Using Velocity of Money in Real Estate Investing

Velocity of Money

Velocity of money is an economic term that refers to how quickly money changes hands within an economy. It's often used as a key metric of an economy's health. 

The faster a dollar gets spent, then re-spent, and re-spent again, the more opportunities that dollar can be taxed. The more opportunities someone might have to do something grand with their dollar, like start a business that creates taxable jobs.

This article illustrates the vehicles real estate property investors often use to build capital fast. It's a powerful tool for real estate investors; but also crucial to our economy as a whole.

It’s something economists spend considerable resources tracking & attempting to adjust on federal and state government levels; but this dynamic is often better demonstrated on city/town levels simply because the results are more readily seen.

Let's take for example a small town that needs a traffic light; but can only afford a stop sign. If a Dairy Queen opens and becomes a popular place, the town can now charge sales tax on each ice cream cone sold. The town can also tax the Dairy Queen owner on the profit she is making. The town can tax the employees and tax them, yet again when they spend their paychecks buying the next coolest sneakers. And this velocity of money changing hands goes on and on till the town can buy their stop light with all the tax it collected.

Where we don’t often hear the term velocity of money is in respect to property investing; because a wise investor knows the big wins often come from the long game. This is true in the stock market and it's true in real estate investing. The smarts on this can’t successfully be argued.

But velocity of money, when you can get it in your investing, is an incredibly powerful wealth builder; so it's worth talking about. And, it's certainly worth giving this dynamic back its name. Since it can easily be had in real estate investing, it's worth an article on it..

Let’s take for example that, instead of you being a small town needing a traffic light, you are a real estate investor needing to build capital quick, or looking for a passive form of income - Imagine investing $30,000 getting your 12% return of $3,600 and getting that same $30,000 back to reinvest in only 3 months. That means that in one year, you can invest that same $30,000, 4 times, at that rate of return (12%) that’s $14,400.  As far returns go, that’s a very good one!

Two main ways real estate investors get high velocity of money returns. One is House Flipping and the other is through being a Private Lender.

House Flipping is where you purchase a property that you can improve in ways that will greatly increase its value, more than it cost you to purchase it and the improvements. Then you sell it for an expected profit. The goal being to buy the property, renovate it and sell it as quickly as you can (velocity of money!).

House flipping is an extremely profitable way to make money and it also has the powerful dynamic of velocity of money working for you. But it often takes considerable effort - you need to find the property, get it renovated and get it sold. But it can be greatly systemized, which can reduce some of the burden.

Private Lending, is a far more passive form of investing, where house flipping will likely require much of your time and energy, private lending will require you to do little more than vett the person you are lending to.

Real estate private lending is where you loan someone money to purchase a property, renovate a property, or both; but the most common loans would be on the acquisition (purchase) or on the renovation part.

Given a choice between the two, I prefer loaning on the renovation, after the borrower has already purchased the property. Why? Because the property acts as the asset that protects my investment, the buyer also has “skin in the game” since she has also invested her own money to buy the property, and I don’t need to wait the additional time it takes to purchase the property, on top of the time it will take to renovate, to get my money back (velocity of money!). Another important reason, is once the property has been found and purchased, I can better decide if this is a good investment or not. I also have a slight more time to decide, as the buyer is frantic to get the property before someone else does.

Hard Money Lending is also private lending. This refers to a private lender doing this on a more professional, and frequent level. A hard money lender typically would be marketing to create a high demand for their private lending funds.

There is a 3rd common way, that is also worth mentioning, called Wholesaling. It’s interesting as the initial financial investment might be zero and the profit might be almost instantaneous.  So the velocity of money skips a step - the part where you put in your money (nice!). Let’s say you know someone will be willing to sell their property worth $100,000 for only $80,000 and you know I would be willing to buy it for  $90,000. You just made $10,000 as a finder’s fee merely introducing two people that can solve each others problems. 

Fast capital building aside, velocity of money also allows you to be extremely diversified, and extremely reactive to adjusting to the market. Not only can you adjust by the month; but those you invest to, will also be tending to adjust as well. Diversification is never a bad thing.

Okay, now it's time to stop reading and go buy a cup of coffee so we can get velocity of money going again.

Happy Investing!

Transcript of Velocity of Video Transcript

 

