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 …