Compound growth: the eighth wonder of the world

By Julia Do Vale Ramos | Bricksave

January 13, 2025

News > Blog Article > Compound growth: the eighth wonder of …

"Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it." – Albert Einstein 

Compound interest is often regarded as one of the most powerful tools for growing wealth, especially when applied to real estate investment. In this blog, we’ll explain the concept of compound interest, explore its benefits, and walk through a detailed example to show its potential over time. 

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What is compound interest? 

At its core, compound interest is the interest on an investment that is calculated based on both the initial principal and the accumulated interest from previous periods. Unlike simple interest, which is calculated only on the original principal, compound interest grows exponentially over time because the interest is added to the principal, leading to more interest being earned in future periods. 

In essence, compound interest allows you to earn "interest on interest," and this growth compounds over time, making it a powerful tool for long-term investors. 

Compound interest in real estate: a perfect fit 

Real estate is an ideal asset class for compound interest. As property values appreciate, rental income accumulates, and reinvested earnings add further value to the initial investment. Over time, this cycle of growth accelerates, leading to significantly higher returns than if you were simply withdrawing your profits. 

To better understand how compound interest works in real estate, let’s go through a hypothetical example involving an investor, Samuel. 

Hypothetical example: Savvy Samuel's investment in real estate 

Let’s imagine a scenario where Savvy Samuel decided to purchase 100% of the property at 9700 South Yates Boulevard, Chicago, which cost USD 126,600 in January 2024. Instead of withdrawing his returns on a monthly basis, Samuel chose to reinvest USD 500 each month throughout 2024 into Bricksave’s crowdfunding properties which required a minimum investment of USD 1,000. 

The key advantage lies here: while the minimum investment for a property is USD 1,000, Bricksave offers investors the unique advantage of reinvesting the returns in their wallets, starting from as little as USD 250. This means Samuel can reinvest smaller amounts like these USD 500 each month even though the minimum investment for a new property is higher, thus allowing him to take full advantage of compound growth. 

Here’s how Samuel’s strategy would unfold: 

• Starting investment: Samuel invests USD 126,600 in the property at 9700 South Yates Boulevard in January 2024.

• Monthly reinvestment: throughout 2024, Samuel reinvests USD 500 each month, accumulating USD 6,000 in total by the end of the year. 

• End of Year 1: by January 2025, Samuel would have invested USD 6,000 through monthly contributions, and would have approximately USD 4,500 available for withdrawal. 

Now, let’s project how Samuel’s portfolio would grow over the next several years. 

By January 2028 (end of the initial 4-year period), Samuel would have withdrawn more than USD 32,000 from his investments. 

• Appreciation: Assuming an average annual appreciation of 5% (which is lower than Chicago’s average of 9.51% between 2016-2024), Samuel would have made a further USD 1,200 profit from the USD 6,000 he reinvested during 2024. 

Furthermore, Samuel’s property in Chicago would have appreciated by USD 25,320 over the four-year period. 

By January 2028, the total value of Samuel's investment would be approximately USD 195,700—a significant (nerarly 60%) increase from the initial USD 126,600. Had Samuel opted to withdraw all his returns each month, his portfolio value would have been around USD 174,000, meaning he would have missed out on an additional USD 22,000 simply by not reinvesting. 

The benefits of compound growth 

This example demonstrates the immense potential of compound growth in real estate investments. Here are some key benefits: 

• Exponential growth: The longer you allow your investment to compound, the greater the returns. Over time, your money works harder for you, leading to increasingly larger gains.

• No additional costs: By reinvesting your earnings instead of withdrawing them, you let your investment grow on its own, without requiring additional capital or effort on your part.

• Maximising returns: Compound interest generally produces higher returns than simple interest. Reinvesting profits increases the base on which future earnings are calculated, creating a snowball effect of growth.

• Hedge against inflation: Real estate often outpaces inflation, as property values and rents generally rise over time. In Samuel’s case, the 5% annual appreciation rate exceeds average inflation, meaning his wealth grows at a faster pace than the decline in purchasing power of money. 

The potential downsides of compound growth 

While compound interest offers many advantages, there are some potential drawbacks to consider: 

• Initial capital requirements: To see significant benefits from compound interest, a sizable initial investment is often necessary. This might slow down investors who may not have access to large amounts of capital upfront, but it does not prevent them from being successful in their investments.

• Market risks: While real estate tends to appreciate over time, market fluctuations can impact short-term returns. A downturn in the property market could temporarily slow down the compounding process. 

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Conclusion: the long-term benefits of compound interest 

This example shows that compound interest in real estate can significantly enhance returns over time. By reinvesting his monthly returns in 2024, Samuel would see his investment grow substantially, with a total portfolio value of USD 195,700 compared to USD 174,000 if he had withdrawn his returns regularly. This difference of almost USD 22,000 illustrates the power of compound growth. 

The key takeaway is that compound interest rewards patience and a long-term investment horizon. The longer you allow your earnings to compound, the greater the payoff. Whether you’re new to real estate investing or an experienced investor, understanding and applying the principle of compound interest can be one of the most effective strategies for building wealth.