With any investment we all want to know the returns then we want to know what the risks are. So when it comes to investment property what are the risks and the returns.
This is when the water becomes muddy, is the real investment performance dependant on a calculation that also includes the owners income?? Very commonly this is the case for mum and dad investors who buy a property to "negative gear" against their income.
On the upside of the sales pitch the numbers look like your accessing more of your earning funds to take care of the present costs and the future value of the property growth is where the full benefit is realised. If your doing it then you know what this means and for the lay person lets paint a picture.
You have an investment that deliberately returns poor performance in the short term because you want it to perform well in the long term. The good part is you know the poor performance short term can be a tax deduction against your income and so the poor performance is partially covered by "the tax man" it looks like everything is great.
So what is the risk of this investment? Apart from liquidity the big risk is you the investor aren't just investing in a property your also investing in your ability to have the tax to offset the poor performance. The risks of this scenario just went through the roof.
As an example investment risk return: Property A is bought as an investment and has to look after it's self, its risk return is normal average risk average return everyone is comfortable hence the term "as safe as houses" (whatever that means) now overlay a negative gearing scenario against a persons income for the same Property A. The risk return has just changed! Why because the investment now includes the income supply of the person and people are very fragile compared to bricks and mortar. Go into any hospital and see the beds full of people who never ever thought it would happen to them!
Now for the sales down side. If your negative gearing a property against income and you become sick or injured and cant earn your income then you then have a property that is still costing you in the short term and you can afford to pay it because your income has stopped. The lender steps in looking to foreclose and your long term profits are on the line, not only that property is illiquid so making a quick sale may necessitate a drop in price of the property. Hell one may say, this has gone from bad to worse. What looked like a good investment has just tuned into a nightmare. There is a solution though and it is a very good one.
Protecting or guaranteeing your income keeps coming to you in the face of sickness or injury will alleviate the risk increase on Property A negative gearing strategy. A well structured insurance policy on your income is best organised with a specialist as half baked insurance is like half baked investments, doomed from the start. It will mean the strategy returns to a more moderate risk return strategy and the investor can sleep at night. The bonus is, this insurance is normally tax deductible so you still get some cost relief.
A final word on investments, for most people their self is their biggest investment, from education to physical ability the average Australian will earn about $2,000,000 from their personal exertion. Not insuring that sort of asset is dumbfounding yet to commonly it is the case. Focused individuals make "self" insurance a part of their strategy, they seek professional help and rest better on the knowledge no surprises will destroy the foundations of their life they though was rock solid.