What is Izu's 100-200 Property Valuation Rule?

When people are purchasing a home whether for their personal residence or as an investment, what affects the decision making process?  If rents are extremely high in the area, would someone purchase their personal residence there?  Would an investor purchase their investment property there?  What other factors are taken into consideration.

At sizusfinlit.blogspot.com, a simplified process was outlined to describe how people could quickly evaluate the price of a property.  The underlying concept is that prices should be based on rent values.

The rule states that for every $1000/month in rent, a buyer can spend $200,000 to purchase the home.  Likewise, because an investor must hit a certain threshold or return on a down payment, an investor may spend $100,000 for every $1000/month of rent.

The rule has the values 100-200 because these are the factors used to multiply by the monthly rent amounts.  These numbers make sense in theory as well as in application.  Next time you may want to consider how much you are overpaying.  There are two main reasons to cover your bases, even if this is just a personal residence:

1. If an unexpected event were to occur and have a negative impact on your situation, you have staying power maximizing your chances of keeping the home.
2. If an unexpected event were to occur and have a positive impact on your situation, you have hit the numbers to keep this property as a rental property, while moving into a larger home.

This post was reposted from http://finlit.biz/retirement-2/what-is-izus-100-200-property-valuation-rule/, originally written on February 12th, 2013.