First,The Fast Track to Your Financial Freedom (Part 2) – Adding Velocity to Your Investments Articles I would like to thank everyone for their interest in the first part of this article – “The Fast Track to Your Financial Freedom (Part 1) – Leveraging your Money”.
Now, you may now be thinking that this whole idea of leverage is great and earning $81,000 on a $20,000 investment over seven years would be terrific. The problem with this is “IT’S STILL TOO SLOW.” We can still do much better. Besides leverage, we need to add the principle of VELOCITY. Here’s how it works:
In the first year, the investor takes the $20,000 and buys the same $200,000 home as previously illustrated in The Fast Track to Financial Freedom (Part 1) – Leveraging your Money. The home still appreciates at 5% each year and the rents on the home cover the expenses of owning the homes, including the mortgage payment.
After two years, this home will be worth approximately $220,000. Instead of letting that appreciation sit and accumulate, the investor borrows it out and buys another $200,000 home. How is this possible? Quite simply, the investor puts a second mortgage on the home in an amount equal to the appreciation. The rent is raised just enough to cover the interest on this additional loan. (Most landlords raise the rent at least every two years.)
The second home also is rented out and appreciates at 5% per year. Every two years, the appreciation for each home the investor owns is borrowed out and used to buy new homes.
By doing this, at the end of seven years the investor will own eight homes with a total value of $2,020,000 and equity of $273,000. This is compared to equity of only $101,000 if the investor only bought the first home and compared to equity of $39,000 if the investor had relied on the compound interest from mutual funds. This is what we call VELOCITY. Velocity of money is simply the process of continually moving money into new and better investments.
At a net equity of $273,000 the investor has more than thirteen times their original investment in seven years. This is so much better than compound interest that most people have a difficult time believing it.
When I do this demonstration in a seminar, there is always at least one person who will not believe it is possible. At that point, I ask the audience if anyone has ever put the concepts of leverage and velocity into practice. Invariably, someone raises their hand and explains that in actual practice, it has worked much faster than what I have demonstrated, because of the very conservative nature of this demonstration.
You probably would be thrilled with this level of