Essential Real Estate Calculation #7: The Rule of 72
For investors that aren’t already familiar with Real Estate Syndications, it involves multiple investors pooling their capital together to purchase no-hassle, hands-off investment properties that deliver passive income and appreciation to the investor. For additional details on real estate syndications, we recommend checking out the following blog posts:
One of the keys to selecting a great real estate syndication investment is performing due diligence and detailed analysis on the Sponsor, Market, and the Property. Our team here at Limitless Investing independently reviews every syndication opportunity prior to sharing with our investors to ensure they are only receiving high-quality, pre-vetted opportunities.
With that said, we believe it is important for investors to understand the Essential Real Estate Calculations that are utilized as part of this analysis. In previous posts we reviewed Net Operating Income (NOI), Cap Rate, Internal Rate of Return (IRR), Equity Multiple, Average Annual Return (AAR) and Cash-on-Cash Return. Today we will be exploring the seventh calculation (and my favorite!): the Rule of 72.
What is the Rule of 72?
Why does Warren Buffett not need a calculator to determine whether a company is a good investment? While everyone can agree that his intelligence is unmatched, there is actually a pretty simple trick that he uses to do this - the Rule of 72.
The Rule of 72 is a calculation that allows you to quickly determine how long it takes for an initial investment (ex. $10,000) to double (ex. $20,000).
Why is the Rule of 72 important?
There are certainly more calculations to perform before determining whether to move forward with an investment, but having a quick rule of thumb is immensely valuable to weed out opportunities that don’t meet your growth criteria.
It also underscores the importance of compound interest by giving you an idea of how many “doubles” you can potentially get in your lifetime.
How do I calculate the Rule of 72?
To calculate the Rule of 72, you simply need to divide the number 72 by the projected annual growth rate of the investment opportunity:
Here are some examples:
Once you understand how quickly your investment can double, you can determine how much your initial investment could grow based on a set period of time. For example, let’s say you can achieve an 18% annual growth rate and your investment compounds over 20 years. Before reading further, take a guess at the final total...
Wait!? How did that happen? As you can see below, the 5 “Doubles” make a huge impact:
And there you have it! You are now armed with one of the most essential (and simple!) real estate calculations. If you’d like to explore how no-hassle, hands-off real estate syndications can help you achieve a strong Rule of 72 output, don’t hesitate to reach out to discuss your investing goals and subscribe to our blog for future content!
If you’re interested in learning more about investing in a real estate syndication, download your free copy of our eBook, Achieving Financial Freedom by Investing in No-Hassle, Hands-Off Real Estate