The Velocity of Money & Real Estate Investing.
The other day i was talking to one of my investor clients from stoneycreek who was asking is it better to put 50% down in the rental property or buy 2 rental properties with 25% down on each of them. I would like to share a lesson from Robert Kiyosaki’s book, “Who Took My Money?” I strongly encourage people to read this book. He writes that the Velocity of Money is the one reason why rich get richer and the average investor risks losing it all. In the book Robert’s says:
“As a professional investor, I want to …
1. Invest my money into an asset.
2. Get my money back.
3. Keep control of the asset.
4. Move my money into a new asset.
5. Get my money back.
6. Repeat the process.
When I teach my real estate investing concept of having homes buy more homes, I am teaching Robert’s velocity of money concept. I had read Robert’s book in 2004. Since then, I had already utilized it with my real estate investing and helped many of my real estate investor clients in Hamilton-Burlington area.
To give you an example: Let’s assume you purchase a nice single-family home for $200,000. To purchase this home, you get a 5-percent down mortgage under CMHC OR GE program and invest approximately $10,000. You use a fixed, interest-only mortgage program and your total monthly payment is, say, $1,400. You offer this home on a Rent to Own Program. Your new tenant/buyer gives you $6,000 up front on this lovely home and picks a program paying you $1,695 a month in rent.
After collecting your up-front payment, you would still have $4,000 invested in this property ($10,000 down payment less that $6,000 upfront payment received from your tenant/buyer). Your monthly cash flow would be approximately $295. (Rent of $1,695 less your payment of $1,400) It would take you another 13 1/2 months to recover your remaining $4,000 invested. ($4,000 divided by $295 monthly cash flow) In this example, it would take you around 14 months 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 move your money into a new asset. Robert continues his teaching as follows:
“A professional gambler wants to be playing the game with house money as soon as possible. While in Casino Niagra, 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 14, you would still receive a cash flow of $295 a month until the property sells. This is all house money. Now let’s move on and assume that the your 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-percentloan to value. A 90-percent loan on a $243,000 home amounts to $218,700, less your current loan on the property of $190,000 would provide you with $28,700 tax-free (Current loan is $200,000 initial purchase price less your $10,000 down payment).
At this point in time, you would have recovered your $10,000 investment, plus taken in an additional $10,030 in positive cash flow and borrowed out another $28,700 tax-free. This amounts to roughly $48,000 in four years. Remember, you still own the original asset — the $200,000 home.
Now, here is where the fun starts to happen. What can you do with the $48,000? Could you use this $48,000 as a 10-percent down payment on a $480,000 asset? Let’s assume you do. What do you think the cash flow would be on this property? Maybe $10,000 a year? In a few years, both of these properties could be refinanced to pull out more money to invest into another asset, creating even more cash flow.
For example, at an appreciation rate of 5 percent a year, the $200,000 home would be worth $295,000, and the $480,000 property would be worth $583,000. You could borrow another $100,000 out of these properties and use as a 10-percent down payment on a million-dollar property. What would the cash flow be on a million-dollarproperty?
Your assets double when you separate your equity from your properties. Can you see what I mean? Can one property properly managed make you a millionaire?Yes..you bet !
Now if you really think about what happened in this example, you will see that you were making your money work extremely hard for you. You didn’t let it sit idle as equity in a property. The key point for you to realize is that equity in a home is idle money. Idle money provides zero return.
If you only take one piece of advice from this report, make it this one …
FUNNELL ALL YOUR INVESTMENTS THROUGH YOUR REAL ESTATE;
Buy an asset (real estate) and have that asset fund your retirement plan, your car, boat etc.
fIRST buy real estate to create cash flow. Then use the cash flow to sustain your lifestyle, fund your RRSP's. As Robert Kiyosaki’s book teaches, your focus should be getting your money back and reinvesting, not letting it accumulate. He writes, “In my world, the velocity and safety of my money is far more important than the amount of my money ... Only amateur investors put their money in their retirement plan,RRSP'S and set the parking brake”
Don’t get me wrong. I just want you to fund your retirement plan, RRSP'S from house money. House money is much better than your money. Don’t you agree?
The information provided here is for educational purpose, if you are interested to discuss in details the ramifications, please consult your financial planner, your realtor for your personal investment goals.
Happy Investing,
Jimmy Singh, B.E.; S.R.E.S
Certified 50+ Real Estate Specialist
Full time Realtor & Investor Serving Hamilton-Burlington & Surrounding areas
Remax Escarpment Realty Inc. Brokerage
905-575-5478
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