“He who understands it, earns it. He who doesn’t, Pays it!”
Understanding the Rule of 72 and 2 can be invaluable in property investment. The Rule of 72 is a quick calculation to estimate how long it takes for an investment to double in value based on a fixed annual growth rate. Divide 72 by the annual growth rate to get an approximate doubling time.
The Rule of 72 works best in the 5 to 12 % range, but it’s still an approximation and doesn’t consider inflation, market change and other variables.
A real property example is a $345,000 unit purchase price with 2% annual growth. 72/2 = 36 years to double. Too long.
Property sales consultants, strategists or property specialists use this Rule with an imaginary annual growth rate. Most books, brochures and sale pitches are calculated based on 5% growth, which can work on powerful properties but not on a high-risk product sale, off-the-plan units or other average products in an oversupplied area and the wrong asset class or property configuration!
This property, for instance, was bought almost 12 years ago for $345,000 with 5% growth on average on the marketing materials 72/5 = 14.4 years.
This property, around 2025-2026, will double in value.
In this specific case, in one of the oversupplied suburbs in Brisbane, 5% growth was a fiction. The property didn’t grow an inch. It decreased in value and is now around $250,000-$280,000. I doubt it will double soon.
Interest rates can replace the growth rate in the formula, but it’s the same.
72/ 6% interest rate = 12 years to double the $345,000 investment
If we calculate based on the interest rate and, in this example, only on the money invested:
e.g. 345,000 x 20% (Deposit) = $69,000 invested capital (exclude stamp duty, lawyers fee, reno miscellaneous etc.)
12 years so far…
Interest rates: 6%
72 / 6 = 12
12 years to double – $69,000 to $138,000.
As mentioned above, if the property is worth 280k sale price or even 300k by the Bank valuer, we are already in a loss of $45,000.
Even if we say that the interest rate was at 4% on average – 72/4 = 18 (although it started in the 7%~ and went down gradually and met the 7% again this year)
It means that in the next six years, up to 18, the property should grow at a fast pace to $138,000 + $45,000 (current loss) and, in total, $183,000.
If we exaggerate and we project that this unit will be worth $500,000 in 5 years, we will still be at a loss of a few 10’s of thousands.
The Rule of 72 works well with low-risk properties, second-hand with a land component on a good socio-economic location!
Beside the Rule, make sure you buy well!
“Hewhounderstands it, earns it. He who doesn’t, Pays it”
In real estate rental assessment, the “Rule of 2” refers to a simple guideline for evaluating the profitability of a potential rental property. According to this Rule, the property’s gross monthly rental income should ideally be at least 2% of the property’s purchase price. For instance, if a property costs $200,000 to buy, the monthly rental income should be around $4,000 (2% of $200,000) to meet this guideline. This Rule helps investors quickly assess whether a property has the potential to generate sufficient rental income compared to its cost.
This prudent approach ensures that the investment remains financially viable over the long term and safeguards against potential downturns in the rental market.
Marketers and investment firms generally use an annual 4-5% rental yield as a sale pitch.
For instance, based on actual numbers in major city locations:
$18,000 annual rent divided by $345,000 purchase price = 5.2% rental yield. (The past two years with significant interest rate increases and COVID rent discount, adding to that rental increase is insignificant.)
Bear in mind that this is gross rent!
The NI (Net income) is $1000 a year, approximately $1000/$345,000 = 0.2%.
0.2% is a meagre yield, and usually, it has negative cash flow. In this case (loss of 5k) -$5000/345,000 = -1.4%
This Rule is suitable for assessment, but sales ads work with gross rental yield usually 4-5% and recently even 6-7%, But consider that it’s gross only.
Operation profit-wise is relatively poor but still positive cash.
$8,000 operation profit / $345,000 = 2.3% (Still work), but with mortgage cost, all the profit became negative and the Rule of 2 doesn’t work!
Negative gearing, which many marketers and consultants pitch these days to become positive after Tax, is not a solution either and doesn’t offset enough after half of the property cycle (around five years).
The tax element is essential but isn’t significant unless we invest well!
Those rules play well in a sale pitch, ads and marketing brochures,please be very cautious about which real estate product you add to yourportfolio and if potential growth or rental income is most likely to occur.
“Hewhounderstands it, earns it. He who doesn’t, Pays it”
FAQs
Understanding the Rule of 72 and 2 can be invaluable in property investment. The Rule of 72 is a quick calculation to estimate how long it takes for an investment to double in value based on a fixed annual growth rate. Divide 72 by the annual growth rate to get an approximate doubling time.
What is the Rule of 72 in real estate? ›
Here's how it works: Divide 72 by your expected annual interest rate (as a percentage, not a decimal). The answer is roughly the number of years it will take for your money to double. For example, if your investment earns 4 percent a year, it would take about 72 / 4 = 18 years to double.
