Shrewd as it sounds, the most popular form of allocating your life savings and into your dream home or a piece of residential land wouldn’t really be regarded as an investment by canny investors.
If only did real estate investments come with nutrition facts like the ones you would find on your cereal box would you know that giving away your money for a fancy roof over your head could leave you without a ground beneath your feet.
Do your research boy! And while you’re at it here’s my two cents.
- Real estate is the most secure form of investment, and
- Real estate generates multifold returns without any effort.
Really? Hmm, let’s take a look at those nutrition facts now, shall we?
Debt incurred on acquisition must top this list as most of the population in general acquire these chunks of land and real estate property through long term loans. Enough said, any asset that incurs a debt larger than the asset value at the time of acquisition cannot be considered as an investment.
So what? My property will generate huge returns and I will be able to sell it for a much larger sum once I pay off the debt. I wonder….The average rate of return on a real estate asset is about 13.2%. Account that for 6% inflation and you’re left with a mere 7.2%. Pretty much the same as a fixed deposit scheme.
Meanwhile if we just take a peek at the Indian stock markets, Sensex has delivered a CAGR of about 23.6%. This means that if you invested 10 lacs in real estate 15 years earlier and the same in the stock markets, then the value of your investments now would respectively be 64 lacs and 2.4 Crores. That’s a gaping difference in return!
For those considering real estate as the most secure investment, say hello to tent cities of UNCLE SAM, the result of one of the world’s worst financial crisis in 2008 brought on by unregulated boom in real estate investment. Not a very happy picture, is it?
Legal hassles and litigations are mass murderers of real estate investments. On an average, 38% percent of all real estate investments are tied up in pending litigations, rotting away with its opportunity costs for years together.
Yes, I did mention opportunity costs. Basically what this means is, what would you rather have utilized your funds for instead of investing them in a particular asset? You could instead opt for various forms of investments available, which wouldn’t be possible for you as your funds are tied up in an asset class that is more or less illiquid. Not to mention the necessity of those funds as an iron reserve for tough times.
Registration costs and maintenance charges are expenses one needs to keep in mind while investing in real estate. Whereas other forms of investment do not carry the need for such lengthy procedures and expenses.
A note to keep in mind is that investing in real estate is done in lump sum and is an investment option meant only for the financially stable. You cannot acquire a piece of land one square feet at a time over a period of duration. However, one can buy into stocks and mutual funds and other instruments in small portions at periodic levels of duration which makes it a better suited option for a budding investor.
So, is Real estate a bad investment? Yes and No. For an asset to be considered as an investment, it needs to appreciate in value over time or generate regular income. If investment in real estate is used to generate rental income or for business operations that would in turn generate returns, then it a great investment tool. If however, the purpose of the investment is to only have a fancy roof over your head, then it is categorized as an expense.