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Golden Rule
The golden rule is an investing rule. It is a rough approximation for rental yield. The rule states only purchase a property if:
Rent = a minimum of 1.4 x interest cost
So for example if the rent is $200 p/w = $10,400 and the interest rate is 7% then the Golden Rule says pay a maximum of $106,122 since: $106,122 x 7% int = $7,428 x 1.4 = $10,400
This purchase price will adjust either up or down dependant on what interest rates are at the time of your calculation.
Limitations
Buying rules of this sort are approximations and should not be relied on as a sole guide to a good purchase. Instead their role is mainly to sort out the wheat from the chaff and to indicate which properties are worth investigating further. The Golden rule only considers one salient feature (cashflow) and doesn't consider other relevant considerations such as equity or capital gains.
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