The rule of 72 is a formula used to determine the amount of time it will take for invested money to double at a given compound interest rate, which is 72 divided by the interest rate.
It states, compounding interest will double the price of a commodity in the number of years of 72 divided by the yearly interest rate.
For instance, if you had $10,000 and it was earning 8 percent per year, you would divide 72 by 8 to find out how long it would take the $10,000 to double into $20,000………..the answer is 9 years.
If you were to invest for a very long period of time, for instance, 36 years; your $10,000 investment would turn into $20,000 in 9 years, $40,000 in 18 years, $80,000 in 27 years and $160,00 in 36 years.
If a commodity increases by 7.2 percent per year, the rule of 72 tells us that its price will double every 10 years. 72 divided by 7.2 is 10. So, you can see that over the long haul it is smart to be invested in real estate all the time.
If we follow the adage that property doubles every 7 to 10 years, the rule of 72 can be used along with leverage to show how you can achieve amazing returns using investment property.
Now simply doubling our money every 10 years will not put us on the super fast track to wealth. To get on the fast track to wealth, you must incorporate leverage. With leverage you control a large amount of worth, while only having invested a small amount of money.
Here’s how leverage works in for us with our property investments…………
Let’s say you are able to put down 20 percent deposit on a $300,000 property. This means you would have invested $60,000.
If the price of that property doubles in the next 10 years ( of course we are achieving much better returns for our Property Friends members, but hey let’s be conservative), the rule of 72 tells us that the value of our property will have increased at a yearly growth rate of 7.2 percent. The price of the property will be worth $600,000 after the 10 year period.
If you had been able to rent out the property with your tenants rent covering the monthly loan payments and tax deductions covering your rates and insurances cost, well in simple terms you will have made $300,000 with your $60,000 investment.
This is leverage at work, because following the rule of 72 you should have doubled your $60,000 in 10 years, but you actually made $300,000 because of the leverage of your mortgage, combined with rental income your property gave you.
By taking this extra equity and applying it to new property investments you can see how a person could use the rule of 72 and leverage over and over again to become very wealthy. This is not a far-fetched hypothesis. It is a proven strategy that has worked countless times.
In the current economic climate there has been a slowing of price increases in real estate and in some instances property values have gone down in certain areas around Australia.
This may be disappointing news for people who were planning on their homes going up in price quickly to make a fast buck. However, a dip in price is good news for those of us investors who are looking to continue expanding our investment property portfolio.
In the coming years, many investors will make excellent money because they took advantage of this opportunity to buy more property while the real estate market was experiencing this downturn.
We at Property Friends are currently finding fantastic deals that are perfectly set up to reap the benefits of buying property at low prices now and being set up for compelling capital growth when the market bounces back.
Many of you have now purchased multiple properties through Property Friends and you would only have to do your own sums to realise that your investments are far exceeding the projections the Rule of 72 would have been making at the time you purchased.
Of course property values do not always go up in a linear fashion as there will always be peaks and troughs within any property cycle.
Property Friends is a specialist Property Investment Advocacy that has been operating for the last 13 years on the basis of 3 principles: Trust, Community & Progress. www.propertyfriends.com.au (03) 9758 5331
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