This lesson is actually adapted from Robert Kiyosaki’s book, “Who Took 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 it all. I agree. From Robert’s book, he writes “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 velocity of money. I read Robert’s book in the summer of 2005. Little known to me, he was already teaching the velocity of money and didn’t really notice. 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 offer this home on a rent-to-own program. Your new tenant/buyer gives you $6,000 up front 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. ($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 about 14 months to complete steps 1, 2, and 3 above. He would have invested in an asset, recovered ALL the money from it, and kept control of this very asset. You are now at step 4, which is to move your money into 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 only played with my winnings, that would have been an example of playing with house money.” House”. The moment I started betting it all, 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 get to a point in your investment where you’ve got all your money back and still own the asset, you’re playing with house money. In this example, after Month 14, he would still receive a cash flow of $295 per month until the property is sold. All this is house money. 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 in the house. You could then borrow a portion of this increase in principal tax-free. You could refinance this house with a 90 percent loan on value. A 90 percent loan on a $243,000 home comes to $218,700, minus your current home loan of $190,000 would give 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 roughly $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 for 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 estate. What would the cash flow be on a million dollar property?
Your assets double when you separate your assets from your properties. 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 will see that you were making your money work extremely hard for you. He did not leave 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 take only one piece of advice from this report, let it be this:
CONDUCT ALL YOUR INVESTMENTS THROUGH YOUR REAL ESTATE
Most people are making 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, it still comes right 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 real estate into your IRA or retirement plan. To be clear, I’m not saying don’t invest in your IRA. I’m saying insert real estate between 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 make 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 co-workers at the international accounting firm I worked for talking about how much each was contributing to their 401(k). They thought he 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 you’re 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 the adjustment of your company because it is insignificant compared 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 business. The profits from the first company were used to start a new company. All this while my “laughing” 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, business #1, and business #2. These can all 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 speed. You cannot take advantage of a 401(k) plan.
Now, if he had followed the traditional approach, he would still be working as a CPA. I would be putting 10 to 15 percent of my income into the company’s 401(k) plan by working a job I couldn’t stand. Yes, I could have more money in my 401(k) plan, yes! I wouldn’t have any 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’ve 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 amateur investors put their money in their retirement plan and hit the parking brake.”
I like retirement plans. Do not misunderstand. I just want you to fund 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 money from your home. Here are some:
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 don’t have to go through any eviction. But he has to work until he is 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 velocity of money has taken me to new heights every five years. I guess it will be the same for you. Where will you be in 2013?