00:00
[Music]
00:09
hi everybody I want to take a minute and
00:11
I'll speak about an article that I wrote
00:14
it seems to be getting on attraction so
00:16
the reason why I think this article is
00:17
getting a lot of traction is the subject
00:19
isn't something we typically connect to
00:22
real estate investing the article is on
00:24
an economic term called velocity of
00:27
money so the article is getting a lot of
00:30
attention I think it's because most of
00:32
us involved in real estate investing
00:33
world I think we feel that the market is
00:36
changing and I think that makes a lot of
00:38
us super hyper aware of different
00:41
strategies we're all trying to figure
00:44
out the best way to make a massive
00:47
amount of money during this shift but I
00:49
think there's another reason I think
00:51
also the concepts of lost any money is
00:53
pretty provocative you know it's about
00:55
getting big returns quickly and you know
00:58
as oak threw the comments you know the
01:00
article seemed to generate I'm not
01:02
really sensing it's a great get with
01:04
rich quick kind of crowd but rather it
01:06
seems to be kind of seasoned investors
01:08
and I think the reason why it kind of
01:11
gets our attention in the reason why
01:12
we're all kind of talking about it is
01:14
because it's it's the concepts kind of
01:17
sexy I mean you're getting massive
01:19
returns been very quickly who wouldn't
01:22
love that and you know so velocity money
01:26
it's an economic term short answer is
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it's how quickly money changes hands
01:32
within an economy the faster dollar gets
01:36
spent then re spent then we spent again
01:39
the more opportunities that dollar can
01:41
be taxed the more opportunities somebody
01:45
might be able to do something incredible
01:46
with it they might be able to use their
01:48
dollar to come up with a cure for cancer
01:50
it might be able to use their dollar to
01:52
be the next Bill Gates they might be
01:54
able to use their dollar to create
01:56
several taxable jobs in the economy
02:00
where we don't often hear the term
02:03
velocity money is in a respect to
02:05
investing you know because wise
02:07
investors know that big wins often come
02:10
from the long game
02:12
this is turning the stock market
02:13
it's also true in real estate investing
02:15
and smarts on this really can't be
02:17
argued but blossoming money is
02:19
constantly being utilized by real estate
02:22
investors and it's incredibly powerful
02:24
wealth builder and so it's worth talking
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about so how are real estate investors
02:30
using velocity money very simply and
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you're not going to be surprised by the
02:34
answers a mansion investing thirty
02:37
thousand dollars in getting for a twelve
02:39
percent return and that return gets you
02:42
three thousand six hundred dollars and
02:45
you get that same thirty thousand
02:48
dollars back to reinvest it in again in
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only three months that means that within
02:52
one year you can invest that same thirty
02:54
thousand dollars four times at that rate
02:58
of return of twelve percent that's going
03:00
to be fourteen thousand four hundred
03:02
dollars return that you made off of that
03:05
same thirty thousand dollars back so the
03:07
end of the year you'll help your thirty
03:08
thousand dollars back plus almost half
03:10
of it more back fifty percent more so as
03:13
far as returns go that's pretty good on
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so there's two main ways that real
03:18
estate investors are getting high
03:20
velocity returns
03:21
one is through house flipping and the
03:23
other one is through private lending so
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house flipping as you know is where you
03:27
purchase a property you improve it in
03:29
ways that will greatly increase its
03:31
value far above what you bought it for
03:33
and then you're gonna sell it for an
03:35
expected profit the goal here is to buy
03:38
the property renovate it sell it as
03:41
quickly as you can and that is the
03:43
velocity of the money and I know
03:46
property flippers knowing that they're
03:48
getting a huge home some I don't know if
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they always realized the dynamic that's
03:52
that play there and not only they
03:54
getting this massive payout but now they
03:56
can go reinvest it very quickly and you
03:58
don't really see that in the stock
03:59
market you don't see in other ways in
04:01
real estate investing
04:02
so cop swimming is an extremely
04:05
profitable way to make money and it also
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has that powerful dynamic of velocity of
04:10
money that's working for you but it does
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take considerable effort we need to find
04:15
a property you need to get it renovated
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you need to get it sold so next would be
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private lending it's a much more passive
04:23
way to invest it doesn't have a
04:26
time consuming aspects of property
04:29
flipping you can all you really have to
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do to private land is take the time to
04:34
vet the person you're owning the money
04:35
to but same thing typically you would
04:37
when somebody the money so that they can
04:39
buy a property or you might loan
04:41
somebody in the money so they can
04:42
renovate a property sometimes you might
04:44
do both I think the most atypical would
04:47
be so many owns a property already they
04:49
purchase let's say a shell and they need
04:51
your money to renovate it
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you're basically secured with the asset
04:56
the shell that they purchased and
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they're going to renovate the property
05:00
and try to get it sold or get it
05:03
refinanced within a very short amount of
05:05
time it's the same thing you're going to
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be getting your money back within three
05:10
months plus your return on your
05:11
investment so more often t money also
05:14
has an either dynamic and that's not
05:16
just changing hands so quickly or
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getting your money back so quickly that
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you can be very very diversified you can
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change your your investment strategy on
05:24
on the turn of a dime when you're
05:26
getting your money back in three months
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when you're making many investments of
05:30
just three-month periods at a time when
05:32
the market changes you're ready to
05:34
change as well and you don't necessarily
05:36
even have to change your if you're doing
05:38
private investing your market strategy
05:40
you can continue lending because the
05:42
individuals you're loaning the money to
05:44
they're changing with the market
05:45
conditions so Boston money is very
05:48
interesting I'll try to put a link to
05:51
the article if you're somehow coming at
05:53
this from the video in the in the notes
05:57
here and how be investing
06:00
[Music]

Author:

Joe White

Joe White is a Philadelphia Property Manager and Real Estate Broker. He is the owner of Grow Property Management and has been involved in the management, sales and purchases of Philadelphia area rental investment properties since 2008. He is an author and works as a real estate investment consultant and construction manager.

View all posts by Joe White
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