How "the Rule of 72" Applies to Real Estate

Many real estate investors, even some professionals, have no idea what "the rule of 72" is or what it means to real estate investing. The rule of 72 gives investors an easy formula to calculate the amount of time that it would take for an investment to provide a return of double the amount of the investment. The number 72 divided by the interest rate gives the time in which an investment or debt will double. For example, any investment that gains interest at a rate of 10% will double in value every 7.2 years.

Invest Smart With the Rule of 72
This rule of thumb works for every type of investment, regardless of whether it is a stock, a 401K, or a real estate investment. When this rule is applied to real estate investments, it shows how long the individual will have to hang on to the property before they can double the money they invested into the home.

The larger the rate of return on the property, the less time that the investor will need to hang onto the property to realize a nice profit. This rule works on all types of real estate, whether it is commercial or residential.

Invest With Caution
The rule of 72 can also work in reverse and hurt the investor. If the investor borrows money from a loan broker, the rule of 72 can calculate how long it will take the debt to double if the balance remains unpaid. Let's say that a real estate investor borrows $10,000 at a 10% interest rate and the balance of the loan remains unpaid. At the end of 7.2 years, that debt will have doubled into a hefty $20,000.

This is also a very common trap for individuals who have less than perfect credit. For example, an individual who has $8,000 in debt, a 2.5% monthly repayment rate, and an 18% interest rate will be paying off the loan for 360 months (30 years) in which the individual will pay the entire $8,000 of debt plus $11,615 in interest.

Smart real estate investors have the rule of 72 working for them rather than against them. That is how they gain wealth and remain wealthy. By remembering the rule of 72, holding on to investments that are providing a good rate of return, and reducing the amount of debts or investments with low rates of return in your portfolio, you can ensure that all of your balances will be to the positive and not the negative. That is what real estate investing is all about.

Content contributed by Colorado's Cherry Hills real estate specialists -- Automated Homefinder.