You don’t have to be an experienced investor, broker or financial advisor to figure out how long it will take for your recent investment to start paying you back. With the Rule of 72, you can calculate exactly how long it will take for your new commercial real estate property to double in value. When you know how many years it will take for your property to double, you can make decisions on how and when to sell.
What is the Rule of 72?
The Rule of 72 is an easy-to-use formula that helps estimate how long it will take for an investment to double in value. It’s meant to help investors understand how long they will need to wait for their investment, whether it be a retirement plan or an investment property, to double given an annual rate of return — no matter what time in the real estate cycle they made the purchase.
How Does the Rule of 72 Work?
The Rule of 72 works as a simple math calculation. You may not even need a calculator to solve it, though an acquisition calculator is an excellent tool prior to purchase.
By dividing the number 72 by the interest rate or rate of return, you can get a reasonable estimate for how long it will take for an investment to double in its value.
72 / Rate of Return = Years to Double
You can also use this formula to figure out your necessary rate of return if you want your investment to double in a certain amount of years. All you have to do is flip the divisor and the quotient of the formula.
72/ Number of Years = Necessary Rate of Return
This rule is most accurate for fixed annual interest rates that fall between 6% and 10%. Keep in mind that if your annual rate of return is above 15%, the estimation won’t be as precise.
How Do I Use the Rule of 72 in Commercial Real Estate?
The Rule of 72 can apply to any scenario where you want to explore the potential of an investment with annual compound interest. While you aren’t given a conventional interest rate when you invest in commercial real estate, you can still use the inverted formula to calculate your necessary return on investment.
For example, say you want to double your money on a $100,000 investment in 8 years. All you have to do is divide 72 by 8 to calculate your rate of return to reach your goal:
Annual rate of Return Required = 72 / 8 = 9%
With a 9% return rate, your commercial property will double every 8 years. If you made this investment in 2021, your property would be worth $200,000 by 2030 — and that’s just the beginning.
If you’re looking to double your money (or more) in commercial real estate, using the Rule of 72 can help you understand how much time it will take to reach your investment goals. Using this calculation not only will assist you in purchasing a property but will also encourage you to expand your knowledge of the investment world and how you can make money within it. The Rule of 72 isn’t hard — just let the math do it for you.