Safe as houses - Are they?

Hello!

I occasionally receive communication from companies touting their property investment services.  Pitches regarding the products being "safe as houses", so that got me thinking, as I do believe that property is a good investment if used correctly.

So, what does "safe" mean?  Usually that something is "low risk".  Okay, so we know that people always need places to live, and aside from properties dropping hugely in price which doesn't seem likely, or a natural disaster, or some road infrastructure springing up near your investment, nothing can go wrong, right?  That certainly seems to be the case.  

The big questions are around opportunity cost, liquidity, leverage and partially diversification.

The opportunity cost - well, that's the cost of not doing something else by investing in property.  What I mean by that is, if you invest in a property worth $250,000, and it grows at a rate of 7%, and earns you $250 per week in rent, is that position better than $250,000 in stock that grows at a rate of 15% and earns a 10% dividend?  It's quite difficult to compare one with another, other than averaging past performance.  However, you'd have to compare the best house with the best performing stock to see the difference.  My view is that property is indeed quite good at earning income, albeit slowly in general.  If enough interest, in terms of comments are posted for this item, I will go about finding the averages and try an unbiased comparison of the two investment types.

There's liquidity.  All that means is that it generally takes a large amount of time to convert the asset into cash.  In comparison to going to your local bank and drawing your cash out, properties are not very liquid.  That has it's benefits and drawbacks.  Due to the liquidity, investors are forced into a buy and hold type strategy, which generally returns better than jumping about in the market.  The downside is that if you want to realise your asset quickly, there may be no market, or a poor or slow one and the money may not be available when you need it.

Then there's leverage.  With property it's a bit of a joke, banks will lend you far more than you can possibly hope to pay off, so you have a highly leveraged position.  Does that help you at all?  Too much negative gearing can quite quickly sink your investment ship, the interest payments grow more quickly than you can afford to pay, and your loan to value ratio (LVR) gets higher, and the investment becomes more highly geared, until the bank forecloses on the loan.
On the other hand, if you can afford such a payment, the availability of a such a highly leveraged position seems unthinkable in the stock market.  Where else could you get a loan and not have to put any money down to do so?  My view on such a position is that it is a stupid mistake.  If you have no deposit, the interest is going to really hurt you, as is the mortgage insurance.   So we can see that we can gain access to a highly leveraged fairly low risk investment, so long as the interest rates don't go mad.

Finally diversification.  The investment property is only one asset class, it's all your eggs in one basket, and with the leverage you may have, you're going to have to pay 
a lot toward the investment to keep it in the black.  If on the other hand you are in the stock 
market, you're able to get into different asset classes and spread your risk (and average your 
returns probably too)  So one important thing - is location of property like diversification?  Can 
we rely on the asset class to much that we don't have to diversify?  Perhaps, seems to have 
worked for a large majority of people.

In the stock market there are similar situations, such as Options, or Installment Warrants that allow you to limit risk, whilst gearing your investment and leveraging your position to build wealth.  These products would allow diversification, but are also more liquid than the property investment.  So are these products likely to serve you better, and it is the property investment companies that are selling you something that is likely to be inferior?  I will look further into Options and Installment Warrants, and let you know, if you leave me a comment!

Finally, it seems that if you can get a property with low gearing, in a good area, with good tennants most of the concerns expressed here can be mitigated.  It's all a case of how easily that position comes to you.  Stock market alternatives seem worthy of research, to see which is most likely to give you the best risk / reward profile, and the best returns in the long run.