PROPERTY CYCLES The Rule of 72

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Most property cycles in Australia follow a very similar habit over a 10 year period, where nothing happens for 2/3 of the cycle and then in 1/3 of the cycle, all the capital growth happens.

And this gets even more interesting when you understand the Rule of 72…

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Transcription

G'day, team. I'm Phil Anderson from LifeCorp, the home of street smart property investors. And welcome back. This is part two of a short video series I've put together to illustrate how street smart property investors are giving themselves the best chance to double, if not triple, the performance of their investment property portfolios. Now, in today's video, I'm gonna show you an interesting, if not phenomenal, insight that I learned, which is gonna blow your mind. It was even so fascinating, it caught the attention of Albert Einstein. Let's have a look at it together.

So, what could be so interesting that it caught the attention of Albert Einstein? Well, we are, of course, talking about what he described as the eighth wonder of the world- compounding interest. And in this case, compounding capital growth. It's a phenomenon. And when you put the elements of this together, layer them together, it really does give you a whole new perspective on the growth and the expectations we can have with holding a property portfolio over a longer term. Let's have a look at a couple of things together.

We talked in the earlier video about the fact that, we looked at a property cycle over a period of what an average property cycle probably looks like around Australia- let's say, 10 years in length. I also mentioned in the first step of this process that one of the key things I've observed over the years is that most property cycles in Australia operate in a very, very common way, where 2/3 of a property cycle- that's right, 2/3 of a property cycle- not much happens, and all of the growth typically happens in 1/3 of a cycle. It's a phenomenon that's just really been something that's caught my attention as I've watched hundreds of property cycles around Australia over a period of more than 20 years. And all of the growth tends to take place in one part of the property cycle. Interesting.

And getting back to the whole Albert Einstein reference, is what we call the rule of the 72. It's a phenomenon that really is well-applied to the property industry. Now, the rule of 72 dictates that if over this 10 year period of time, we can just get an average of 7.2% capital growth- 7.2% capital growth on average over a 10 year period- that's all it will take for a property to double in price every 10 years. Doesn't have to get 10% per year for 10 years to double in price, which you would probably first think. It actually only needs to get 7.2% capital growth per year over a period of 10 years for a property purchased at the start of the cycle to fully have doubled in price at the end of the cycle.

Now, I bring attention to this, because the reality for me, knowing that this is where we want to target to buy properties, what I call 7 o'clock markets, and the lunch money property investment system is designed to identify markets that are very well-placed for this particular scenario. The rule of 72 dictates, like I said, that a property will double in price- the property that you buy here will have doubled in price by the time it gets to here- but, if you notice that all of the growth is happening in 1/3 of the cycle- no growth in 2/3, all the growth in 1/3 of the cycle- can you imagine what the growth needs to look like in here? So, inside of the market, where this is all happening, of course you're gonna get much stronger growth in this period just for it to average out to at least 7.2%. If it's gonna be 0% between here and here, of course it's gotta be much greater than that to just get back to a basic Australian market, an average of around 7.2% capital growth.

The rule of 72 is something which really is worth understanding, because it gives you the confidence to know that even holding a property in the longer term, you're probably gonna look like a rock star eventually, but, as soon as you start managing to target these 7 o'clock markets- and, you're looking for this growth potential in the market, this ideal timing in the market, of course you can experience that growth much, much quicker.

Now, next week, when we come back, I'm gonna show you how to duplicate, how to use these factors that we've already identified, how we put them together and how we duplicate, how we put the properties to work for us. So, it's bye for now. We'll see you next week. And remember- if you're thinking about buying a property- if you can't buy it with your lunch money, don't buy it.

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