• Tweet

• Tweet

Any time an investment, business, or strategy is being evaluated, one of the elements to consider is the velocity of money. This is a methodology that many real estate investors use to determine whether or not an investment property is worth their time or not, but it applies in virtually any wealth building strategy.

The velocity of money is essentially how quickly money is spent, but to an investor it means how quickly the money can be retrieved.  People with cash often ask, “what is the best place to invest to make the most amount of money?” The answer may be the opportunity that a risk and reward measure that you are comfortable with, and allows you to get your money back as quickly as possible.

Using real estate as an example… let’s say you have $50,000 in investment capital, and you are evaluating three investment opportunities. For the sake of arguments, we’ll pretend they all offer equal amounts of risk and reward.

• Property A that you can immediately sell for a profit
• Property B that you can use down payment money and college $500 in cash flow from rental income
• Property C that is expected to appreciate at a rapid rate over the next 5 years

These might all be good investments, but once your investment capital is gone, you can’t invest in anything else until you retrieve your money. Let’s say in each of the scenarios above, you will make $10,000 off of the deal. With Property A, you can quickly get your money back in order to put it into another investment, whereas Property C may take 5 years to get your money back. Strategy A allows you to make $10,000 over and over again in a relatively short period of time, where as the other options with a lower velocity of money do not offer that benefit.

This concept does not just pertain to real estate. While a shorter/quicker velocity of money may increase risk, particularly when dealing with the stock market, but it doesn’t necessarily have to increase risk. For entrepreneurs, there are businesses that require the same up-front investment but significantly differ when you consider how quickly you can make back your investment in order to start another business.

If your strategy is to make money, rather than stash your cash and produce a passive income, velocity of money is an important concept to consider. Those thinkg about starting a new business or rethinking their current model should also consider how fast the business cycle is. Cyclical businesses that require big upfront investments only to see the pay off one or two times a year, for example, may face challenges that businesses with shorter business cycles don’t necessarily face.