A rule you can count on

By Mary Holm

Monday 15th April 2002

It's not always easy to tell, at a glance, how quickly an investment will grow, or what return you've achieved.

But there's a simple rule that's really handy in many situations. It's called the 72 Rule, and it works two different ways:

- If you want to know how many years it will take for an investment to double, divide the return into 72.

For example, if the return is 6 per cent - and you reinvest all interest, dividends, rent or whatever - your investment will double in 12 years. If it's 10 per cent, your investment will double in about 7 years.

- If the value of your investment has doubled, divide the number of years into 72 to find our what return you've got.

For example, if the investment has doubled in 9 years, your return has been 8 per cent a year.

The rule is an approximation of much more complicated formula.

It's very accurate for returns around 7 to 9 per cent. And it gives near-enough results for returns between about 3 and 15 per cent - the range within which we're usually working anyway.

Follow-up

In this column a few weeks ago I wrote about the risks of investing in a residential rental property.

I covered the lack of diversification from your own home; the increased risk whenever you borrow to invest; possible difficulties in selling quickly; and so on.

"I'm not talking about getting tenants from hell, or no tenants at all for several months," I said.

But one reader clearly thinks I should have covered that topic.

"In your recent rental property article," he writes, "you failed to mention the biggest risk of all. That is getting honest, law abiding tenants.
"With today's laws so slanted towards the tenants, they are playing the bankruptcy game as well as the absconding game.

"The laws are so weak they know the landlord has a hard job to find them. Even after a tribunal hearing has been arranged they simply do not attend and declare bankruptcy and get away with not paying arrears.

"Income Support pays tens of thousands of tenants the Domestic Purposes Benefit, but there is no rule which says it has to go towards their rent payments.

"Hence, they spend it on anything they like, usually luxuries, and let the rent lapse.

"If the rules were tidied up, there would be more people willing to take on private rental properties. As the law stands now it is too risky, and the politicians can't or won't fix it.

"They know full well of the tricks that are played through their own Housing Corp. tenants.

"But where the difference lies is that in the case of HC tenants the courts will assist. Not so with the private landlord, who may have a binding written agreement which has been unlawfully violated."

My response: You've clearly had a bad run. Not everyone does. I've talked to quite a few landlords who are happy with their tenants.

From the other perspective, there are also plenty of tenants who haven't got much good to say about their landlords.

Your generalisations are certainly unfair to many tenants.

So why have I published your letter?

It's a warning to would-be landlords who say they prefer rental property to investing in, say, a share fund, because they have more control over the investment. It doesn't sound as if you feel you have much control.

As I concluded in the earlier column, "rental properties aren't necessarily bad investments. But landlords should be aware of the risks they take."

Mary Holm is a freelance journalist and author of "Investing Made Simple", commissioned by the New Zealand Stock Exchange to write an independent personal investment column. She can be reached at maryh@pl.net

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