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The Rule Of 72 Combined With The 1 Rule In Real Estate Investing
Dated: October 10 2020
I wanted to introduce you to the rule of 72, a very easy, useful tool not many people know about. It is very simple and allows calculating the number of years that your investment will take to double: just take 72 and divide it by the interest your money is earning (please note, the interest is compounded meaning it is re-invested every year and taxes are excluded meaning it would work best for RRSPs / 401Ks):
72/ 4% =18 years to double
72 / 5% = 14.4 years
72 / 6% = 12 years
72 / 10% = 7.2 years
72 / 15% - 4.8 years
On the example above it will take 18 years to double your money if you invested at 4% / year. Real estate investors, of course, do not work with just 4% returns. Here is where the rule is useful:
Say you will need $1.5 mill in retirement and only have $200k to invest now. Assuming you invest at 12% returns, your money will double every 6 years (72/12%=6 years). So after 6 years, you would have $400k, after 12 years $800k and after 18 years $1.6 mill - retirement.
To speed the process up you would invest more money over time or get higher than 12% interest rates.
The 1% rule click here for full blog
Example 1: If you invest in a real estate property worth $150,000 and can make $1500 per Month, (Hence the 1% rule) (Defined by The rent per month is at least 1% of the net purchase price)
Your Down Payment of 20% on a house = $30,000 plus closing costs and getting the home ready= $35,000 total investment.
Principle, interest, insurance taxes etc / month = $629/month
Income from property = $18,000/year(Rent of $1500x12) - ($629 x12mth = $7548 ) = $10,452 - misc expenses $3000 = $7452 profit/year
Return on Investment = $7,452( Income for year) / $35,000 (total amount invested) = 21% return on investment.
Of course, this looks amazing yet it happens, and the smaller you can put down the bigger the ROI. But it is possible. Different parts of the country have booms and busts all the time. You can even invest in other countries like me as well.
But there is time and effort invested as well, unlike some other investments like IRA's, stocks, bonds etc. With real estate, you also can benefit from tax depreciation, appreciation in-home, and other tax benefits in real estate making your investment even more powerful but the numbers can get tricky.
The interest rates and appreciation in AZ make it very attractive, it's just hard right now to find that 1% rule to work.
Jay grew up on a grain and cattle farm in Saskatchewan and started working at a very young age. He got into real estate early as well buying his first property at 23. He's owned several businesses in....
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