What is the 2 rule in real estate investing? ›
The 2% rule is a rule of thumb that determines how much rental income a property should theoretically be able to generate. Following the 2% rule, an investor can expect to realize a positive cash flow from a rental property if the monthly rent is at least 2% of the purchase price.
What is the Rule of 72 in investment strategy? ›
The rule of 72 is a mathematical formula you can use to calculate how long it will take for an investment to double in value, presuming it has a steady annual rate of return. The rule is an easy-to-remember calculation: Simply divide 72 by the annual rate of return for an investment.
How many years are needed to double a $100 investment using the Rule of 72? ›
To find the approximate number of years needed to double an investment, divide 72 by the interest rate. In this case, with an interest rate of 6.25%, divide 72 by 6.25, which is approximately 11.52. Therefore, it would take approximately 11.52 years to double the $100 investment.
Does the Rule of 72 really work? ›
The Rule of 72 is a simplified formula that calculates how long it'll take for an investment to double in value, based on its rate of return. The Rule of 72 applies to compounded interest rates and is reasonably accurate for interest rates that fall in the range of 6% and 10%.
What is the golden rule in real estate? ›
You have the right to expect that housing will be available to you without discrimination or other limitations based on race, color, religion, sex, disability, familial status, or national origin. This includes the right to expect: Housing in your price range made available to you without discrimination.
What is the 80 20 rule in real estate investing? ›
In the realm of real estate investment, the 80/20 rule, or Pareto Principle, is a potent tool for maximizing returns. It posits that a small fraction of actions—typically around 20%—drives a disproportionately large portion of results, often around 80%.
What is the 80% rule in real estate? ›
When it comes to insuring your home, the 80% rule is an important guideline to keep in mind. This rule suggests you should insure your home for at least 80% of its total replacement cost to avoid penalties for being underinsured.
What is the 50% rule in real estate? ›
The 50% rule or 50 rule in real estate says that half of the gross income generated by a rental property should be allocated to operating expenses when determining profitability. The rule is designed to help investors avoid the mistake of underestimating expenses and overestimating profits.
How To Double Money In 24 Hours – 10+ Top Ideas
- Flip Stuff For Profit.
- Start A Retail Arbitrage Business.
- Invest In Real Estate.
- Play Games For Money.
- Invest In Dividend Stocks & ETFs.
- Use Crypto Interest Accounts.
- Start A Side Hustle.
- Invest In Your 401(k)
To calculate how long it takes money to double, divide the interest rate into 72. To see how long money triples, divide it into 115. Assuming a 7% interest rate, it will take approximately 10.3 years for the original principal to double and 16.4 years to triple. There is also a rule of 144.
How to double 10K quickly? ›
How To Double 10K Quickly
- Flip Stuff For Money.
- Invest In Real Estate.
- Start An Online Business.
- Start A Side Hustle.
- Invest In Stocks & ETFs.
- Fixed-Income Investing.
- Alternative Assets.
- Invest In Debt.
Just take the number 72 and divide it by the interest rate you hope to earn. That number gives you the approximate number of years it will take for your investment to double. As you can see, a one-time contribution of $10,000 doubles six more times at 12 percent than at 3 percent.
How long in years will it take a $300 investment to be worth $1000 if it is continuously compounded at 9% per year? ›
To find t, we rearrange the formula to t = ln(A/P) / r. Substituting the given values into the formula gives us t = ln(1000/300) / 0.11. Solving this equation gives t ≈ 13.98 years.
How can I double $5000 dollars? ›
How can I double $5000 dollars? One way to potentially double $5,000 is by investing it in a 401(k) account, especially if your employer matches your contributions. For example, if you invest $5,000 and your employer offers to fully match at 100%, you could start with a total of $10,000 in your account.
How does a 72 hour contingency work? ›
If the seller receives an offer that is better than the initial offer, he can activate the 72-hour clause to force the buyer to purchase the house or forfeit the contract. The time period in the release clause can be negotiated, but advanced notice is always required before the seller can cancel the deal.
What is the 70 rule formula in real estate? ›
The 70% rule can help flippers when they're scouring real estate listings for potential investment opportunities. Basically, the rule says real estate investors should pay no more than 70% of a property's after-repair value (ARV) minus the cost of the repairs necessary to renovate the home.
What are the flaws of Rule of 72? ›
Errors and Adjustments
The rule of 72 is only an approximation that is accurate for a range of interest rate (from 6% to 10%). Outside that range the error will vary from 2.4% to 14.0%. It turns out that for every three percentage points away from 8% the value 72 could be adjusted by 1.
What is the Rule of 72 allows you to estimate? ›
The Rule of 72 is a convenient method to estimate the approximate time for invested capital to double in value. By merely taking the number 72 and dividing it by the rate of return (or interest rate) expected to be earned, the output is the approximate number of years for an investment to double.
