Hi Steve,
Why is property investment in a conservative way, instead of maxing out negative??
How is having a swag of property and a cash buffer, while living off the income bad??
Yes I agree that if there is good growth in the next 10 years then maxing out the leverage now is the best option.
But you have to agree that if there is the disaster (ie a period of say 10 years where there is actually negative growth, (and including shares)), then just living off the income with cash buffer would be the best approach. (Even if your LVR fell due to the neg growth)
It comes down to how risk tolerent/averse people are, and a bit of future prediction( however futile it may seem).
What do we know that can help with future prediction???
1. The growth rate of well located res property has been over 7% p.a. for a long time. Hence the assumption that property doubles every 10 years.
2. Yields are at historic lows, and even using your Rental Reality, would still be at extremely low levels compared to historic norms.
3. We have a large section of the population thinking/or starting to think about retirement and where to invest for their future.
4. We have just had huge cap gains averaging over 15% p.a. in many areas over a 6 or 7 year period. ( Was this catch up for the previous period? was this some/most of the next periods growth? Was it a bit of both?)
5. Inflation and interest rates are at low levels not seen for over 30 years.
6. Markets do not behave rationally. When everyone expects them to do one thing they often prove the majority correct for a time, then incorrect for a time.
What does this all mean to me??
If there is no growth for 10 years, then the yields in Duncan's example would go from 5% to 6.7%, given 3% annual inflation.
Is this possible?? To me the answer is yes.
If there is growth of 5% p.a. for the next 10 years (while inflation stays at 3% p.a.), then the yields in Duncan's example would go to 4.1%.
Is this possible?? To me the answer is also yes.
Which is most likely?? Ahh the future, very hard to see.
Am I prepared to throw away some of the potential gain for mitigating some of the risk???
yes
Has Jan Somers approach been that bad, that suggesting it means being negative, throwing away money and being a "doomster"?? Yet growth or no growth, high interest rates or low interest rates, boom or bust, the approach to slowly build wealth while mitigating risk seems to work.
bye
P.S.
As I have stated in other threads a long time ago, that if I could see a period of high inflation ( averaging over 10% p.a.) with relatively low interest rates, then I would "pin the ears back" to get into Steves method to leverage up the asset base.