Compound interest plays a crucial role in the growth of your investments over time.
As time progresses, interest is not only earned on the initial principal amount but also the accumulated interest from previous periods. This is referred to as interest on interest.
This compounding effect is a powerful tool for long-term wealth accumulation, especially with alternative investments like mortgage REITs.
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What is compound interest?
When it comes to your long-term investments, patience is the key to exponential growth.
The reason for this is due to compound interest.
Compound interest empowers investors to leverage time as a crucial factor in wealth accumulation and retirement planning.
What are the key components of compound interest?
- Principal: The initial amount of money invested or borrowed, upon which interest is calculated
- Interest rate: The percentage of the principal that is charged or earned as interest over a certain period (usually expressed annually)
- Compounding period: How often the interest is added to the principal balance—whether it be daily, monthly, quarterly, semi-annually, or annually
- Time: The duration in which the money is invested or borrowed, measured in years or months
These key components collectively interact to determine the future value of an investment or the total amount of interest paid on a loan.
Understanding how changes in each component can affect the overall outcome helps make informed financial decisions, evaluate investment opportunities, and plan for the future.
What is the formula for calculating compound interest?
The formula for compound interest takes into account the initial principal, the interest rate, the compounding frequency, and the period over which the investment grows.
The formula to calculate compound interest
A = P(1+r/n)^nt
- A = the future value of the investment, including both the principal and the interest earned
- P = the principal amount, which is the initial amount of money invested or borrowed
- r = the annual interest rate, expressed as a decimal
- n = the number of times the interest is compounded per year
- t = the period the money is invested, measured in years
Accurate data is crucial when using the compound interest formula to ensure precise calculations and realistic projections of investment growth.
The compound interest effect with private mREITs
Private mortgage real estate investment trusts (mREITs) are a growing alternative investment valued for their passive, high-yielding fixed income that holds for the long term.
Given their income-generating nature, mREITs are well-positioned to benefit from the compound interest effect.
The compound interest effect occurs naturally within the mREIT portfolio
- The mREIT invests in mortgage assets such as residential or commercial mortgages and mortgage-backed securities (MBS)
- These mortgage assets generate interest income, which is collected by the mREIT
- The interest income earned is typically reinvested by the mREIT back into additional mortgage assets or securities
- The interest income earned from the existing mortgage assets is added to the principal balance, effectively increasing the total amount of invested capital
Subsequently, the mREIT continues to earn interest not only on the original principal amount but also on the accumulated interest from previous periods, leading to the compounding effect over time.
This compounding effect applies to both the initial investment and any additional contributions made over time.
The power of compound interest in your investments
The power of compound interest is a significant factor contributing to the attractiveness of investments.
Let’s explore the benefits of compound interest for mortgage REITs in particular.
Exponential growth
Mortgage REITs typically distribute a significant portion of their earnings to investors in the form of dividends.
These dividends represent the interest income earned from the mortgage assets held by the trust.
By reinvesting these dividends, investors can take advantage of compound interest to amplify their returns over time.
As these reinvested dividends compound, they generate additional earnings, leading to accelerated growth of the investment portfolio.
Long-term wealth accumulation
Compound interest is particularly powerful when investing for the long term.
By reinvesting dividends and allowing them to compound over several years, investors can harness the full potential of compound interest to accumulate substantial wealth.
Diversification and risk mitigation
Investing in mREITs provides diversification benefits by spreading investment risk across a portfolio of mortgage assets.
Compound interest enhances this diversification strategy by continuously reinvesting earnings and reducing reliance on a single source of income.
Strategies for maximizing compound interest
Incorporate these strategies into your investment approach to harness the power of compound interest.
Stay in it for the long term
Compound interest works best over the long term.
Maintain a long-term perspective when investing in mREITs and avoid making impulsive decisions based on short-term market fluctuations.
Stay focused on the compounding effect and the potential for exponential growth over time.
Start now
Because the power of compound interest is most effective over long periods, start investing as soon as possible to take advantage of more compounding periods and maximize growth potential.
Reinvest dividends
One of the most effective ways to maximize compound interest in mREIT investments is to reinvest dividends.
When mREITs distribute dividends to investors, consider reinvesting those dividends back into the trust rather than taking them as cash.
By reinvesting dividends, you allow the earnings to compound over time, leading to accelerated growth of your investment.
Regularly review your portfolio
Regularly review your mREIT portfolio to ensure it aligns with your investment goals and risk tolerance.
Rebalance your portfolio as needed to maintain an optimal allocation that maximizes compound interest while managing risk effectively.
Unlock the power of compounding interest with Marquee Capital Fund 1
Private mREITs give investors access to the benefits of real estate investing without the need to directly purchase and manage physical properties.
Private mREITs are a powerful alternative investment opportunity that allows you to:
- Earn passive income
- Grow returns
- Preserve capital
- Diversify your portfolio
- Access tax benefits
Marquee Funding Group’s loans are secured by real estate and underwritten with the value of the assets and the borrower.
Investors benefit from these private financing deals with our quality borrower base to earn higher yields quicker, with a preferred return of 8%.
Discover how our private fund will empower your investment strategy with the power of compounding interest.
