Real Estate v/s Equity : A Never Ending Debate

– Meghashyam Sinkar 

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 .

  1. I have kid/kids so I want to leave behind one property for them .
  2. I ( or my spouse ) may start the business ( no idea about which business but something of own ) and hence buying the commercial shop.
  3. I will have rental income in my retirement life.
  4. My kid ( which is just 7 -8 year old ) may start some business so need a land for him/her .
  5. For my kid’s education or marriage etc
  6. 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 .
  7. I am going to settle at my home town or any particular place after 10 -15 years so need it for my own consumption.
  8. 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

  1. Will my spouse be able to manage the properties after me like talking to agents for renting or selling it out ?
  2. 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 ?
  3. Will my business require office space? If yes, then such small or big , same or different area , same or different type of property ??
  4. 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 ?
  5. What If I need large sum of money for any emergency? Do I have enough liquid assets to take care of it ?
  6.  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 !!!