Property investing comes with its fair share of rules that you’ll need to follow, if you hope to be one of the relative few success stories to create wealth through residential real estate.
One in particular that you’d do well to know when evaluating your next potential property investment is what’s referred to as the rule of 72.
What is it?
The rule of 72 is a simple calculation that gives you a rough idea as to how long it will take to double your invested money.
Let’s say you want to achieve a return of 8 per cent per annum on a cash investment.
You divide the number 72 by your ideal (and/or estimated) annual rate of return when applying the rule, as follows…
72 ÷ 8 = 9 years to double your money
The rule can also be used to determine how long it will take for the cost of goods and services to double, when 72 is divided by the current rate of inflation.
If inflation were tracking at 2 per cent for instance, the sum would look like this…
How does it work when applied to property investment?
Imagine you buy an investment property (say a 2 bedroom apartment) in one of Melbourne’s inner suburbs for $550,000.
Over the last decade Melbourne properties have averaged around 7% capiatl growth each year, so the rule would be applied in the following manner…
72 ÷ 7 = 10.2 years to double your money.
You apartment is likely to be worth around $1.1 million in 10 years time and if you look back at the records you’re likely to find it was worth around $275,000 ten years ago.
Not a perfect science
Of course as with all things property related, nothing is ever set in stone and the rule of 72 is no exception.
But it can be useful when evaluating different investment locations to determine what type of performance and returns you might anticipate achieving, and how quickly.
Plus it’s a fun little exercise you can do without paying your accountant by the hour!