Buying a property for use and buying one for investment are fundamentally different...
28-Mar-2013 •Dhirendra Kumar
It’s a seemingly simple question that a reader emailed to me a few days ago. He’s been a mutual fund investor, having been investing regularly through Systematic Investment Plans (SIPs) for about eight years. Over this period, his effective rate of returns has been 13 per cent. That’s the equivalent of money growing to 2.7 times its original value over the period. Which is not bad given that a big part of this period has seen a huge economic crisis.
However, the question he asks is actually about real estate. He wonders whether he should stick to mutual funds or switch to real estate. All around him, he says, people are buying houses at very high prices. What’s more, these purchases are clearly investments as they often are in second houses which are not needed for use.
It’s a question that a lot of people ask themselves. The answer lies not in trying to answer the question in the abstract but evaluate the investment in conventional terms of liquidity, safety, transparency, returns and similar parameters. Most people get confused about this because there is a fundamental difference between your first house where you live in and property bought purely for investment. The first house is a need and when you take into account the fact you can stop paying rent, then the financial advantage is huge. 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, specially for an individual. The ticket size is huge, and liquidity is 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, entire markets disappear for long periods. Pricing may be hard to discover. Information is anecdotal and hard to verify.
Perhaps this is something that can be done on a large-scale but individuals who get attracted to making a one-off investment should take a long, hard look at the idea.