1. The “Rule of 72”
The "Rule of 72" is used to estimate how long it will take your money to double itself at a given rate of return on your investment.If you divide your rate of return into 72, the answer is how long it will take your money to double.For example, if you earn 6% on a savings account, it will take you 12 years for your money to double in value – 72 divided by 6.If you are able to increase your return to 10%, your money will double in 7.2 years – 72 divided by 10.
2. The “Rule of Leverage"
One of the beauties of real estate (as opposed to other forms of investment) is that you can use leverage to increase your rate of return.You leverage your investment by using a loan on the property and reducing the amount of your own money you invest.The tenant makes the payments for you by paying rent.When you leverage (use a loan), your rate of return is increased.For example, if you purchase a property for $100,000 cash and it goes up in value by 5%, you have earned 5% on your money ($5,000 divided by $100,000) plus the amount of rent collected. However, if you purchased the property with a 10% down payment ($10,000) and a $90,000 loan, your rate of return will be 10 times greater or 50% ($5,000 divided by $10,000).
3. The “Rule of Return.”Here’s a simple way to figure your return on investment:
(a) Convert you down payment to a fraction.
(b) Multiply the denominator times the appreciation rate to find your first year return on investment.
For example, if your down payment is 20%, when we convert it to a fraction yoru down payment is 1/5.The denominator is 5.Multiply the denominator (5) times the property’s appreciation rate (say 10%) and your first year return on investment is 50%.
Let’s test this rule to see if it works.Let’s say we buy a $100,000 property and put 20% down ($20,000) with a $80,000 loan.Our down payment of 20% converted to a fraction is 1/5.If the property appreciates 10%, it will go up $10,000 in value. $10,000 divided by our investment of $20,000 equals a 50% first year return.
The “Wake-Up Money” Easy Investment Analysis and documentation was developed by Larry Kendall and The Group, Inc. Real Estate, and Tim DéLeon of Focus 1st,LLC, and all information associated with it is copyrighted and is used with permission.