So, you’ve decided to invest in property… good choice! As we discussed last month, many analysts agree property offers the best capital growth opportunity over the medium to long term.
Now knowing that capital gains are the primary focus of a solid property investment strategy, it’s good to understand how to your returns can be boosted by compound growth and the rule of 72.
Compound growth occurs where by your property gains are amplified by the previous year’s growth. Just as your savings in the bank benefit from compound interest (interest earned on your savings balance plus the interest previously earned), property benefits from compound growth.
The equity in your property (capital growth) takes off over time, rising at an ever-increasing rate. Therefore, the earlier you invest the better your returns will be through compound growth.
An example of compound growth in action can be outlined by the following:
If given the option of receiving $100,000 today, or receiving just one cent today but doubling its value every day for the next 30 days, what would you do?
As this table (left) shows, going for the second option would make you very wealthy…
By doubling the value of your original cent over 30 days, you would be left with $5,368,709.12.
Compound growth can maximise capital gains and boost your overall profit, as well as highlighting the value of getting on the property ladder as early as possible.
On a graph like this one below, the same example clearly illustrates how critical time is to the size of the final gain.
It’s the same effect that allegedly made Albert Einstein declare that compound interest was the eighth wonder of the world and “the greatest mathematical discovery of all time”.
Stay tuned for our next post, where we discover a neat trick for calculating how long it will take you to double your money using compound interest.