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Although investing in real estate may appear appealing, it is actually a high-risk, low-return option for the average middle-class Indian. Real estate is the investment category that investors tend to become most emotionally attached to out of all those that are offered.
For many Indians, owning real estate could be a significant step toward financial independence. However, it might be naive to think of it as a superior investment to making investments in the stock market. The story of income-generating properties begins to make sense when many investors decide to rent their home rather than sell it, emulating their parents’ prior decisions to buy an income property or purchasing a rental unit because they were unsure of what else to do with their money.
Due to their propensity to ignore possible hazards, investors may be prevented from making financially prudent decisions as a result of deeply ingrained misconceptions about the real estate sector. In order to prevent being burdened with an unstable investment in the future, this essay debunks real estate industry myths.
KEY TAKEAWAYS
- Over a 30-year period, an underperforming asset class like real estate offers roughly the same returns as a fixed deposit.
- Emotionally charged financial asset because investors frequently associate real estate with fond memories and feelings.
- Liquidity is not assured, and an urgent sale typically nets far less money than the asset is actually worth.
- high maintenance effort You must pay taxes and utility bills for each property you own, keep it in good repair, and locate new renters as and when necessary.
Table of Contents
High Land Value Expectation
It is only a presumption that land values will always rise.
The notion that property prices will continue to rise because of a lack of available land is supported by the world’s expanding population. However, a detailed examination of the data demonstrates that this is not the case. Even though the amount of land on earth is limited, there would still be plenty for people to live on and prosper. This is achievable as a result of improved technological usage of the available land. According to certain studies, the world’s population will also stabilize.
Furthermore, the fact that developing nations are experiencing an unheard-of real estate boom leads to the belief that land prices will keep rising. With prices plummeting by 40% to 50% over the past ten years, the real estate market has collapsed when compared to the economy of industrialized nations like Japan and the United States.
This means that neither the nation’s style of living nor the amount of land available can define its value. It is illogical and only serves to spread the myth.
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An asset class that performs well is real estate.
Real estate investing is similar to fixed deposit investing in that it yields roughly the same returns over a 30-year period. It offers an annual rent that ranges from 2% to 5% of the asset’s entire value, which is less than both the EMI payments and fixed deposit returns in comparison.
Let’s examine how real estate might end up being an unsuccessful investment. Let’s say Mr. Modi was paying Rs. 50,000 per month to rent a flat. Then, if he wants to borrow money from a bank, this is how things would work out for him if he choose to purchase a property for Rs 1.5 crore.
Mr. Modi choose to put down Rs. 30 lakh, or 20% of the price of the house. The bank will loan the remaining sum, or Rs. 1.2 crore. Mr. Modi now need to account for the 8% payable interest. He will therefore be making an EMI payment of Rs 1,03,000. This is a 100% increase over the rent I was previously paying.
Mr. Modi will be paying the bank a total of Rs. 2,40,89,474 over the course of 20 years. Notably, the cost of the loan now exceeds the cost of the loan.
In accordance with the aforementioned example, if you invest the same sum in the financial markets as in real estate, your returns will be higher. Additionally, you will be able to save money on other charges since the example did not account for costs like yearly property taxes, upkeep, insurance, and sales commission when you decide to sell it.
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The entire financial profile is at risk from excessive leverage.
Leveraging can make it possible for someone to keep making real estate investments because it increases returns and accelerates the process of building equity. Although it can increase the benefit, it can also increase the risk just as readily. Over-leveraging happens when investors borrow a disproportionately large amount of money against a single asset compared to both its value and the income it produces.
Consider that you put a down payment of Rs 2.5 lakh on a home you bought for Rs 50 lakh. If the property’s value drops by 30%, it is now only worth Rs. 35 lakh, but you are still responsible for paying interest and principle on the entire loan, which comes to Rs. 47.5 lakh. And you run a serious risk of failing on the property if the amount of rent you receive decreases as well.
Future real estate performance is difficult to forecast.
You supposedly purchased property in Rajarhat village, where Kolkata’s IT Hub is located, twenty years ago. You would have amassed a fortune the size of a villa today. If you had made a similar land investment ten years ago in your city, which would soon become a capital city, you would have seen the same scenario.
Only if you are extraordinarily lucky or have prior knowledge of the area experiencing a development boom in the near future will you be able to reap such windfall gains. Aside from these two instances, real estate continues to be a poorly performing asset class with lengthy periods of stasis.
The expansion and contraction of a property’s value is only influenced by its location, rather than other factors such as the building’s quality or the size of the lot. For instance, a Noida apartment purchased 20 years ago is now a liability. However, the Gurgaon apartment that was purchased 20 years ago is now a valuable asset.
To give an example, the High Greens, Noida Extension apartment that was purchased in 2012 for Rs 35 lakhs in the hopes that the new metro lines would drive up property values is now worth Rs 28 lakh. Similar to this, a buyer at Zodiac City paid Rs 71 lakh for a property in 2012; however, when he sought to sell it, the current market worth was just Rs 50 lakh. When projecting a place that is going to undergo development, investors might make a wise decision, but in uncertain times, these plans frequently get scrapped and they wind up investing a large sum of money on a property that does not help them in any way.
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Real estate investing is similar to putting all of your eggs in one basket.
In order to achieve financial goals with little risk, portfolio diversity is essential. Contrary to financial investments, real estate does not present a variety of opportunities based on an investor’s investment goals and level of risk tolerance. Real estate cannot be diversified, and the high initial capital requirement is the main cause of this flaw.
According to rumors, purchasing a single house in each market would cost you more than Rs. 50 lakh. But when you can diversify your portfolio with 100 stock firms for the same money, it makes no sense to invest thousands of rupees on a single property, in a single state, or in a single country.
Furthermore, managing the homes in the same manner you handle other financial assets wouldn’t be simple, even if you invested in several properties in different areas to diversify your investment. For instance, it only takes a few clicks to view the daily performance of the five mutual funds you have invested in. But how often can you physically check on five houses you own?
In a portfolio of investments, passion has no place.
Real estate is the investment category that investors tend to become most emotionally attached to out of all those that are offered. Investors run into trouble when they can’t evaluate the benefits and drawbacks of a purchase choice honestly. The idea of real estate investment has been elevated due to the subsequent emotionally charged and rationalized acts, making it one of the most overrated investment possibilities.
People are more at ease investing in real estate than in any other type of investment due to the cultural obsession with owning properties. India’s middle-class and upper middle-class people have significant aspirations to own a property because it is typically seen as more successful in society. They frequently disregard the fact that real estate investment is riskier because it necessitates taking out a mortgage and getting trapped in debt.
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Conclusion
It may bring the owner peace of mind or reduce her anxiety about the future, which makes owning property feel pleasant. However, it is not always possible to recommend the same as a desirable or practical investment alternative. Despite its apparent allure, real estate is actually a high-risk, low-return investment for the average middle-class Indian. When making a real estate investment, it’s crucial to take several things into account. Included in these variables should be your net worth, risk tolerance, diversity, etc. Additionally, rather than investing all of one’s wealth at once, one should just invest a portion of it in real estate.
One must use all available information and make a cold, considered choice based on the numbers and their risk tolerance when contemplating real estate as an investment option. Real estate trading should not involve passion or fanaticism as this could have a negative effect on one’s financial future.
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