Real Estate – The Speed of Money
This lesson is actually adapted from Robert Kiyosaki’s book, “Who Moved My Money?” I highly recommend investors to read this book. He writes that the Velocity of Money is the only reason the rich get richer and the average investor risks 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. Maintain 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 investment strategy for buying houses, I am teaching Robert’s concept of 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 didn’t really 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 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 are offering this home on a rent to own program. Your new tenant/buyer puts you $6,000 up front on this beautiful home and chooses a program that pays you $1,695 a month in rent.
After your down payment is collected, 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. ($1,695 rent minus your $1,400 payment) It would take another 13 1/2 months to recoup the remaining $4,000 invested. ($4,000 divided by $295 monthly cash flow) In this example, it would take you about 14 months to complete steps 1, 2, and 3 above. He would have invested in an asset, recovered ALL of the money from it, and retained control of this very asset. You are now at step 4, which is moving your money to a new asset. Robert continues teaching him as follows:
“A professional gambler wants to play with house money as soon as possible. While I was in Vegas, if I had put my money back in my pocket and just played with my winnings, that would have been an example of playing with house money.” House”. The moment I started going all-in, 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 my own money.”
When you reach a point in your investment where you have made all your money back and still own the asset, you are playing with money from the house. In this example, after Month 14, he would still receive a cash flow of $295 per month until the property is sold. This is all money from the house. Now let’s go ahead and assume that your tenant/buyer does not 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 be ALL money from the house. You could then borrow a portion of this increase in principal tax-free. You could refinance this house with a 90 percent equity loan. A 90 percent loan on a $243,000 home comes to $218,700, minus your current home loan of $190,000 would get you $28,700 tax-free (the current loan is an initial purchase price of $200,000 minus your $10,000 down payment).
At this point, you would have recouped your $10,000 investment, plus receive an additional $10,030 in positive cash flow and borrow another $28,700 tax-free. This equates to approximately $48,000 over four years. Remember, you still own the original asset, the $200,000 house.
Now this is where the fun begins. 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 house would be worth $295,000 and the $480,000 property would be worth $583,000. You could 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 estate from your property. Can you see what I mean? Can a well-managed property make you a millionaire?
Now if you really think about what happened in this example, you’ll see that you were making your money work extremely hard for you. You did not lay it idle as equity in a property. The key point to keep in mind is that home equity is idle money. Idle money provides zero return.
If you only take one piece of advice from this report, let it be this:
DRIVE ALL YOUR INVESTMENTS THROUGH YOUR REAL ESTATE COMPANY
Most people are making contributions to their company’s 401(k) plan or some type of IRA account. These contributions are paid, in most cases, directly out of pocket. If your company automatically contributes to your retirement plan with your paycheck, it’s still out of pocket. I truly believe 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 contribution to the retirement plan. Buy an asset (real estate) and have that asset fund your retirement plan.
This is the advice that will get many people up in arms. 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 your company’s 401(k) plan. I know. I have been there. I remember all my coworkers at the international accounting firm I worked for talking about how much each one was contributing to their 401(k). They thought I was crazy for investing 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 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 will be making a big mistake by listening to others. Please, 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 don’t mind. Your first investment dollars go into real estate. The real estate dollars then go into your retirement plan. Don’t worry about your company’s fit because it pales in comparison to what will happen if you follow this advice.
I bought real estate to create cash flow. I used the cash flow to quit my job and start my own company. The profits from the first company were used to start a new company. All this while my “laughing” coworkers keep 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 these can channel my retirement, living expenses, new businesses, and/or additional assets. This is the speed of money in action. The key is where your FIRST investment dollars go. If they go to a traditional retirement plan, you’re not creating velocity. You cannot take advantage of a 401(k) plan.
Now, if you had followed the traditional approach, you would still be working as a CPA. I would be investing 10 to 15 percent of my income in the company’s 401(k) plan working a job I couldn’t stand. Yes, I could have more money in my 401(k) plan, yes! I would have no assets working for me. Financing real estate first was the best decision I have ever made. I really don’t care how much money I have invested. I care about the assets I have working for me. Most people focus on the size of their portfolio. As Robert Kiyosaki’s book teaches, your focus should be on getting your money back and reinvesting it, not letting it accumulate. He writes, “In my world, the speed and safety of my money is much more important than the amount of my money… Only hobby investors put their money into their retirement plan and put the parking brake on.”
I like retirement plans. Do not misunderstand. I just want them to fund their retirement plan with money from the house. House money is much better than your money. You do not agree? There are many options for investing your home money. Here are a few:
1. Create 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. Buy and resell a mobile home
8. Invest in someone else’s business
9. Invest in a Whole 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 my way is the hard way. It’s 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 house hunting. You don’t have to show your properties. You do not have to go through any eviction. But you 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 No. 1 in October 2000. I started company No. 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?
