Thanks Peter,
I think the crash scenario is more complex.How long will it last and how far will it fall are hard to determine. If the home value falls, then bank anxiety increases, , like banks calling in their shares options.What happens to rent in a falling house market? As the philosophy requires buying poor property in poor streets, selling becomes more difficult.
I am initiating this rather cautious debate, as I left the UK 6 months before their property slump hit in the late 80s. Prices halved, and mortgages were hence greater than the actual value, hence selling wasn’t even an option.
Shares in that financial climate are more liquid.
Hi Long: I can’t speak for Steve, but my answer to your questions would be:

1. Buying in rapidly rising market

Getting a 10.4% yield on good quality property is tough when the market is hot. In most areas to do it you’d have to do something special, eg make it a boarding house. If you refuse to buy under a particular (fairly high) yield level (Steve says 10.4%, Neil Jenman says 7%) that should protect you from paying too much. It’s analogous to only buying shares with low P/E ratios (ie value stocks).

2. Dealing with a market crash.

If you’re buying purely for income and deemed 7, 10 or whatever % yield as acceptable when you bought it, a crash might not be too much of a concern. Assuming you’ve got something in reserve, the main problem is that you’ve got less to borrow against when planning future acquisitions. If you’re still worried, why not set a max LVR across your portfolio of (say) 50% rather than 80%, so there’s a bit of leeway? You don’t need to have all that as equity in the properties; it could be in shares, etc instead.

Peter
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