The Law of 72!

[Dr. Scott Benjamin]

Folks,

I want to introduce you to an exiting financial rule that should get you all very excited.  When investing (whether it be stocks, bonds or real estate) your investment doubles based on 2 variables.  The first is time and the second is the interest rate.  Allow me to explain - if you had $10,000 to invest in the stock market and wanted to know how long it will take to become $20,000, you would take the interest rate (say 6%) and divide it into the CONSTANT 72 to see that your money would double in approximately 12 years.  Say you were more risky and tried to get 9% in the market, your money would double in 8 years (again, divide 9 by 72).  You can see the obvious relationship between interest rate and speed to double.

Now apply that to our real estate rental properties. If you own a house that is worth $100,000 - assume that the market appreciates at 6% (historically is about right) - that house becomes worth $200,000 in 12 years. That means, you made $100,000 in 12 years...pretty good. The difference between the stock market and real estate is incredible due to leverage. You would need $100,000 in cash to buy $100,000 in stock (we aren't going into margin accounts etc.) Now what is absolutely unbelievable, and separates real estate from the stock market, is that you probably bought that house with 25% down or just $25,000 for the same purchasing power. If you had $100,000, you could buy 4 houses for $400,000 and watch the power of compounding kick in. In another post, I'll discuss the ROI of stocks versus real estate. Really cool stuff! Happy Investing.

Scott Benjamin, PhD, MBA

The Absent Minded Professor