Real Estate vs SIP

The answer is .It depends!!

Real ESTATE vs SIP is a question of CAGR vs XIRR .In real estate you put lumpsum ,so even at lower annual rate you make more money .In SIP you put in multiple periods so though higher rate but lower money

lets say you want to buy a 1 Crore home.

You pay 10% from pocket and 90% loan .

SO total investment is 10 lakh and 90 Lakh is borrowed money

Now if you stay in that house you save some rent .Lets say at 25000 Per month i.e 300000 a year. which is 3% of total value of investment.

EMI for 10 years at 8.4% is 111106

Rent generate per month is 25000

Net actual EMI = 111106–25000 = 86106

So now what is the effective cost of loan where I have to pay 86106 EMI on 90lakh

answer is 3% !!!!!!!!!!!

why so low..?? My cost of fund is just 3 % why because I am getting rent on property of 1 cr while paying loan on reducing balance of 90 lakh I have borrowed . SO effective interest cost is 3%.

So in 10 year time what do my return look like:

Initial capital = 10 lakh

Total EMI = 1 .33 crore (EMI on 90 lakh)

Rent benefit = 40 lakh( assuming initial rent was 25k .in 10 years it grew to 35k)

So total investment = 1 crore approx

Initial house price grows by 7% then return is 2crore 6 lakh

What about stocks:

Total investment is

Initial capital = 10 lakh

Total SIP – RENT for 10 years at 86000 per month = 93 lakh

Profit from SIP at 12% annual rate = 2 crore 6 lakh

Initial 10 lakh also gives 30 lakh.

Net Money = 2 Crore 36 lakh

So a 7.5% growth in real estate is equal to 12% annual rate in market through SIP

So it depends:

  • Real estate will beat stock market due to leverage effect ( capital and rental yield) if it appreciates more than 7% a year but will lose if market stagnates
  • Basically in SIP you are investing in periods so your rate may look high but capital appreciation is less compared to lumpsum in Real estate
  • You save on tax exemption but again house maintenance cost money.
  • Important factor is higher interest rate will increase the breakeven rate for real estate.
  • Technically if i borrow 50% loan at 8.4% at reducing balance im paying 4.2% on rs 100 but I am getting 3% flat (rent)interest on 100 which is equal to 5.46%. I am actually making money even with a loan without capital appreciation !!!
  • Their are idiosyncratic risk with real estate like liquidity premium etc. which I am not touching

Randomwalk

I dabble in Quantitative finance,Analytics P2P investing,Derivative trading and Product development.My goal is to help people create low cost optimized portfolio .

One thought to “Real Estate vs SIP”

  1. I want wealth creation in long-term.i read ur article on quota.i want talk t u, kindly give me ur mob no.
    Dr anil garg
    9414225805

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