# October 27, 2016

## Real Estate – The Velocity of Money

This lesson is really adapted from Robert Kiyosaki’s book, “Who Took My Money?” I strongly encourage investors 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. I agree. From Robert’s book, he writes “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 homes buying homes investment strategy, I am 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 5-percent down payment loan program and invest approximately \$10,000. You use a fixed, interest-only loan 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 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 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 …

## Are You A Slave To Money?

If you have ever done something or gone somewhere you did not want to, just because you have paid for the tickets and could not get your money back, then you have been a slave to money.

In a sense money does ‘talk’.

In English, Japanese, Taiwanese or French, two simple words ‘How much?’ and an open wallet can get you round most of the world. In a capitalist system we need money to function and a big part of you is the way you handle, control, manage, lose, fritter, invest, eat, burn, love, hate or worry about money.

The things money can buy have probably defined your experience of holidays, birthdays, Christmas; alongside which reside some of your most deep seated memories, and values. For example, were you brought up to ‘get your money’s worth’? What happens now when you fail to get value for money–do you end up feeling cheated or ‘ripped off’?

Think about the things money symbolises to you. When you were a child, what were the conditions of pocket money? Did money bring you joy and happiness, love, entrapment, resentment or fear?

As an adult, what is your definition of waste or extravagance? I have friends at either end of the scale when it comes to grocery shopping. One buys a lot of sausages and cheap mince and prides herself on her economy; the other spares no expense and buys exotic fruit, fresh salmon and expensive, lean cuts of meats without exception. Her argument is you can buy a lot of quality food for the price of a triple heart by-pass or a mobility scooter!

What does prosperity mean to you? Some financial advisers advocate that you save \$3.50 a day (the cost of a cup of coffee) so you can reap the benefits of compounding interest and retire in moderation years later. I was inclined to agree with this advice until the day I realised that having the disposable cash and time to enjoy a bought coffee a day was prosperity. It was neither a wasted opportunity to save, nor an extravagance.

Money means different things to different people, and it can buy us experiences that are unique to us.

A friend of mine told me her dream was to buy a brand new Porsche. Bridget had worked out she could afford it if she added the loan to her mortgage and paid it off over 25 years. Being financially savvy she knew the real cost of the car but said it was something she just wanted to do in her lifetime so the expense would be worth it. When I found out she had not yet driven one we arranged a test drive. We had only been driving five minutes when I asked her if the car ‘did it for her? Was it worth it?’ She replied, ‘I don’t know, I think I might sooner …