How to Increase the Velocity of Your Money

What to do with all this Value?

A friend and I recently discussed what we have been doing with our money, basically how we have invested in the last few years.

It turned out that he and I had done very similar things, except that he also has some partnerships in software companies because he went to school and learned how to develop software.

While we were talking about the investments and how they performed, he asked me:

Hey, the houses you and I invested in are increasing in value much more than I had anticipated. That’s really cool but the value they have gained is pretty much sitting there doing nothing. What’s your take on that?

I told him that we can always look at the velocity of money and how we can activate or increase it.

If you haven’t heard this term before, here is an explanation that will help.

If you look at the journey to financial freedom — what we call “The Journey to your Time Freedom Point”, you know that you have established a certain amount of money you want to arrive in your bank account as passive income each month.

Let’s assume you would be saving $2,000 each month until you have $20,000. Then you buy a house priced at $100,000. Your property management company puts a nice tenant into that house who pays $1,000 per month. Let’s assume your tenant never leaves and your rent increases 3%/year.

Photo by Tierra Mallorca on Unsplash

Out of the $20,000 you invested to buy the house, the tenant will pay rent that you use to pay the mortgage for the other $80,000 you got from the bank when you purchased, the insurance policy, the property taxes, and your reserves. At the end of each month in the first year, you have $300 left. That money goes into the same bank account that the rent comes into and keeps accumulating.

You keep doing that for 15 years. By then the rent will have increased to about $1,567/month. Your cost will still be the same for the mortgage, maybe slightly more for insurance and property taxes. Instead of earning $300/month, your passive income will have increased to about $800/month.

When the mortgage is totally paid off, you will probably have about $1200/month in positive cash flow or passive income from that 1 house.

That bank account that you let your passive income sit each month will have grown to about $68,000.

That all looks pretty nice but when you apply the idea of the velocity of money you will quickly see how many opportunities you left on the table.

If you bought that nice house we are talking about at the end of 2019, it would have now increased in value by a total of about 25%. That means that the house is now worth $125,000. You also probably paid down about $4,000 in the roughly 3 years you own it. That means your mortgage balance would be at $96,000.

If you kept the $300/month in passive income in your account for about 33 months, you have almost $10,000 in that account.

So instead of having the money just sit and do nothing, meaning the velocity is very slow, you can speed it up.

You can take the $10,000 from your account and add a Home Equity Line of Credit (HELOC) on the property. You can probably get 70% of the equity. That $25,000 in value increase + $4,000 paid off, so the total of $29,000 x 70% = $20,300

That means you have a little more than $30,000 available and can buy another house for about $120,000.

Now you have 2 houses that perform the same way as the first year.

In a little more than 2 years, you can get the 3rd house, applying the same approach.

The velocity of your money increases.

Photo by Miki Fath on Unsplash

That also means that you will reach your Time Freedom Point faster and you will build more and more assets.

You are activating the value that has developed in your first property to help you get the second one and then the third one and so on. The time between purchases will get shorter and shorter because the velocity of your money increases more and more.

In case you are wondering what happens if we see more and more inflation, as you have probably seen when you go shopping these days?

Inflation has to be seen as if someone gives you extra-powerful fuel into your money engine. The more inflation you see the faster you will be able to go. The only thing you always need to keep in mind is this: The performance of the houses you buy needs to remain the same.

In 2019 you bought a house for $100K and got $1,000/month in rent. In 2021 you buy a house for $125K and collect $1,250/month in rent. In 2024 you will buy your third house for $150K. Make sure you will collect $1,500/month in rent and all will be great and the plan will work as described.

Photo by Clemens van Lay on Unsplash

I hope I see you on your journey towards the time freedom point.

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