LAST WEEK, I received a question from a Value Research Online member, which was about real estate as an investment. The questioner has two apartments for which he is paying a certain monthly installment on loans taken. These are intended as investments although at some point in the future, his offspring will inherit it. He wanted to know whether it makes sense to sell one of the flats and make the other debt-free with the proceeds.
This kind of a query is not uncommon. While a particular question may be different from another, the dilemma is the same: is real estate good investment? In the go-go years of the real estate boom, no one asked this question because they assumed that it was a great, perhaps the best, place to park money. However, the boom faded long ago and has devolved into a never-ending slump, while EMIs and interest rates are still mounting. Those who bought property from unaccounted cash are holding on in quiet desperation, but honest EMI payers are in depression. What should they do?
The answer to this question lies in evaluating real estate investments in the normal terms of any investment — liquidity, safety, transparency, returns and similar parameters. Most people get confused about this because there is a fundamental difference between your first house, in which you live, and property bought purely as an investment. The first house is a need and when you take into account the fact you can stop paying rent and get a tax break on the EMIs the financial advantage is obvious. In any case, a first house may or may not turn out to be an investment — it doesn’t matter.
But after that, the case for real estate is shaky. The ticket size is huge, and liquidity poor. The entire investment has to bought and sold at one go. You may or may not be able to sell when you want to—in a slump, for instance, entire markets disappear for long periods. Pricing may be hard to discover. Information is anecdotal and hard to verify. Looking at it sensibly, the answer is clear.
{{/usCountry}}But after that, the case for real estate is shaky. The ticket size is huge, and liquidity poor. The entire investment has to bought and sold at one go. You may or may not be able to sell when you want to—in a slump, for instance, entire markets disappear for long periods. Pricing may be hard to discover. Information is anecdotal and hard to verify. Looking at it sensibly, the answer is clear.
{{/usCountry}}A house is a roof over your head, not a safe for your money.