What Is The Rule Of 72 And Why It Matters To Real Estate Investors

What Is The Rule Of 72 And Why It Matters To Real Estate Investors

The Rule of 72 is basically a tool to allow investors to know when their investment is going to double in value, based on different return rates. The Rule of 72, and applying it to real estate is really exciting to me because it shows you the power of compound interest and investing in real estate.

If you want to know when a real estate property is going to double in value I will illustrate using an example of a property appreciating at 3% a year. Obviously the rate will vary, I'm just using an average. If you have a property that appreciates at 3% a year, you divide 72 by 3 and you get 24. In 24 years that real estate property is going to double.

When you're looking at real estate investing returns, remember, you're not factoring in just appreciation. I covered this in another post, The Four Ways That You Can Make Money Off Of One Investment Property. The other ways are through cash flow, principal pay-down and tax benefits.

Taking all of those factors into consideration, you're not only getting 3% appreciation, but you're getting all four ways of earning income on one property. A more realistic return on an investment property is between 15 and 20 percent. I'm not guaranteeing that, but I am investing for at least for double digits when buying an investment property.

If you take all those ways to make money off of one investment property and you apply The Rule of 72 to that 15 to 20 percent, you're going to be doubling your money in  four years. That gets me excited about real estate investing because it shows you the power of leverage and compound interest to grow your net worth so that you can achieve your financial freedom goals.

Knowing that you're doubling your money every four years, an exciting thing to know and it's a good rule to apply to your other investments as well. If you're able to look back on your mutual fund portfolio, and apply The Rule of 72, then you'll be able to know when you're able to double those investments as well.

Obviously I'm biased towards real estate investing because I feel like the returns are so much better. If you're going to be investing your money that you would be using towards something else (whether it's a vacation, a nice handbag or whatever you're into), I want to be sure that I'm investing my money into something that is going to give me the biggest bang for my buck, and to me that is investing in real estate.

The other cool thing to note is that it really doesn't matter where or when you start, because the power of real estate investing allows you to grow your money quickly and efficiently.

You really can start anywhere and get to those financial freedom goals that you want that much faster using a vehicle like real estate investing.