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by atw

ATW Blog Post

Recently, during one of my Real Estate boot camp events, we had a large number of investors that were going through some investments available for purchase; I had an interesting conversation with an investor that centered on my return policies. For those that aren’t aware of my return policy, no matter what kind of investment we’re doing, I focus predominately on two things.

The first thing is, “When Do I Get My Principal Back?

I’m often shocked that more investors don’t have this mentality. It’s not uncommon for an investor to enter a transaction and put a sizeable amount of principal into an investment and then pretty much forget about it and only focus on returns. To me, this is crazy! One of the things that is on the forefront of my mind before I enter into a transaction is how long does it take for me to get my principal back; and if the timeframe to get my principal back is unreasonably long, I won’t proceed with the transaction. I do this for one reason, Velocity of Money.

The true meaning of “Velocity of Money”

Many investors think of “Velocity of Money” as something that requires them to get loans so that more principal can buy more investments. I do not consider this to be the case. For me, a successful investment is one that returns my principal to me quickly, so I can use that money again and again (of course with a nice, hefty profit attached as well); or it returns my principal to me and once back, more return keeps flowing into me for a long, long time (investors who have been to my boot camps have an idea of what this looks like for me)

The second thing is, “What’s My Net Return of the Investment?”

It’s shocking how many investors decide to enter into an investment based on the gross return provided. I’ve found that the calculated model return used does not hold up in the long run, investments that are stated to be 15%-20% often lose money when ran on a net return model. It’s 100% imperative to only use net return models to look at the strength of an investment.

The conversation had with this particular investor stated that for several years he had invested into CD’S (Certificate of Deposits) the investment principal he had given was $100,000 dollars and his return was often $3,500 over a 12 month period. He was curious as to why his return was 3.5% annually and the return never changed, yet our investment returns changed EVERY year.

Any bank who offers this particular investment wouldn’t want an investor to look at their investment the way I outlined earlier, because the return would not benefit the bank and in this particular investors case, it would take him 28.8 years to get his principal back and once back would of course produce nothing further.

While this is a different way to look at investments, we encourage you to ask yourself the two questions outlined earlier: “When do I get my principle back?” and “What’s my net return of the investment?” that would not only make you more knowledgeable about your investment but it would also be beneficial to you, the person investing the money. Once you have a better understanding about your money and its return, you would be able to watch your portfolio grow stronger and produce much, much more money!

Happy investing and remember always to invest with PASSION!

Brian Payton

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