Investment in Real Estate, does it really makes sense

We all like to invest in real estate, as we can see that and feel, and it also gives a status symbol. But does it really makes sense? Let us understand more about investments in real estate and what are pros and cons of real estate investment.

Most of us Love Real Estate, the main reasons for it are as follows: 

• Real Estate is something big that we can see and feel.
• We can show it to our Family Members and relatives as it becomes a status symbol.
• Real Estate is seen as 100% Security with the growth of Equity.
• People can imagine renting the house if not living in it.
• It is easier to imagine the Cash Flow value of a house by renting it out.

 

But what we can’t see while investing in real estate is: 

• Purchasing a property on loans leads to an interest burden and in current rising interest rate scenario it further increases the interest burden.
• When we rent our house we take the concentrated risk because the whole property is rented to a single person.
• House Rent Yields cannot stand up to Inflation.
• Check the facts that a ₹2 cr flat in Mumbai gives a monthly rent of approx. ₹ 35-40000. Which means annualised return of 2.1-2.4%, if we deduct maintenance charges and property wear n tear expenses it will further come down.
• Liquidity Risk is another important drawback in real estate as we can’t sell it quickly at a fair price.
• Further, if we don’t need whole amount but just a part of the money we can’t sell the property in parts; either full property or nothing.
• Buying and selling real estate has transaction costs i.e. Stamp duty, Registration, brokerage charges etc. which is a sunk cost.
• In today’s world when people keep on changing jobs and cities; buying a house and then shifting to another city becomes a double whammy.
• A House is a White Elephant in today's context as it gives little returns and needs a lot of money and cares to maintain.

 

Rather then that: 

• We can invest that money properly.
• We can diversify the investments in different asset classes and sub-classes to reduce concentration risk.
• We can adjust our cash flows based on our needs like some assets may give regular cashflows while some may just accumulate.
• Different asset classes and cashflows also helps to optimize our tax liabilities and beat different market cycles.
• We can liquidate investments partially in case of emergency even we can take loan agains the securities.
• Investment in Equities can help our money to out beat inflation over a longer duration.

 

While purchasing a house for self-living could be a fair decision due to emotional and comfort reasons however it may not be a good idea from an investment perspective. So think rationally before making a decision to buy a property for investment.