How Risky are Your Property Investments
Investment properties can make many of us feel financially secure, but it’s worth taking a close look at how well a portfolio stands up to any potential nightmares, to ensure you aren’t running the risk of losing everything.
The unexpected can always happen and things can go wrong, so investors are wise to consider asset protection from the early stages of their portfolio.
Unfortunately, on the whole, asset protection is not well understood by property investors. While most understand the importance of being protected, few actually take out insurance or fail to receive the full benefits associated.
Protection can range from the structure in which to purchase the investment, whose name to buy in or even the specific type of insurance required.
Without the correct protections in place, investors run the risk of losing everything if something goes wrong. For an investor or for that matter any home owner skimping on insurance is not a particularly good idea.
As an example, if someone was to be injured or worse at your investment property, and there was a lawsuit brought against you, it is possible that your insurance would not fully cover the amount of the claim.
In a case like this, if the properties are all owned in the investor’s own name, then all the assets can be claimed. This includes the investor’s home.
Knowing which name or structure to purchase an investment in can, however, be a confusing exercise.
It is always worth seeking advice from financial planners, accountants and solicitors that have experience with property.
They will be able to assess your overall situation and help you implement a strategy that is most suitable to your circumstance and your portfolio.
On the Way In
For investors that own, or are planning to own assets other than investment properties, such as a home, it is advisable to keep them separate.
This gives you some protection with claims only able to come against a single property.
There are typically three ways to purchase a property; these include buying it in your own name, in the name of a company or in the name of a trust.
The standard way to purchase a property, in the name of the investor, allows negative gearing concessions and is fairly simple to organise, but provides very little protection should someone sue.
Buying through a company is the next option. This allows the liability to remain with the company, while the shareholders are protected against the banks seizing their personal assets.
This leaves a third option, the trust structure. This can be hairy and complicated, but essentially, if you buy a property in a unit trust then you can apply negative gearing to it because the debt is still in your name and the distribution from the trust becomes income.
The other type of trust, a hybrid trust, is a mixture of a unit and discretionary trust, but banks will not typically lend to this type of trust. For this reason, it is not a popular choice with investors.
Seeking out More Information
Making changes down the track to different investment structures, or adding insurance policies after damages, can be costly.
For this reason, obtaining advice from accountants, solicitors, financial planners and insurance specialists are worthwhile steps before deciding on what is right for your portfolio.
When your portfolio holds your potential future financial security, it may sometimes be worth considering more expensive insurance packages for peace of mind.