How Does Compound Interest Work in Real Estate?

Question

Hey all!

I'm struggling to understand what seems like it should be a simple concept: compound interest in real estate.

Here's my dilemma. I used two calculators: a rental property calculator and a compound interest calculator. For the rental property calculator, I plugged in a $43,000 down payment (20% on a $200,000 property + $3000 in fees) plus some other figures and it gave me an IRR of 12.8 percent over 30 years. The total profit when sold added up to $662,022.

When I plugged in $43,000 into the compound interest calculator and had it compound at 12.8% over 30 years, the total was WAY higher at $1,595,929.

Why is this? What am I not taking into account in order to get $662,022 up to $1,595,929? How can I leverage compound interest in real estate investing?

Any help would be greatly appreciated! Thanks in advance for helping me understand.

Taylor L. · Answer

IRR isn't the same as compound interest. It's a very different calculation.

Brett Deas · Answer

Real estate investors don't really rely on compound interest on one asset, the goal is to use that one asset to start buying multiple them. So when running the numbers, when can you refinance out of that and use the equity to buy a second one? Then you have two building up interest and in theory, then you can refi into 4. So you could come up with a complicated calculator for all of that because it is like compound interest but juiced up. Also, there are other benefits to real estate investing than straight up stock investing which makes it an attractive investment, not just an appreciation of assets.

Ethan Carbonaro · Answer

Thanks for the response! I see this now, but I still don't understand how I can leverage compound interest in real estate aside from investing Cash Flow and Tax Benefit cash into stocks/other rentals.