Lot of time investors get into comparison of real estate and equity .However, they are two different asset classes so comparison may not be prudent . They are not competitive to each other but can be complement to each other .
However , the investment decision should always be determined by individual cash flows , profession, financial goals, desires , actual requirement , family background . Because there is nothing called good or bad asset classes . It is always suitable or non suitable .
Majority of investors come with below thought process when they think of buying( investing into ) the real estate .
- I have kid/kids so I want to leave behind one property for them .
- I ( or my spouse ) may start the business ( no idea about which business but something of own ) and hence buying the commercial shop.
- I will have rental income in my retirement life.
- My kid ( which is just 7 -8 year old ) may start some business so need a land for him/her .
- For my kid’s education or marriage etc
- Something like metro , ring road , airport coming nearby and hence there would be sudden uprise in property prices and will pocket handsome gains in shorter time .
- I am going to settle at my home town or any particular place after 10 -15 years so need it for my own consumption.
- My friends, colleagues or relatives bought it and hence I am buying it . ( May be peer pressure).
Here we don’t want to debate or question on above financial goals or thought process . However, investors need to ask certain questions to themselves before taking the decision which are like
- Will my spouse be able to manage the properties after me like talking to agents for renting or selling it out ?
- If my kids gets settled outside the country or even at far distant place in India , will it be possible for them to manage property related issues after me ?
- Will my business require office space? If yes, then such small or big , same or different area , same or different type of property ??
- What if triggering point of metro , airport doesn’t come up or get postponed by some reason ? Am I in a financial position to hold such bulky illiquid asset ? Am I in a position to service the interest ( EMI ) for another few years ?
- What If I need large sum of money for any emergency? Do I have enough liquid assets to take care of it ?
- Will I be really going to my native place after 15 -20 years of living in urban city ? will that area still be liveable which I dreamt of ?
If answers to above questions are not clear then avoid getting into such concentrated investment .
The major challenge in real estate is liquidity . What is a point of having an asset which does not come handy when you need it most or when it requires for any decided goal .
This situation is like Asset Rich & Cash Poor. We have also observed that It creates hindrance for planning and achieving goals like vacation as people generally don’t sell assets (Specially tangible assets ) to go for Europe trip .
Then it comes with legality issues though RERA act has taken care of it to considerable level , but still if it arises then our judicial system is really slow.
Return is one of the most important deciding factor in the investment . Majority of investors are under impression that they have made a fabulous returns because they always talk around numbers and not percentage when it comes to physical assets .E.g. I bought the house for Rs 40 L and today it is Rs 1 cr. What they forget is to add TIME and don’t calculate the IRR/CAGR to know the exact growth rate (Click here to Understand the calculation of IRR/CAGR/XIRR).Then it comes with taxation , maintenance overheads which further reduces the returns .
Both equity and real estate are long term assets class in nature and should be bought with the horizon of minimum of 7 years plus . However, investors don’t get daily value of the property , the fluctuation in the prices . Being tangible assets , they feel emotionally connected and hence tend to hold for reasonably longer period which ultimately results into higher value of asset over a period of time . Whereas equity being volatile & liquid , it is generally held for shorter duration . It always gets punished first whenever there is cash requirement and hence hardly 2% of the investors experienced superior returns inspite it being more transparent , least cosily and better tax efficient asset class as compared to real estate.
So next time , ask the relevant questions before buying into real estate and of course even for equity.
Happy Investing !!!