Is Real Estate Investment an Asset or Liability?

It can be both an asset or Liability!

  • 10 years ago Flat bought in Noida is a liability today and in Gurgaon an Asset.

NOIDA

Buying Flats is like buying Equity . If you buy at the right price, Right asset and right time it becomes an asset or else a liability!

Many factors which will decide the outcome:

  • Your Cost of Loans
  • How much you are leveraging
  • Location, Location and Location( even within a city ,localities grow at different rate)
  • Real Estate market growth
  • The authenticity of the developer
  • Rental yield you will get

How many do you have control over? 2 maybe 3, out of 6

Are you an expert in assessing property or you want to buy because everybody is buying it?

If I suggest someone take 40 lakh Loan and buy Kotak Mahindra share today how many will do that!

They will tell me how can someone take so much risk even though chances are high they will make good return.

But people happily take loan 10 X of their annual salary to buy flats. Just because you cant see the price of Flat going up and down on your screen everyday doesn’t mean you are not taking risk!

You must be marvelling how much return your parents made in real estate. Just calculate the CAGR of those returns ,most are at par with Equity market.

What worked for your parents was Good Luck and Leverage!

They took a big Loan :

20 Rs their own and 80 Loan.

Paid Interest of let’s say 10% on 80 Rs = 8 Rs.

property grew at say 12% percent . They made 4rs (12Rs-8Rs) on 20 Rs investment = a cool 25% return

had the opposite happened .Real estate crash then!

They would have paid 8 rs and let’s say Real estate didn’t move .

8 Rs loss on 20 is 40% loss!!

Looking Back it’s easy to connect the dots. Gurgaon Flat owners can boast about their investment accumen and Noida Owners can blam their bad luck

It’s not about whether Real Estate is good or bad .

It’s about it’s whether you want to bite more than you can chew !

Conclusion:

If you have 100 Rs its ok to put 20 in real estate. If you have 20 rs don’t put

100 in it.

Hope is not the best financial plan.

PS:Now we Have REIT where you can take diversified exposure to commercial property .ideal for allocating some money to Real Estate.Create a well balanced portfolio rather than going in and riding your luck!

 

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 .

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