24 Jun Calculate Your Return Within Few Second_Rule Of 72
The Rule Of 72
Have you heard of this real estate investing concept and wondered, “What is the rule of 72?”
Have you ever tried to work out the effect of inflation on your savings?
Do you how long it will take for your home or any other investment to double in value?
Rule of 72 is the easiest way to calculate compound interest and estimation of the time it takes to double your investment and also the expected rate of inflation. It works best with lower rates of return. Once the rate of return gets above 15%, the estimation starts to get further off the mark.
How the rule of 72 Works
When using the rule of 72, all you need to do is divide 72 by the rate of return or interest rate. The answer is the number of years it will take for a given sum to double at the expected compound rate of return, or for your dollar to halve in value at your predicted rate of inflation. Here are some examples:
– Your house is worth $450,000 today. You predict it will increase by 7% per annum. Divide 72/7% and the answer is close to 10. If your prediction is correct, your house will be worth around $900,000 in 10 years time.
– You work out that your cost of living is $40,000 a year. You forecast inflation will be 5% per annum. Divide 72 by 5% and the answer is about 14. Therefore you can expect your cost of living to double to $80,000 in 14 years.
You can use the Rule of 72 as a simple compound interest calculator to check the validity of your forecasts. Let’s suppose your home was worth $450,000 today and you guessed that it would appreciate at a steady rate of 6% per annum. Is that reasonable? Use the Rule of 72.
72/6% = 12.
If your calculations are right the value will go like this:
Value today $450,000
In 12 years time $900,000
In 24 years time $1,800,000
In 36 years time $3,600,000
Are the figures correct? Yes the figures are correct, but nobody knows if the house values will perform as you have just predicted. If that house is worth less than $3.6 million in 36 years time, the capital gain will have been less than 6% per annum.
In summary, the Rule of 72 enables you to work out quickly how long an investment will double at any given rate of return. Take the time to adopt the Rule of 72 as your friend. You’ll find you’ll be using it all the time once you get into the habit.
Using The Rule Of 72 In Real Estate
Truthfully, you can use the rule of 72 in just about every scenario where you would want to estimate compound interest. However, this particular equation is most accurate when the interest compounds annually, which makes it an especially good match for real estate investing and, notably, retirement planning.
While it’s true that you’re not given an interest rate when you invest in real estate in the same way that you would be with credit cards or money market accounts, you can still take steps to calculate your annual return on investment (ROI). Then, you can use that number in place of the compounding interest rate in the rule of 72.
To calculate your rate of return on a real estate investment, you would calculate the following:
(Gain from investment – Cost of investment) / Cost of investment
In this case, your gain is from the rental income that you make plus any equity you’ve built. Meanwhile, your cost of investment would represent things like your mortgage payments, maintenance costs, and utility bills.
Once you have all the values in place, you can use this equation to compare how long it will take to recoup your investment with different rental properties.
references:
https://www.smartline.com.au/mortgage-broker/jthomson/blog/know-how-to-use-the-rule-of-72/
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