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Understanding the Power of the Rule of 72s in Real Estate

May 31, 2008
In this article we are going to discuss and demonstrate by example the power of the Rule of 72s. This rule comes in handy as a quick way to figure how long it will take to double your money. It doesn't matter what the investment is, real estate, a certificate of deposit, the stock market or a bond, the rule works the same in every case.

Let's say that you know the number of years that you want to wait to double your money. If you divide that number into 72, the result will give you the interest rate that you must earn each year.

Interestingly, the rule also works in reverse. Say that you know the interest rate that you will earn, you can divide that number into 72. The result will be the number of years that it will take to double your money. So the equation will work either way.

Let's look at an example. Say that we want to double our money in fifteen years. What kind of rate of return would we need? All we would do is divide the fifteen years into 72 and we would come out with 4.8. So what does that mean? That means that in order to double our investment in 15 years, we'd need to achieve a 4.8% rate of return on average ever year. Now this doesn't take into account investment fees, commissions or everyone's favorite, taxes. It is simply the interest rate we must achieve.

So let's say we are going to invest $100,000 in a rental property for 15 years. Given the historical averages, 4.8% is not an unreasonable expectation despite the recent turmoil in the real estate market. So our $100,000 house should be worth $200,000 at the end of the 15 year period if we get on average a 4.8% increase in property values.

Now, what if we know that our area is "special" and that we are going to do something a little different to our house and we can get a better rate of return, say 6%. If we invest the same $100,000 in a property, when can we expect our property will have doubled in value to $200,000? Well, let's find out.

If we divide the expected rate of return, 6%, into 72, we find that the answer is 12. So this means that achieving 6% appreciation will cause our property to double in 12 years which is 3 years sooner than if we had gotten only a 4.8% return as in our previous example.

The Rule of 72s is a wonderful rule of thumb to use when estimating your rate or return or how long it will take to double your money. Use this powerful rule when estimating your profits and how long you will wait for the power of compounding to make you rich!
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