Real Estate (Land and Buildings) as an Investment option in Indian Context

Hi Friend,

Land is OK, but how about a Better Quality Life with  Better Wealth?

Let us find out how...

We all Love Real Estate:

If we don’t accept this, let us check the percentage allocation to Real Estate in ours as well as our friends’ portfolio using the Following link, by typing in the values of various assets that we possess.

http://www.mathcracker.com/pie_chart.php

We would find that 60-80 % or even more, of our assets , are concentrated in Real Estate , either by passing-on of these properties from elders or due to the strong emotional need "to own a house of my own" or due to the feeling that land is the “safest asset- as its price can not go down” etc.,

When we love something too much, we won’t mind paying a bit extra for it and in most cases, we end up paying more than the asset’s worth.

Also, we don’t question its ability to generate good returns and consequently we don’t bother about checking its relative performance against other asset classes like Equity.

Its illiquid nature- one may not be able to sell it within a short notice and in some cases (especially if the demand is not there) for a very long period (years together).

The problem with illiquidity is, we may accumulate wealth, but we may not be able to use it when the need arises (Like a Medical Emergency, Children’s Education, Marriage, Retirement etc., which more often than not require substantial cash ) there by betraying the fundamental reason of accumulation of wealth.

We have to commit Huge sums - We can not buy 1 square yard, 2 square yards etc., depending on our income level and buying Real Estate, more often than not, involves, taking a Big Loan as well.

A Big Loan means a very long term commitment. The issues with this are,

• Loan needs to be paid compulsorily and most of our jobs are not guaranteed for such a long term (15-20 years).

• It may give rise to Stress and may affect our decision making while choosing jobs (Example: With Big loan weighing on our mind, we may have to go for a job option which gives us reasonable job security but compromises our professional growth, rather than going for a job opportunity which gives us a chance to learn as well as grow our income potential in the longer run)

• We may have to compromise in our life-style and may have to lead a sub-standard life style (affects the overall quality of our lives).

• It may not allow us accumulate the much needed cash to satisfy our genuine needs like a medical emergency, children’s education, marriage, Retirement etc.,

• The Real Estate asset we bought may not generate any income at all (If it is a plot) / may generate little income (If it is a flat or building- compared to the investment) but, there may be substantial out-go of interest.

There is no credible data which gives the true picture of appreciation of capital in case of land across markets.No data means, no logical basis for taking decisions.

This coupled with our own partisan attitude, i.e. remembering only the most successful bets in land, we have, more often than not, been Speculating (doing things based on hope and greed) in land.Speculation can not be a sound way of creating wealth or planning our finances.

Tax in-efficient- When we sell Real Estate to satisfy a need, we have to pay capital gains tax. In case of Equity - no tax is payable for long term capital gains.

The other Dis-advantages are,

• We may lose lucrative opportunities else-where, even if we know of their existence.Most of our real estate investments have a size of around Rs.30,00,000/-. That is not a small sum and that is all what we have in most cases.

• A best example would be, in late 2008 and early 2009, there was a huge fall in equity markets.Data says, any big fall in equity markets is a certain opportunity to make money over the longer run.Even if we know this fact, it is impossible to sell the Real Estate asset and invest the money in equities quickly, for Two reasons- Illiquid and Black Money involved.

• There will be assets, but they will be of little use when it comes to practicalities of life and in enjoying life to the maximum.We can not use Black Money generated from real estate for financing children’s education abroad, a foreign trip, buying a car of our choice etc., because of Tax implications.Once in land, in all probability, forever in land.

Those transactions of Real Estate which take place in cheques(generally flats) are not worth thinking about in terms of capital appreciation.

Average Equity returns are far superior and more predictable than average Real Estate returns in the longer run.

People became Rich and billionaires by investing in Businesses(Equity) and not in Land.

Happy Investing.