Many investors are flocking to real estate investment trusts (REITs) because they’re considered a relatively safe and high yield investment. Some dividends can be 10% or higher and offer the potential for capital appreciation. Approximately 84% of real estate investors indicate that they will make another investment soon, and compound interest can help them achieve their financial goals faster. Here’s what you need to know about compound interest and how it applies to REIT investing.
What is Compounding Interest?
Compounding interest is the concept that your money makes you more money over time when the interest compounds on your original investment and interest earned. Compounding interest creates a snowball effect that can accelerate the value of your investment. For example, if you invest $1,000 at an annual interest rate of 10%, you will have $1,100 at the end of year one. If you leave the interest earned ($100) and the original investment ($1,000) in your account and earn another 10% in year two, you will have $1,210 at the end of year two. Fast forward 30 years, while continuing to earn 10% annually and not making a withdrawal on your account, you will have $17,449.4. Conversely, if you decided to withdraw the $100 interest earned every year for 30 years, you would have only received $3,000 in interest (30 years x $100) and still have just $1,000 in your account. In this scenario, the effect of compounding interest generated more than four times the amount of money compared to making annual withdrawals.
How Can You Use Compounding Interest to Your Advantage?
Compounding interest takes patience but is not difficult to use to your advantage. Most REITs and brokerage platforms offer a dividend reinvestment plan (DRIP). By enrolling in a DRIP, you are reinvesting your dividends back into the REIT or stock that you own. Over time, you will own more shares of the REIT or stock, and the dividend payments will become greater (assuming consistent dividend payments over your investment period). When you redeem your shares in 5, 10, 15, or 30 years, you will see the fruitful effects of compounding interest.
Why Does It Matter?
If you don’t harness the power of compound interest, you may be cutting yourself short of your actual earning potential. Non-accredited and passive real estate investors are already generating a massive amount of wealth using the power of compounding interest by investing in REITs with DRIPs.
If you’re looking to maximize your investments’ value, compound interest can help accelerate your portfolio’s growth over time. To learn more about compound interest, speak with one of the professionals at a commercial real estate investment company online, or better yet, in person, with someone local. Ask them how you can reach your financial goals faster by harnessing the power of compound interest.