Real estate: the speed of money
This lesson is actually adapted from Robert Kiyosaki’s book, “Who took my money?” I highly recommend that investors read this book. He writes that the velocity of money is the only reason the rich get richer and the average investor runs the risk of losing everything. I agree. From Robert’s book, write “As a professional investor, I want …
1. Invest my money in an asset.
2. Get my money back.
3. Stay in control of the asset.
4. Move my money to a new asset.
5. Get my money back.
6. Repeat the process “.
When I teach my houses the home buying investment strategy, I am teaching Robert’s concept of the speed of money. I read Robert’s book in the summer of 2005. Little known to me, he was already teaching the speed of money and I really didn’t realize it. Fortunately, I was already using it with my investment.
To give you an example: Let’s say you buy a nice single-family home for $ 200,000. To buy this home, you use a 5 percent down payment loan program and invest approximately $ 10,000. You use a fixed interest loan program and your total monthly payment is, say, $ 1,400. You are offering this home on a rent-to-own program. Your new tenant / buyer gives you $ 6,000 upfront on this beautiful home and chooses a program that pays you $ 1,695 a month in rent.
After collecting your down payment, you would still have $ 4,000 invested in this property ($ 10,000 down payment minus the $ 6,000 down payment received from your tenant / buyer). Your monthly cash flow would be approximately $ 295. (Rent of $ 1,695 minus your payment of $ 1,400) It would take you another 13 1/2 months to recover the remaining $ 4,000 invested. ($ 4,000 divided by $ 295 of monthly cash flow) In this example, it would take you about 14 months to complete steps 1, 2, and 3 above. You would have invested in one asset, got ALL your money back, and kept control of this same asset. You are now in step 4, which is to move your money to a new asset. Robert continues his teaching as follows:
“A professional gambler wants to play house money ASAP. 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 how to play with it. House money. The moment I started betting everything, I lost the game because I lost sight of my goal, which is to stay in the game but play with other people’s money, not mine. “
When you reach a point in your investment where you have recovered all of your money and still own the asset, you are playing with the money in the house. In this example, after month 14, you would still receive a cash flow of $ 295 per month until the property is sold. This is all house money. Now let’s go ahead and assume that your tenant / buyer does not purchase their 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 be ALL the money in the house. You could then borrow a portion of this capital increase tax-free. You could refinance this home at 90 percent of the loan’s value. A 90 percent loan on a $ 243,000 home equals $ 218,700, minus your current home loan of $ 190,000 would give you $ 28,700 tax-free (current loan is the initial purchase price of $ 200,000 less your payment $ 10,000 initial).
At this point, you would have recouped your investment of $ 10,000, plus borrowed an additional $ 10,030 in positive cash flow and borrowed another $ 28,700 tax-free. This equates to approximately $ 48,000 in four years. Remember, you still own the original asset, the $ 200,000 house.
Now, this 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? Suppose it does. What do you think the cash flow would be on this property? Maybe $ 10,000 a year? In a few years, both properties could be refinanced to get more money to invest in another asset, creating even more cash flow. For example, at an appreciation rate of 5 percent per year, the $ 200,000 home would be worth $ 295,000 and the $ 480,000 property would be worth $ 583,000. You can borrow another $ 100,000 from these properties and use it as a 10 percent down payment on a million dollar property. What would the cash flow be on a million dollar property?
Your assets double when you separate your equity from your properties. Can you see what I mean? Can A Properly Managed Property Make You A Millionaire?
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 lay it idle as equity in a property. The key point for you to realize is that home equity is idle money. Idle money provides zero return.
If you’re just following a tip from this report, make it this:
SEND ALL YOUR INVESTMENTS THROUGH YOUR REAL ESTATE
Most people make contributions to their company’s 401 (k) plan or some type of IRA. These contributions are paid, in most cases, directly out of your pocket. If your company automatically contributes to your retirement plan with your paycheck, this will continue to come directly out of your pocket. I really think this is a massive wealth destroyer. Instead, take these contributions and invest them in real estate. Then invest the cash flow from the real estate in your IRA or retirement plan. To be clear, I’m not saying don’t invest in your IRA. I’m saying insert real estate into your direct retirement plan contribution. Buy an asset (real estate) and have that asset finance your retirement plan.
This is the advice that will encourage many people. I know Money Magazine tells you to maximize your 401 (k) contributions. I know your parents would tell you to put everything in your 401 (k). I know your company’s human resources department would tell you to invest in their 401 (k) company. I know. I’ve been there. I remember all my coworkers at the international accounting firm I worked for talking about how much each one contributed to their 401 (k). They thought he was crazy to invest in real estate. They thought I was a real nut the next time I quit my high paying job to invest in real estate full time. I can still hear the jokes and the giggles.
This will also happen to you. Everyone will think that you are making a big mistake. The reality is the other way around. You are making a big mistake listening to others. Please listen to this advice. I can’t tell you how powerful it is. I can hear you say, “Well, my company matches my contributions.” I do not mind. Your first investment dollars go to real estate. Real estate dollars go into your retirement plan. Don’t worry about the coincidence of your company because it is insignificant compared to what will happen if you follow this advice.
I bought real estate to generate cash flow. I used cash flow to quit my job and start my own business. The profits from the first company were used to start a new company. All this while my “giggling” co-workers are still arguing about how much they should invest in the company’s 401 (k) plan.
Now, I have all the real estate, company # 1 and company # 2. All of this can channel my retirement, living expenses, startups, and / or additional assets. This is the speed of money in action. The key is where your FIRST investment dollars go. If they go for a traditional retirement plan, you are not building speed. You cannot take advantage of a 401 (k) plan.
Now, if you had followed the traditional approach, you would still be working as a certified public accountant. I would be investing 10 to 15 percent of my income into the company’s 401 (k) plan working a job that I could not bear. Yes, I could have more money in my 401 (k) plan, yippee! I wouldn’t have any assets working for me. Financing real estate first was the best decision I have ever made. I don’t really care how much money I have invested. I care about the assets that I have working for me. Most people focus on the size of their portfolio. As Robert Kiyosaki’s book teaches, your focus should be to get your money back and reinvest it, not let it pile up. He writes, “In my world, the speed and safety of my money is much more important than the amount of my money … Only amateur investors put their money into their retirement plan and put the handbrake on.”
I like retirement plans. Do not misunderstand. I just want you to finance your retirement plan with money from the house. The money in the house is much better than your money. You do not agree? There are many options for investing your home money. Here are just a few:
1. Build an emergency fund for your family.
2. Invest in more real estate, houses buy houses
3. Pay off credit card debt or other loans
4. Invest in your retirement plan / IRA
5. Invest in a mutual fund / stocks or bonds
6. Start a new business
7. Buying and reselling a mobile home.
8. Invest in someone else’s business.
9. Invest in a comprehensive life insurance plan
10. Invest in seminars, books, and audio programs.
11. Hire people to help you with your investments.
12. And many more
I know that my path is the most difficult. It’s so much easier to make contributions to your company’s 401 (k) plan and not think about it. Let’s face it, you don’t have to go looking for houses. You do not have to show your properties. You do not have to go through an eviction. But you do have to work until you are 65 years old. Chances are, you won’t be able to live the life you really want when you retire. I started investing in real estate around 1994. I started company # 1 in October 2000. I started company # 2 in August 2005. The speed of money has taken me to new levels every five years. I guess it will be the same for you. Where will you be in 2013?