Harnessing the Power of Money Velocity
There is an allure of real estate as a wealth-building tool. It offers steady cash flow, potential appreciation, and tax benefits. However, there’s a crucial aspect that often is overlooked: the velocity of money. Mastering this concept can significantly boost your returns and accelerate your path to financial independence.
Understanding the Velocity of Money
At its core, the velocity of money measures how quickly money moves through the economy. In the context of real estate investment, it refers to the speed at which your initial capital returns to you so you can reinvest it into new opportunities. Think of it as a perpetual motion machine for your investments.
Let’s break it down: when you invest in a real estate project, whether it’s a rental property, a syndication, or a real estate fund, your goal is to generate consistent returns on that investment. However, the truly savvy investor recognizes that these returns shouldn’t just sit idly by. They should be a dynamic force, continually generating new opportunities for growth.
The Importance of Getting Your Original Investment Back
Imagine you invest $100,000 in a rental property that yields a 10% annual return. After one year, you’ve earned $10,000 in profit. This is where the power of money velocity comes into play. Rather than leaving that $10,000 in the same property, consider the benefits of reinvesting it.
By getting the full, or some of your original investment back, you unlock several key advantages:
Diversification: Reinvesting your initial capital into a new project allows you to diversify your portfolio. Spreading your investments across different assets, markets, or strategies mitigates risk and enhances your potential for higher returns.
Compounding: When you reinvest your original investment and profits, you create a compounding effect. This compounding accelerates your wealth accumulation, as both your original investment and subsequent returns are working together to generate even more income.
Scalability: With your initial investment back, you’re not limited to the same property. You can participate in multiple projects simultaneously, scaling your real estate portfolio and maximizing your overall returns.
Adaptability: The real estate market is dynamic, and opportunities may arise that align better with your evolving financial goals. Having your capital available allows you to pivot quickly when a promising investment comes your way.
Real-World Application
Let’s illustrate the concept with a real-world example:
You invest $200,000 in a commercial real estate project with an expected annual return of15%($30,000/year). After seven years, your investment has generated $210,00 in cashflow so that you’ve gotten ALL of your money back and are still invested in the deal that will continue to give you 15% return every year.
Rather than leaving that money tied up in the same project, you decide at the end of year 2, to take $60,000(2 years of cashflow) and invest it into a real estate project that expects to earn 17% annual return. You’ve got 2 years of experience and now have a better understanding of how to find a better opportunity. At the end of year 3 your portfolio is starting to look like this:
Year 3:
- Original Investment of $200,000= Producing $30,000 annually
- Year 3 Investment of $60,000= Producing $10,200
In 3 years, you’re now generating over $40,000 through investing!
This doesn’t take into consideration that you’ll also be focused on increasing your active income and reducing your expenses during this timeframe which will allow you to invest more.
After five years, your total investment portfolio has grown significantly, benefiting from both the initial property and the new multifamily or self-storage real estate project.
Wrapping It Up
The velocity of money is a powerful concept that passive real estate investors can harness to supercharge their wealth-building journey. By actively seeking opportunities to get your original investment back and reinvesting it into new projects, you create a self-perpetuating cycle of growth. This approach allows you to diversify, compound returns, scale your portfolio, and remain adaptable in the ever-changing real estate landscape. Remember, while speed is essential, wise decision-making and a balanced approach are key to reaping the full benefits of money velocity in passive real estate investing.
