Note Professor Newsletter

Money Cash and Notes... Continued

In a nutshell, money is anything accepted as a medium of exchange and the retirement of debt. Cash, on the other hand, is currency, or paper a government has decreed to be legal tender, which is supposed to represent values. Take time to ponder on these definitions for a second.

Many like to think of credit cards as money, but credit cards are not money. Why? Because while credit cards are generally accepted as a medium of exchange, credit cards create debt, they do not retire debt. (I knew there had to be a catch.) This is why paying off your MasterCard with your Visa catches up to you sooner or later.

With these definitions in mind, let’s look at examples where not all cash is money, and not all money is cash. We further can see that money takes in a wide variety of goods and, yes, services, too. For example, “sweat equity”, the trading of services for interest in real estate is a no cash technique, but it is not a no money technique. The services that one uses to acquire the real estate is, in fact, money, but not cash. The exchanging of services was used as a medium of exchange for interest in real estate. Another example would be the exchanging raw land for an apartment house. By definition, both the land and apartment house are a form of money because both were used as a medium of exchange to acquire the other. Perhaps you can think of examples in your everyday life where you have made trades, with no cash involved. The parent telling the teenager to mow the yard, and he can have the car tonight, has just bartered and exchanged values. To the teenager the use of the car was a good medium of exchange for his services of mowing the yard. And likewise, the parent, letting the teenager use the family car as a medium of exchange for cutting the grass. (How much sweating the parent does when the teenager is out in the car is a different matter.)

Now you know that even though there is no cash involved, there is money involved in all transactions. In the dawn of trade, barter was used as the medium of exchange. Trading goods and services for other goods and services was taking place millenniums before the concept of cash or currency evolved. Trading goods and services for goods and services is a form of using money without using cash.

For example, I know we have all heard the phrase, "not worth his salt." This came from ancient Rome, when the Roman soldiers were paid in salt, not cash. Salt was a medium of exchange, and therefore money. (In a future issue, the PROFESSOR will discuss money and its history. Very important to know, whether you are going to be investing in real estate or baseball cards)

OK, PROFESOR, I understand what you are saying about other things besides cash being money, and that all money is not cash, but how in the name of the Federal Reserve Board, can you say that all cash is not money? A prime example would be in today's Argentina where their currency, or cash, is worthless. Grain seeds and other goods and services have replaced Argentina’s useless fiat money as a medium of exchange. The people will not accept Argentina's cash, but they will accept grain seeds. Therefore, cash in Argentina's case no longer serves as money. We have all heard of the phrase, "not worth a Continental". This came from our Revolutionary War period, where the currency of the time, the "Continental" had no value. It was only paper and it was back by nothing. (Sort of reminds you of our dollar today, doesn't it?)

Those of us who remember the almost runaway inflation of the 70s and 80s, know that often goods and services had more value than did cash. Often, goods were demanded as the medium of exchange, not cash, and it was common to convert your cash to anything from autos to real estate. Because inflation almost instantly increased equity in properties, 1031 tax deferred exchanges were desirable to cash sales in order to preserve equity. For this reason, frequently cash would not be accepted for real estate, but like kind property would be accepted. Cash was then by definition not money because it was not accepted as a medium of exchange.

Another example of cash not being money is being on an island where the natives are not privy to the wonders of cash. Even though you might have a million dollars in cash, try to use this to buy food or water. Here are instances where cash is not money. Remember that you are learning concepts here. Should economic situations change from the easy money model we have now, you will be able to adjust to market conditions by understanding the difference between cash and money.

Ah, but wise Professor, how do notes relate to money, cash and real estate? Notes are nothing more that the promise to pay a debt over a period of time. Notes can either be secured or non secured. Although there are other forms of note repayment, relative to real estate, notes are generally paid in a series of cash payments. Notes are in essence cash, but this cash is paid over a period of time. This is why it is called cash flow. When you take back a note for $1000 to be repaid in one year, the note is therefore cash, to be paid in one year. How much is this $1000 worth today? This can be learned by going to the EDUCATIONAL section of HOW TO DISCOUNT a Series of Payments. But what is important here is the concept that notes are the same as cash, paid over time.

In real estate arena of the 80s, when there was little or no cash, and financing was either impossible or too expensive (seems hard to believe today, doesn't it?), notes were used regularly as both money and currency. It was the acceptable course of business for the owners to take back a note, or in other words, owner finance, in order to dispose of their real estate. It was also not uncommon to trade these notes on other real estate. (Yes, there were tax ramifications, but that comes up in future issues of the NOTE PROFESSOR NEWSLETTER.) Notes therefore, became a form of money, because notes were accepted as a medium of exchange.

Although it is a lost art, notes are accepted as a medium of exchange today. In the world of real estate, who would accept a note as a medium of exchange? Anyone who would be willing to carry back a note to dispose of his property, or a motivated seller, that’s who. Think about it; if you would be willing to take back a note to sell your property, and you were offered a replacement note that was as good, if not better, than the note you were going to carry back, would you not strongly consider it? Of course, you would. Also a distressed seller would be more than willing to accept a note as a medium of exchange. Successful people are using these note techniques everyday. In the EDUCATION section, “Make Money by Overpaying and Under Selling”, one of the profitable techniques of how to use notes as money will greatly increase your wealth and net worth. As interest rates start to rise, and we move from an “easy money” economy, to a tight money economy, owner financing and notes will replace mortgage brokers and bankers for funding of real estate.

So I hope I have shown that all cash is not money, and that all money is not cash, and how notes can be both. Remember that notes are merely cash paid over a period of time, and notes can effectively be used as money. When you learn the different techniques of exchanging and trading paper for assets, you will be way ahead of most of the “wanna be’s”, who know only the “easy money” way of dealing in real estate. But when the “easy money” runs dry, you will have the knowledge and confidence to adjust if you know the concepts of money, cash and notes.

Please contact The Professor with your questions or comments. It is from your questions that I get topics for my newsletters.