Property Management Blog

Using Bank Money and Velocity of Money

Uptown Properties - Tuesday, August 20, 2019

One of the key tools that one can use to ensure a good return on investment is the velocity of money. In real estate terms, the velocity of money is the rate at which money invested will be returned to its owner for reinvestment.

The rate at which the money invested into one investment returns back to the owner will determine the reusability of the investment capital to venture into another investment. This is one main advantage that investing in real estate has over stock market investment. For example, an individual can use some money to acquire a house, renovate it, and sell it. He or she can then use the originally invested capital after regaining it back to acquire another property all in a short period of time. Therefore, in this case, one can use an amount of let’s say $10,000 to repeatedly invest in property then selling them at a profit every time.

Using the velocity of money to earn from a real estate investment

When looking to invest in the real estate market, potential investors will compare the cost with the profits. That is, one adds up all the expenses and then subtracts the amount from the value of the house after undergoing repairs. This will give you the profit which you then compare it to the costs to get the real rate of return.

However, the profit and cost should not be the only metrics one should consider before investing. One should also factor in the period to complete the project as detailed in the scope of work. Therefore it is imperative to approach such an investment from a monthly rate of return view and not a return on investment terms.

To express this in a much better way, individual A acquires a property that has to undergo renovation. The said renovations are supposed to take at least 6 months. After listing, the property will stay for some few months under contract to buy. For individual A, his or her investment has been tied for a sum of at least 8 months, meaning that he or she cannot use the initial capital in other opportunities and therefore unresponsive to the market.

Individual B deals in flipping houses and his plan involve making cosmetic repairs to the houses he sells. Additionally, in his work, he is not required to have any permits or the house undergoing any inspection from the local housing office. After three weeks of renovations, the property is now ready for sale into the market. The property takes an average period of 6 weeks to get a buyer and individual B having earned a profit, can now invest the initial capital and the newly earned profit to work on a similar deal to his first one. This ensures that money is free for rinse and repeat operations thereby earning much more from a single investment.

Using leverage to earn in real estate

The use of leverage means using borrowed capital to increase the returns that an investment is set to produce. One can access leverage through financing programs, mortgage, and personal money. Additionally, you should be on the lookout for sellers that might be willing to provide financing options for the property that they are selling. Such cases can be beneficial as you can acquire a property with little or no money at all.