthly payment) You offer this home on a Rent to Own Program. Your new tenant/buyer gives you $6,000 up front on this lovely home. This upfront payment you receive is an instant 30% return on your investment. Let's also assume that your tenant pays you $1,695 a month in rent. (See the Income for Life New Member Kit for instructions on how to rent your home for the highest possible price.) After collecting your up-front payment, you would still have $14,000 invested in this property ($20,000 down payment less the $6,000 upfront payment received from your tenant/buyer). Your monthly cash flow would be approximately $395. (Rent of $1,695 less your payment of $1,300) It would take you just 3 years to recover your remaining $14,000 invested. ($14,000 divided by $395 monthly cash flow) In this example, it would take you 3 years to complete steps 1, 2 and 3 above. You would have invested in an asset, gotten ALL your money back and kept control of this same asset. Now you are on to step 4, which is to move your money into a new asset. Robert Kiyosaki continues his teaching as follows: "A professional gambler wants to be playing the game with house money as soon as possible. While in Las Vegas, if I had put my money back in my pocket and only played with my winnings, that would have been an example of playing with house money. The moment I began betting everything, I lost the game because I lost sight of my goal, which is to stay in the game but to play with other people's money … not my own money." When you come to a point in your investing at which you have gotten all of your money back and still own the asset, you are playing with house money. In this example, after Month 35, you would still receive a cash flow of $395 a month until the property sells. This is all house money. Now let's move on and assume that the tenant/buyer doesn't purchase your home during the Rent to Own Program. In four years, your $200,000 home would be worth $243,000 with a 5-percent appreciation rate. This appreciation would ALL be house money. You could then borrow a portion of this increase in equity tax-free. You could refinance this home at 90-percent loan-to-value. A 90-percent loan on a $243,000 home amounts to $218,700, less your current loan on the property of $180,000 would provide you with $38,700 tax-free (Current loan is $200,000 initial purchase price less your $20,000 down payment). At this point in time, you would have recovered your $20,000 investment, plus taken in an additional $4,960 in positive cash flow and borrowed out another $38,700 tax-free. This amounts to roughly $63,660 in four years. Remember, you still own the original asset — the $200,000 home. TO BE CONTINUED IN MY NEXT BLOG POST! It gets even better... If you would like to have blog posts emailed to you automatically, add your email in the box on the top right hand side of our blog. This way, you won't miss part two!! Rob Minton |
Alabama Gulf Coast Real Estate Market News
Thursday, February 14, 2008
How Real Estate Investors can use the Velocity of Money to Build Wealth - PART ONE
