The Rule of 4 In Property Investing


How does it relate to property investing? 
The ‘Rule of 4’ calculates the value of the property you can afford to buy (including costs such as stamp duty and legal fees) when using your equity or a cash deposit. Simply multiply your useable equity or cash deposit by 4!

How does this rule of 4 work?
Let’s work it backwards. Take a $400,000 property using an LVR of 80%.

(LVR – Loan to Value Ratio is the percentage of the property value that is being borrowed. Most lenders prefer 80%).

Property Value $400,000
LVR of 80% x 0.8
Loan $320,000
Deposit required (cash or equity) $80,000
Plus allow 5% of the property value for buying costs +    $20,000
Total Deposit Required $100,000

Therefore $100,000 deposit buys you a $400,000 property. It’s that simple!

Let’s look at a real life example:

Home Value $490,000
LVR of 80% $392,000
–  $135,000
Usable Equity $257,000
Rule of 4 x 4
You can buy property valued up to $1,028,000

If you leave $50,000 of the usable equity aside as an emergency fund, things look like this: 

Home Value $490,000
LVR of 80% $392,000
–  $135,000
Usable Equity $257,000
Emergency Fund
–   $50,000
Balance of Usable Equity $207,000
Rule of 4 x 4
You can buy property valued up to $828,000

Why not try this based on your personal circumstances?

Current property value $________ x  80 % – Emergency Fund – Home Loan = $_________ Deposit

Boosting the rule of 4

You can keep the LVR on your home at 80% but leverage higher on the investment property.

If $100,000 lets you spend $400,000 at 80% LVR, how much can you spend with higher leverage? 

LVR of 80%  ——> Multiply deposit by 4 ———–> $400,000
LVR of 85%  ——> Multiply deposit by 5 ———–> $500,000
LVR of 90%  ——> Multiply deposit by 6.66 ——-> $666,000

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“I should have invested in properties 10 years ago”

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