The Power of Compounding: Doubling Your Investment in Real Estate
As a passive real estate investor, you hold the key to unlocking the remarkable potential of compound interest. One essential tool that can help you gauge the growth of your investments is the Rule of 72. Let’s explore what the Rule of 72 entails and how it can be applied to a real-life investment scenario.
Understanding the Rule of 72
The Rule of 72 is a simple yet powerful concept that estimates the time it takes for an investment to double at a fixed annual rate of return. To calculate the time required, you divide 72 by the annual rate of return (expressed as a percentage). The resulting number represents the approximate number of years it will take for your investment to double.
For instance, with an annual return of 8%, it would take approximately 72/8 = 9 years to double your initial investment.
Applying the Rule of 72: A Real-Life Scenario-Doubling $50,000 to $100,000
Let’s dive into a real-life investment scenario to showcase the potential impact of the Rule of 72. Imagine you start your investment journey with an initial investment of $50,000 in year one. Over the next five years, you will receive an annual average return of 15% of that $50,000 which will double to $100,000. Here’s how that would break down:
Year 1:
Initial Investment: $50,000
Cumulative Total Investment: $50,000
Average Annual Return of 15% on invested capital($50,000)= $57,500
Year 2:
Cumulative Total Investment: $57,500
Average Annual Return of 15%($57,500)= $66,125
Year 3:
Cumulative Total Investment: $66,125
Average Annual Return of 15%($66,125)= $76,043
Year 4:
Cumulative Total Investment: $76,043
Average Annual Return of 15%($76,043)= $87,450
Year 5:
Cumulative Total Investment: $87,450
Average Annual Return of 15%($87,450)= $100,567!!!!!!
As you can see, if you start investing with $50,000, you can double that $50,000 to $100,000 in 5 years using the Rule of 72. 72/15=4.8 years
How To Supercharge Your Investment- The 7X7 Roadmap To Financial Freedom
Let’s take the same scenario as above, but let’s extend it to 7 years, and let’s add the same initial investment($50,000 per year) PLUS an additional 7% every year cumulatively and our money is earning an average annual return of 15%.
Year 1:
Initial Investment: $50,000
Cumulative Total Investment: $50,000
Cumulative Total Investment Earning Average Annual Return Of 15%= $57,500
Year 2:
Investment: $53,500 ($50,000 + 7% increase)
Cumulative Total Investment: $57,500 + $53,500 = $111, 000
Cumulative Total Investment Earning Average Annual Return Of 15%= $127,650
Year 3:
Investment: $57,245 ($53,500 + 7% increase)
Cumulative Total Investment: $127,650 + $57,245 = $184,895
Cumulative Total Investment Earning Average Annual Return Of 15%= $212,629
Year 4:
Investment: $61,252 ($57,245 + 7% increase)
Cumulative Total Investment: $212,629 + $61,252 = $273,881
Cumulative Total Investment Earning Average Annual Return Of 15%= $314,963
Year 5:
Investment: $65,540 ($61,252 + 7% increase)
Cumulative Total Investment: $314,963 + $65,540 = $380,503
Cumulative Total Investment Earning Average Annual Return Of 15%= $437,578
Year 6:
Investment: $70,128 ($65,540 + 7% increase)
Cumulative Total Investment: $437,578 + $70,128 = $507,706
Cumulative Total Investment Earning Average Annual Return Of 15%= $583,682
Year 7:
Investment: $75,037 ($70,128 + 7% increase)
Cumulative Total Investment: $583,682 + $75,037 = $658,719
Cumulative Total Investment Earning Average Annual Return Of 15%= $757,527
You’ve now built up your portfolio to $757, 527 and if you continued to have that $757,527 earn 15% AAR it would be $113, 629 annually before taxes WITHOUT adding more capital into it.
Wrapping It Up
The Rule of 72 and the concept of compound interest are invaluable tools for passive real estate investors seeking to understand the growth potential of their investments. Keep it simple.
How long will it take to double my money? Use the Rule of 72!
