Should you sell your investments to buy a rental property?

I am considering liquidating my stocks and mutual funds to buy a flat in Bangalore North. Will this be a good option with the next 5 years as the horizon? Or should I stay invested and buy a flat after 5 years? Which will give me a better return? The flat, if purchased, will be rented out. - Shankar Krishnamurthy

One should compare it and look at it very objectively. What is the gain potential of the flat he plans to buy? The second is what is going to be the rental income from this? What percentage is it in terms of the capital cost of the flat? If that is favorable, then it might be worth it. And if there's an appreciation potential and the flat will give him a 4-6 per cent rental yield, that'll be nice.

Otherwise, if you compare with mutual funds. You don't have to worry about anything. You're not liable to pay taxes till you realise any part of it.

So it is just a matter of choosing between the simple and the complex. There are a lot of variables; you have to look at appreciation, realisability, concentration risk, and investment size before deciding.

However, the choice would have been much clearer if he was living in a rented house and he was buying a house for himself. Then, I'd be biased towards buying a house.

Even if it translates to little less returns, I'd be for it. But just check the complexity of it of buying a house just to rent it out. Unless you're getting a terrific bargain, it may not be worth it.

Conclusion

This question was asked by a Premium subscriber, and featured on our special series Subscribers' Helpline. If you'd like to get answers to similar questions, watch this month's episode.

Also read: How good is real estate as an investment?

This article was originally published on February 11, 2025.